Good day, and thank you for standing by. Welcome to Centuria Office REIT FY 2022 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Grant Nichols. Thank you. Please go ahead.
Good morning, and thank you for dialing in to the Centuria Office REIT Full Year 2022 financial results and funds update. My name is Grant Nichols, and I am COF's Fund Manager. Joining me today is COF's Assistant Fund Manager, Belinda Cheung. I would like to commence today's presentation with an acknowledgement of country. I'm joining you from the lands of the Gadigal people of the Eora Nation. Centuria manages property throughout Australia and New Zealand and pays its respects to the traditional owners of the land in each country, to their unique culture, and to their elders past, present, and emerging. COF has delivered solid results for the 2022 financial year, including a 50% increase in net profit while delivering funds from operations and distributions consistent with guidance.
These results were driven by COF's continued leasing momentum as its geographically diversified portfolio of young quality assets offer good workforce commutability, high levels of amenity, and attractive, affordable rents, which offer accommodation solutions that tenants are increasingly seeking. Looking to the year ahead, prevailing inflation and subsequent rising interest rates present market-wide challenges, and consequently, our FY 2023 forecast FFO has been impacted. Despite this, we believe COF continues to provide an attractive and compelling distribution yield with income underpinned by a quality portfolio of desirable assets. Earlier today, we published various documents on the ASX relating to the full year results, including a results presentation, which we will go through this morning. Starting on slide four.
COF delivered a solid performance in FY 2022, including generating funds from operations of AUD 0.182 per unit, paying distributions of AUD 0.166 per unit, maintaining gearing at around 33%, and increasing net tangible assets to AUD 2.50 per unit. Looking at the results summary in more detail on slide five. The most pleasing aspect of the FY 2022 results is the amount of leasing that COF continued to generate. In fact, since the outbreak of COVID-19, COF has leased over 120,000 sq m, equivalent to about 40% of net lettable area. In FY 2022, specifically, leases were agreed over 41,283 sq m, representing 13.6% of the portfolio's NLA.
The leasing completed saw occupancy as at 30 June increased to nearly 95%, while the weighted average lease expiry of 4.2 years was maintained. COF generated a like-for-like valuation gain of AUD 37.9 million. While our leasing activity contributed to the healthy valuation uplift, valuation gains were well supported by recent transactions across metropolitan and near city office markets. In fact, across the Australian office market, 71% of office buildings transacted during the second half of FY 2022 were outside the core CBD office markets. Metrics from these sales strongly reinforce the property valuations which make up COF's net tangible assets at AUD 2.50 per unit, which I note is materially higher than COF's current trading price.
During the second half of FY 2022, COF refinanced nearly AUD 258 million of debt and added an additional AUD 50 million of headroom, taking its total debt facilities to AUD 962.5 million across a diversified pool of six lenders. The debt refinancing increased the REIT's weighted average debt maturity from 3.3 years to 3.7 years, with no debt tranche expiring until FY 2025. Despite the increased tenure, there has been no material change to the weighted average debt margin. This refinancing solidifies COF's capital position and insulates COF from potential increases in debt margins that may occur in the short to medium term. Looking forward to FY 2023, while we recognize that a rising interest rate environment creates some future uncertainty, we remain optimistic for Australian office markets.
Tenant inquiry levels backed by strong employment growth continue to improve, and some of the strongest demand is within metropolitan office markets. This bodes well for medium-term rental growth. However, prevailing inflation and subsequent rising interest rates have impacted our FY 2023 FFO guidance. We expect COF to have like-for-like net operating income growth through FY 2023. For FY 2023, COF provides FFO guidance of AUD 0.158 per unit and distribution guidance at AUD 0.141 per unit, with distributions expected to be paid in equal quarterly installments. Based on the recent trading price, the distribution guidance equates to a distribution yield of 7.7%, which we believe provides an attractive, compelling yield within the current economic environment. In making FY 2023 guidance, we have adopted an interest rate forecast with suitable buffers to manage potential further interest rate volatility.
