Centuira Industrial REIT Record Expansion and impressive Return on Equity

Australia’s largest ASX-listed pure-play industrial fund, Centuria Industrial REIT has announced its Financial Year 2021 Year End Results revealing a record year for the REIT in terms of portfolio expansion and significant leasing activity resulting from strong industrial sector tailwinds, delivering significant value to its unitholders.

During FY21, CIP transacted 18 high-quality acquisitions worth $966million. This included $631million worth of assets across two new high conviction industrial sub-sectors, Data Centres and Cold Storage, as well as $335million worth of urban infill logistics acquisitions. According to RESourceData, CIP acquired these assets on a weighted average cap rate of 4.8%.

Already in FY22, the REIT has further increased its portfolio from 62 to 67 industrial properties, increasing its portfolio value from $2.9billion to $3.1billion. Within 13 months, CIP has almost doubled its portfolio value from $1.6billion as at 30 June 2020 to FY22 YTD.

The quality of CIP’s portfolio is illustrative with more than a half-billion-dollar valuation uplift ($587million) during FY21.

CIP’s portfolio Weighted Average Capitalisation Rate (WACR) compressed 151bps from 6.05% to 4.54% during FY21.

The strong valuation gain underpinned Net Tangible Assets (NTA) of $3.83 per unit, a 36% increase during FY2112. This, combined with distributions of 17.0cpu, delivered a Return on Equity of 41.8% to unitholders throughout the financial year.

NTA increase of 36% and Distributions of 17cp delivered Return on Equity of 41.7%.

Jesse Curtis, CIP Fund Manager, said, “FY21 was an extremely successful year for CIP, driven by transformative acquisitions and major portfolio leasing with income continuing to be supported by blue chip industrial tenant customers. Increased tenant demand and record low national vacancy rates, propelled by the continued rise of e-commerce, positively impacted the industrial property market.

“During FY21, Centuria delivered scale for CIP, boosting the portfolio with nearly $1 billion of high-quality industrial acquisitions. We made a high conviction call to enter two new industrial sub-sectors, with $633million of investment in Data Centre’s and Cold Storage, sectors that will continue to benefit from significant growth. This was complemented with $335million worth of urban infill logistics assets located with markets characterised by constrained supply.

“The strength of CIP’s performance is highlighted in its return on equity exceeding 40% during FY21. This strong performance is in partly credited to Centuria doubling CIP’s portfolio value in just over a year and major leasing achievements, which translates to high returns for our unitholders.”

FY21 was punctuated with by strong leasing transactions for CIP with nearly 240,000sqm of lease terms agreed. A substantial 33 leasing transactions were completed, which accounted for more than a fifth (22%) of the portfolio’s gross lettable area (GLA). Major long term leasing transactions were undertaken with the likes of Woolworths and Visy.

As at 30 June 2021, occupancy was maintained at 96.9% and CIP’s Weighted Average Lease Expiry increased to 9.6 years from 7.2 years during the previous period.

CIP continued to deliver on its value-add projects with the completion of a brand new, prime-grade industrial development at 42 Hoepner Road, Bundamba QLD achieving Five-Star Green Star Design and As-Built status.

Curtis continued, “CIP has delivered exceptional leasing and value-add projects during FY21 through an active management approach and dedicated industrial team. We partnered with major tenants, such as Woolworths and Visy, to achieve these results, which create great outcomes for our tenant customers and unitholders, alike.”

During FY21, CIP was included in S&P/ASX 200 Index and most recently the FTSE EPRA Nareit Global Index, the latter means the REIT is more easily compared to high-performing peers across the world.

Curtis concluded, “The domestic industrial market has continued to strengthen with strong tailwinds from increased adoption of e-commerce as well as increased demand from tenants onshoring operations. Record low vacancy rates have been recorded across all major markets and Australia’s industrial real estate sector remains a highly sought-after market attracting investment demand and creating robust competition for quality industrial and logistics assets.

“With rising e-commerce, there’s a shift in consumer expectations for rapid delivery times and we believe that this global shift from shops to shed will continue. This creates strong demand from occupiers for urban infill logistics assets to help manufacture, fulfil or distribute orders quickly, and these markets are a focus for CIP where we see a greater propensity for rental growth.

“CIP’s focus centres on building critical mass in key urban infill markets and, through acquisitions, leasing and value-add projects, the REIT aims to deliver long-term sustainable income streams and capital growth to unitholders.”

CIP provides FY22 FFO guidance of no less than 18.1 cents per unit and distribution guidance8 of 17.3 cents per unit with distributions paid in equal quarterly installments.

The Centuria Industrial REIT has not been on our Top Picks List as we feel that the REIT’s capacity to deliver ongoing growth in valuation is limited due to our view that cap rates for industrial assets are not likely to compress much further and that there is risk to valuations in the years ahead. We therefore feel that with a yield of circa 4.4%, the future ROE will be lower over the medium term as growth with large come from rental increases.

We recently met with Centuria to discuss their investment strategies and I asked them about whether they are tempted to move further into the Development space to generate higher returns like other industrial REITs. They indicated that while they will undertake some development activities it will not be a key source of acquisitions and growth for the CIP.

The REIT will continue to source quality industrial stock in key urban areas with a strategic move to invest further into Cold Stores and Data Centre, which we support.

According to RESourceData, Centuria Industrials acquisitions over the last year include;

Trading Chart

A comparison of the REIT to the ASX 200 Index is shown below. As indicated in the chart, the unit price for CIP (Gray Line) has moved +32.8% since the 1st July 2020 vs the Index (Orange line) which has moved 27.8%. The index is cleared weighed down by REITS with significant exposures to Office and Shopping Centre assets which have not performed as well over the period. We also show the index for Goodman (Green line) which has shown much higher growth of 50.3% over the past 12 months. Goodman are of course a much more diverse REIT with a global footprint and fees generated from significant development activities and funds managements.

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