This interest rate forecast averages 3% over FY 2023. We acknowledge that the velocity of current interest rates is unprecedented in recent times and that there is both upside and downside potential to the adopted interest rate, and we will continually monitor our guidance in relation to it. For further context, for much of FY 2022, COF was paying a floating interest rate of less than 20 basis points, contributing to an all-in FY 2022 total debt cost of 2.2%. As of yesterday, the three-month BBSW or floating rate was about 2.1%. While it's materially below our forecast average FY 2023 interest rate of 3%, it is significantly higher than interest rates paid throughout FY 2022.
In considering our debt position for FY 2023, while we have pursued debt refinancing to mitigate potential further increases in debt margins, COF has adopted a flexible hedging position, noting the difference between forecast cash rates and the yield curve. We'll continue to monitor this position throughout FY 2023. Moving to the vision, strategy, and objectives for COF on slide six. Our focus for COF has been and will continue to be generating predictable and quality income streams by building Australia's leading office REIT. Through active and engaged management, Centuria seeks to further enhance the COF portfolio by taking advantage of the opportunities that have come from having a diversified portfolio of quality Australian office assets. Looking at this more practically on slide seven.
We believe tenants are increasingly seeking higher quality accommodation in new generation buildings that provide healthy work environments, efficient floor plates, improved amenity, and competitively priced accommodation. Furthermore, there is increased demand to be located in areas that provide efficient commutes to improve employee satisfaction and attract the best talent. When looking specifically at the COF portfolio, it has been positioned to deliver on many of these qualities by offering a young portfolio with an average age of 16 years, high-quality assets with 90% meeting A grade specification, highly efficient buildings with a near 5-star average NABERS energy rating, buildings that provide large, efficient floor plates that are attractive to government and corporate tenants, which is important given that many metropolitan and inner-city office markets are dominated by large corporate and government tenants.
They are in locations that are easily accessible by public and private transport, with generally generous car parking availability and at a price point that is relatively affordable. For the tenants seeking new accommodation solutions after extended periods of working from home, we are noticing strong preference for improved standards of accommodation and building amenity. This flight to quality, flight to experience, will likely lead to divergence between prime and secondary office stock, which will be advantageous for portfolios like COF. Within markets, we are also seeing robust tenant demand for metropolitan locations, with the Melbourne Fringe having the strongest six-month prime net absorption of any Australian office market.
It may surprise some to note that 53% of the ASX 200 companies are headquartered in metropolitan or regional office markets, and many of the CBD headquartered companies, such as CBA, have significant metropolitan office market exposure. Before I hand over to Assistant Fund Manager, Belinda Cheung, to take you through the financials and portfolio metrics, I'll provide a brief overview of the manager and the benefits Centuria provides to COF on slide eight. COF is an externally managed REIT that forms part of the larger Centuria Capital Group family, a leading Australasian real estate funds manager operating under the ASX ticker code CNI, and included in the ASX 200 index.
With more than AUD 20 billion of assets under management, Centuria Capital Group specializes in real estate markets including decentralized office, urban infill industrial facilities, cost-efficient healthcare property, daily needs retail, large format retail, and agriculture across Australia and New Zealand. It also provides non-bank financing to the Australian property market through Centuria Bass Credit. Additionally, Centuria provides investment bond options through its LifeGoals product range.
COF accounts for around 12% of Centuria's total assets under management and is the platform's largest office real estate fund. There is strong alignment between the broader Centuria business and COF. Advantages of being managed by Centuria is the group has a long and successful track record in property funds management and has a substantial commercial property platform, particularly in relation to office real estate. With in-house property and facilities management, Centuria provides deep leasing capability and hands-on management of the COF portfolio. Centuria Capital Group remains COF's largest unitholder as it and has been a strong supporter in COF's evolution to now be Australia's largest ASX-listed pure-play office REIT that is included in both the ASX 300 and FTSE EPRA Nareit index. I will now hand over to Belinda.
Thank you, Grant. Moving to the FY 2022 financial results on slide 10. COF produced funds from operations of AUD 104.9 million or AUD 0.182 per unit, and paid distributions of AUD 0.166 per unit in quarterly installments. The payout ratio for FY 2022 was around 91%. Rising interest rates increased finance costs through the second half of FY 2022 as applicable interest rates, particularly in May and June, were much higher than previously anticipated. FY 2022 was again impacted by COVID-19, with an expected credit loss of AUD 1.4 million, comprising rental waivers totaling approximately AUD 800,000 and other provisions predominantly related to agreed rent deferrals. We do not expect rental waivers or deferrals relating to COVID-19 to impact FY 2023.
Pleasingly, FY 2022 portfolio rent collections were 98.2%, with the majority of arrears expected to be recovered. Turning to capital management on slide 11. As already noted, during the second half of FY 2022, COF refinanced AUD 257.5 million of debt and added an additional AUD 50 million of headroom, taking its total debt facilities to AUD 962.5 million across a diversified pool of six lenders. The debt refinancing increased the REIT's weighted average debt maturity from 3.3 years to 3.7 years, with no debt tranche expiring until FY 2025. Debt covenants of a 50% loan-to-value ratio and 2x interest cover ratio apply to the new and extended debt facilities in line with existing covenants.
As at 30 June 2022, COF's loan-to-value ratio was 35.8%, and the interest cover ratio was 6.3 x. In FY 2023, we expect that COF's all-in cost of debt will be materially higher than the 2.2% incurred through FY 2022. To reiterate, in making FY 2023 guidance, we have adopted an interest rate forecast with buffers to manage potential further interest rate volatility. This interest rate forecast averages 3% over FY 2023. As at 30 June 2022, cost debt was approximately 56% hedged. COF is adopting a flexible hedging position, noting the difference between forecast cash rates and the yield curve. We will continue to monitor this position through FY 2023. Looking at portfolio metrics on slide 13.
COF has a truly geographically diversified portfolio of 23 assets without any single market concentration and exposure to most of Australia's major office markets. Metrics on this slide also represent the quality of assets COF has assembled in Australian metropolitan and near city office markets. Beyond the asset metrics, such as 9% of the portfolio being A-grade with an excellent average NABERS energy rating of 4.8 -stars, the portfolio is supported by excellent tenant covenants. Nearly 80% of portfolio income is derived from government, listed, and multinational tenants, with only a small exposure to SMEs. The ability to attract quality tenants is reinforced by around 70% of COF tenants by area exceeding 2,000 sq m. This point is contrary to some market participants' understanding of metropolitan and near city office markets, who believe CBDs attract larger tenants and better tenant covenants.
As Grant mentioned earlier, 53% of ASX 200 companies are headquartered in metropolitan or regional office markets. Further to that, a number of metropolitan office markets are dominated by government tenants, which reinforce the availability of quality tenant covenants. Moving on to leasing on slide 14. After a record leasing year in FY 2021, COF continued to complete a significant number of leasing deals during FY 2022, with over 41,000 sq m secured, representing 13.2% of NLA across the portfolio. This includes 21 lease renewals across 23,678 sq m and 27 new leases across 17,605 sq m. The most significant leasing deals executed during this period occurred at 825 Ann Street in Fortitude Valley, where over 10,000 sq m of leases expiring in FY 2023 have either been renewed or replaced.
46 Colin Street in West Perth, where IAG have renewed their circa 5,000 sq m tenancy for a further seven years. Noting that this was previously COF's largest FY 2023 lease expiry at half-year-end. 576 Swan Street in Richmond, where approximately 3,000 sq m of vacant space has been leased. As a result of the portfolio leasing, COF has increased occupancy to 94.7% and improved the resilience of the leasing profile with around 77% of the portfolio now expiring at or beyond FY 2025. Maintaining high portfolio occupancy is a key management focus, and we are actively seeking outcomes to address our current vacancy and near-term expiry profile.
A primary focus for FY 2023 is the pending lease expiries at 154 Melbourne Street and 203 Pacific Highway and the ongoing vacancy at 818 Bourke Street. Specific to 818 Bourke Street, we have leased around 3,500 sq m to CPB for short-term project space. The project, which relates to Melbourne infrastructure works, is set to be awarded in the coming months. If CPB is a successful contractor, it is obligated to take a longer-term lease over the space. Please note, the CPB lease has not been included in COF's current portfolio occupancy stats. Turning to slide 15, as noted earlier, one of the key benefits of Centuria's management is the strong capabilities of Centuria's in-house asset management team. With a dedicated leasing team, Centuria has consistently maintained high occupancy across its listed and unlisted platforms.
Since COF listed in 2014, Centuria management has consistently leased a significant portion of the portfolio year in, year out, maintaining high levels of occupancy each and every year. What is particularly pleasing is the amount of leasing completed since the COVID-19 outbreak. Since FY 2020, COF has leased over 120,000 sq m of space during a period in which many had reservations about the depth of tenant demand. Clearly, COF is offering a product that is desirable to tenants, supported by a nimble, creative, and capable asset management team. Turning to portfolio valuations on slide 16. As at 30 June 2022, 12 of the 23 assets were independently revalued, resulting in a like-for-like increase in portfolio value of approximately AUD 9 million for the half year.
As a result, COF's NTA per unit increased to AUD 2.50 as at 30 June 2022. The valuation increase primarily resulted from the leasing success achieved across the portfolio, with recent market-wide transactional evidence also strongly supporting COF's net tangible assets. The weighted average capitalization rate as at 30 June was 5.58%. Moving to sustainability initiatives on slide 17. COF, by its nature as a REIT, has no staff and is solely a portfolio of assets. COF is externally managed by Centuria Capital Group and aligns itself to Centuria's sustainability framework, consisting of three core strategies. One, conscious of climate change, relating to the environmental considerations. Two, valued stakeholders, relating to social initiatives. Three, responsible business principles, referring to governance.
Specific to the environment, over the course of FY 2022, COF enhanced its energy efficiency with its portfolio average NABERS energy rating now at 4.8 -stars. Social initiatives are measured through both Centuria's annual tenant satisfaction survey and annual employee engagement survey. Both produced excellent results during the year. 96% of survey tenants were satisfied with Centuria as their landlord, and 94% of Centuria's employees are proud to work at the company. Centuria is also committed to gender diversity and inclusion. At present, there is roughly a 40-60 split of female to male staff. On the governance front, we have adopted the Task Force on Climate-related Financial Disclosures recommendations. This means climate change is now a standard investment consideration, with adaptation plans being developed across the Centuria portfolio.
Slide 18 elaborates on specific case studies where COF assets have benefited from ESG initiatives. Throughout FY 2022, extensive works at 818 Bourke Street in Melbourne have lent themselves to improved worker health and well-being, while the improved environmental considerations have seen the asset's NABERS rating improve to 5 -stars for energy efficiency and 4 -stars for water efficiency. The property also received a WiredScore Gold rating, which is an international recognition standard for digital connectivity. At 8 Central Avenue in Sydney, we are currently completing the installation of a solar panel system to deliver green electricity to the building, saving an estimated 355 tons of carbon each year. Green energy solar systems are being explored across other existing COF assets to further reduce carbon emissions. I will now hand back to Grant to cover the market outlook and guidance.
Thanks, Belinda. Looking ahead on slide 20. As we enter FY 2023, Australian office markets are navigating through the lingering impacts of COVID and the prospects of rising inflation. Despite these challenges, we believe there is a positive outlook for COF's office markets, with the following key themes likely to dominate in the year ahead. Firstly, and as already mentioned, we expect tenants will gravitate toward higher quality office accommodation for a number of reasons, such as creating a new and enticing working environment after a prolonged period of working from home, seeking accommodation in buildings that offer higher levels of environmental and well-being credentials to align with the tenants' changing ESG requirements. As technological and communication improvements necessitate change, tenants will be seeking accommodation that meets these requirements.
Tenants recognize the workplace can heighten company culture and will actively seek space that creates and cultivates rather than simply a place to work. This particular point is driving increased leasing activity with better quality buildings with strong amenity winning a large share. Commercial real estate agency Colliers have noted record demand for office leasing in the first half of calendar year 2022, and metropolitan market office leasing is on track to exceed its record year of 2021. What will further accelerate tenant activity is the robust Australian economic conditions and positive employment outlook. Australia is currently seeing a record number of job advertisements, and coupled with international borders reopening, there are very positive tailwinds for tenant demand across Australian office markets. Growth in employment numbers necessitates more office space, and we expect stronger positive net absorption through FY 2022.
In relation to the potential for rising inflation, it is important to note that commercial property is a natural inflation hedge, and many of the things that drive inflation, such as low unemployment and strong economic growth, are tailwinds to tenant demand. Regarding increased construction costs, which are already evident in many markets across Australia, it is certainly an issue for developers, but owners of established properties are somewhat insulated from these cost impacts and may in fact benefit, as increased construction costs will likely temper office supply. Another aspect of increased construction costs is that it may lead to higher levels of tenant renewals as the cost of fit outs become prohibitive. Again, this could be beneficial to existing owners of established properties, particularly those that provide quality, affordable accommodation like COF.
Strong investment demand for Australian metropolitan fringe and regional office assets continued throughout the second half of FY 2022, and several of these transactions occurred in comparable office markets to COF and have been detailed in the table on slide 21. When this basket of comparable property transactions collated demonstrates very strong demand as investors recognize the relative affordability and accessibility these markets provide to tenants. It is worth noting that over 70% of office transactions in the second half of FY 2022 occurred outside the core CBD office markets of Sydney, Melbourne, Brisbane, and Perth. The average metrics from these sales illustrates strong investor demand for the types of assets COF owns, with many selling on metrics that are significantly tighter than COF's current valuation metrics.
This point is amplified when compared to COF's current trading price, which implies an average cap rate across COF's portfolio of around 6.8%. Concluding on slide 22. We recognize that a rising interest rate environment creates some future uncertainty, but we remain optimistic for Australian office markets. Tenant inquiry levels, backed by strong employment growth, continue to improve with some of the strongest demand evident in metropolitan office markets, while rising construction costs are likely to temper supply. This bodes well for medium-term rental growth. During FY 2022, we witnessed a continuous shift in tenant preferences towards better quality accommodation that is close to key transport nodes, providing better commutability and subsequently improved work-life flexibility. COF's young portfolio lends itself to these leasing preferences, with its modern and sustainable office buildings providing better access to wellbeing amenities, retail, hospitality, while offering affordable rents.
Australia's strong employment rate and rising return to office corporate policies provide encouraging tailwinds for tenant demand in FY 2023. Across COF's portfolio, we are encouraged by the leasing activity that Centuria has been able to generate and continues to see across our invested markets. This leasing activity gives us confidence as we proactively address current vacancy and near-term expiry risk. For FY 2023, COF provides FFO guidance AUD 0.158 per unit, distributed, distribution guidance at AUD 0.141 per unit, with distributions expected to be paid in equal quarterly installments. Based on the recent trading price, the distribution guidance equates to a distribution yield at 7.7%. Thank you for your interest in Centuria Office REIT. I will now hand back to the operator and invite any questions that you may have.
Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone. Please stand by while we compile the Q&A roster. First question comes from the line of Murray Connellan from Moelis Australia. Please go ahead.
Morning, Grant and team. I was wondering whether you could give a little bit of color around the assumptions in your guidance. You've obviously mentioned that the big mover there being the interest rate assumptions of an average cash rate of 3%. Just around leasing and CapEx, you know, the big movers there are obviously the Docklands, South Brisbane, and St. Leonards. What are the assumptions for leasing in your guidance for FY 2023?
Yeah, thanks, Murray. Looking at those three specifically, so for Docklands, we do have some of the space leasing through the back half of FY 2023, but there is some of the space that we are not forecasting to lease for the balance of FY 2023. As we move through that lease at 154 Melbourne Street, there's 4-5 levels that are coming available for lease in that building. Again, it's a staggered letting assumption that we've made, and we're assuming that some of that space will be let from the early part of calendar year 2023, and the back half of that space won't be leased in the balance of FY 2023, but in the start of FY 2024.
For the expiry, the Healius expiry at 203 Pacific Highway, so their in situ or their lease expires at the end of September. Again, that is a multiple floor expiry and we have assumed a staggered letting assumption with some of the space being let in the back half of FY 2023 and the balance being let in the early part of FY 2024.
Can you say what your average portfolio vacancy would be in the assumptions for FY 2023?
Sure. Look, in terms of vacancies, we've taken a specific lease-up assumption for each individual vacancy, but probably what is more pertinent to your and others' purposes for leases expiring through the year, our renewal assumptions is that there will be four months downtime within the cash flow. Obviously if we can do our lion's share of renewals, there should be some potential upside for income through FY 2022.
Thanks. Then just around, I guess, some of the broader market conditions for prospective tenants and the inquiry that you're seeing in some of those key markets. Can you maybe just give us a bit of a snippet on each?
Sure. Look, we've had very good leasing results. As Belinda went through during the course of the call, we've leased a lot of space since the advent of COVID. To be honest, we've seen pretty good leasing activity in all markets, probably outside of our one exposure in Docklands. We've seen reasonable levels of inquiry in every other market that we're exposed to. We have addressed a lot of the vacancy that we've had within our portfolio. Outside of Docklands through to 30 June. If I think about, we did have near on 3,500 sq m of vacancy at Swan Street in Richmond, in Melbourne, which we've, you know, mostly addressed. Over 3,000 sq m has been leased.
We did have some lingering vacancy at Canberra, which has subsequently been leased as well. A lot of the vacant space that we've had within our portfolio has attracted tenants and has now been leased. We're pretty comfortable with where leasing activity is in the vast majority of the markets we're exposed to. Just to reiterate, we have done a lot of leasing since COVID. Near on or over 120,000 sq m leased over the course of the last three years, which is near on 40% of the portfolio NLA.
Thanks. Just the last one from me. Obviously with new guidance, there's quite a few moving parts, which probably make FY 2023 a bit of a tough one to forecast. In the event that FFO at the end of the year ends up differing from your guidance, are you expecting to keep that the 89% payout ratio that you're guiding to unchanged? Or does the dividend stay AUD 0.141 regardless of the FFO backdrop?
Look, we've been saying for a little while now that we'd like to get our payout ratio between 85%-90% of FFO. If there was immaterial change to FFO, if there was a slight dilution, I don't think you would see any impact on distributions. At this stage, I think it's too early to tell what that impact would be. In making an FY 2023 forecast or providing FY 2023 FFO guidance, we did put a lot of thought into it. We have adopted an interest rate that we think is fairly, you know, reasonably conservative that will give us buffers to potential future or further volatility in interest rate expectations. We are pretty comfortable with what we've put out there. I would be hopeful that there is more upside than downside risk to that.
At this stage, it's probably too early to tell, to give you any further guidance on what I've just said, Murray.
Sure. That's fair enough. Thanks very much, Grant.
Thanks, Murray.
Thank you for the questions. Once again, to ask question, please press star one one. Your next question comes from the line of Tom Bodor from UBS. Please go ahead.
Morning, Grant. I just wanted to check in around your flexible hedging policy. I think you mentioned that word a few times. Just wanted to know what you mean by flexible and where your hedging is at the end of FY 2023, and if there's any sort of things to note around the hedging there, sort of things like interest rate caps or any other things that are sort of unusual that you've looked to use to hedge.
Sure, Tom. You were just fading there at the back end. Just to summarize, you just wanted to go through what we meant by our flexible hedging policy, to just overview where our hedging will flow through FY 2023 and whether we're considering any alternate hedging policies to vanilla interest rate swaps. Is that correct?
Yeah, that's right. Yep.
Yeah. In terms of our hedging policy, what we mean by hedging or flexibility is that we haven't sought to put in a material amount of hedging in the immediate term simply because there has been quite a wide divergence between interest rate expectations and where the yield curve has been. Now that is over the course of probably the last couple of weeks, that is starting to close. There may be opportunities that we will look at further hedging in due course. In regards to looking at alternatives, we have put an interest rate cap in for FY 2023. That is something that we will consider, and that's probably part of what we mean by flexibility. We will not simply look at just vanilla interest rate hedges.
We will look at other ways of mitigating our interest rate risk. In terms of our interest rates and how they progress through FY 2023, all our interest rate swaps are noted in the statutory accounts. There will be hedges that roll off through the course of FY 2023. We will need to look at putting further hedging in place as we progress through the year.
Are the caps included in the 56, or are they outside it?
No, the caps are included.
What's your policy minimum hedging?
50%.
Thanks very much. Just one final one from me. Just wanted to sort of understand the direct market seems to be still very strong. Are you considering non-core asset sales to sort of reduce your gearing, or are you comfortable with where you sit?
Look, we'll always look at asset allocation. Over the course of the last two financial years, we have sold assets. If we deem that we've maximized value on any given asset, we will certainly consider selling assets. At this stage, we have got no immediate plans to sell any of our portfolio.
Would you like to see gearing lower, or are you comfortable with the 34%?
Look, I think we are comfortable with where gearing sits at the moment. We have got ample debt covenant headroom. I think it's something that we'll continue to monitor as the year progresses. As mentioned during the call, there is quite a wide variety of expectations on where interest rates are headed. So I think you can probably. It's probably worth waiting to see where interest rates moderate before taking a firmer view on gearing.
Okay. Thanks very much.
Thank you for the questions. Our next question comes from the line of Lauren Berry of Morgan Stanley. Please go ahead.
Thanks. Morning, Grant. Just wanted to clarify your comments around the 3% cash rate. Are you referring to the RBA cash rate there or the BBSW?
We pay three months BBSW.
Okay. 3% BBSW. What's your average margin at the moment?
Look, I think somewhere between 1.4 and 1.5 is probably going to give you a fair indication.
Okay. All in cost of debt will be around 4.4%-4.5% for FY 2023. That's your assumption?
You'd be in the ballpark, yes.
Yep. Okay, cool. Just wondering your view on cap rates over the next 12 months. Looks like you didn't get any like-for-like compression on your portfolio, but there was still, you know, a small increase from income. Where do you see the cap rates going in the kinda near term?
All the transactions we've seen recently have continued to demonstrate pretty strong metrics. If anything, the sales that we've seen through the course of calendar year 2022 could probably warrant further cap rate compression across the COF portfolio. My personal view on transactions in the immediate future is that you probably will see less transactions in the immediate term because people are trying to ascertain what the impacts of interest rates are going to be. I think the current uncertainty and also the differences in opinion of where interest rates are going, you'll see a moderation in transactional activity for the remainder of FY 2022, or calendar year 2022. Beyond that, I think it's really dependent on where interest rates do sort of moderate in time.
I think if interest rates moderate, for argument's sake, CBA have got a forecast out where they think that interest rates will peak at 2.6%, potentially be cut through 2023 back to 2.1%. If interest rates are moderating between that 2%-2.5% range, my personal view is that you could probably see cap rates maintained where they're at because there's still a pretty healthy yield gap between an interest rate of 2%-2.5% and cap rates between sort of 5.5%-6%. I think it's at this stage unknown, but I do think you'll see fewer transactions through the back half of this year.
I don't think you will see the potential cap rate softening that many are projecting.
When you are forecasting out your management fees, payable to Centuria, are you just forecasting flat valuations for FY 2023?
We have for FY 2023, yes.
Yep, cool. Just last one for me. Are you able to comment on how incentives have been tracking in some of your key markets, I guess, in particular the Brisbane market where you've got that Melbourne Street vacancy coming up?
Sure. Across our portfolio, for new leases, during FY 2022 we gave away gross incentives of about 30%, and for renewals it was closer to 20%. Every market is different. As you'd be aware, when we look at individual markets, Brisbane generally has had a higher incentive rate than some of the other markets that we are exposed to. For South Brisbane, you're probably in the range of 35%-40%. That's probably where the market conditions currently sit.
All right, cool. Thank you.
No problem.
Thank you for the questions. Our next question comes from the line of Sholto Maconochie from Jefferies. Please go ahead.
Oh, hi, everyone. Thanks for your time. I'm just following up on a lot of the questions that have already been asked, but in your guidance, did you assume the 3,000 sq m at Bourke Street is that's been currently leased? Is that in the guidance for 2023?
No. Other than what they're obligated to pay.
Okay.
There is no assumption that their current lease progresses to a longer term lease.
How long is the lease for that 3,000 m?
It depends on when they get. The current circumstances is that they would, if they didn't get awarded the tender, they would be out by the end of this calendar year. If they did get awarded the tender, then it progresses to, I think, a three-year lease extension from 1 January.
Okay. Three-year lease from 1 January. I think you said there was no COVID. You had about AUD 1.4 million of COVID charges this year, 800 waivers, and then the rest deferrals and things like that. You assume no COVID charge in FY 2019. I appreciate the code of conduct ended, but just to confirm, there's no COVID or credit loss charge in guidance this year?
Correct. We haven't assumed that there's any continuing impact from COVID through FY 2023.
I think in the commentary you said the FY 2020 property NOI is flat. You've got the acquisition benefits coming through and some small divestment. If it is the vacancy and then you've got the benefit from no COVID charge, this looks like it's the vacancy that's addressing, you know, Melbourne Street, Pacific Highway and Bourke Street. Are they the main drags on the NOI line this year?
Yes, pretty much.
Okay. What are you assuming similar levels of incentives, I think from Lauren's question, for this financial year as well then, particularly in Melbourne and in Brisbane?
Yes, we are. We have assumed that there is, and what we're seeing in the market is incentives have been relatively flat, but we are starting to see some prime rental growth come through in some markets. In some situations we've adopted that base rental growth. Generally, incentives are relatively flat year on year.
What are the incentives sort of in Melbourne? I know it's different, Docklands versus the rest of it. What are you sort of seeing in Docklands? Is it in the high, in the mid? Is it sort of the four handle?
Yeah, you're sort of nudging that 40%.
Okay. I think that's everything for me. Everything's been answered. Thanks very much for your time.
Cheers, Sholto. Thanks, mate.
Thank you for the questions. As a reminder, to ask a question, you need to press star one one on your telephone. There are no more questions from the line. I'd now like to hand the conference back to the management for closing remarks.
I'd like to thank everyone for joining today. If anyone wants a one-on-one meeting following this call, please feel free to reach out to me, Jesse Curtis or Belinda to arrange. Otherwise, thank you and have a good day.
This concludes the conference call. Thank you for participating. You may now disconnect.