CBD yields power Metro

11 October 2016

TheAustralian

By Gareth Abernethy 

As published in The Australian on 11 October 2016

Interest rates have been front-of-mind in financial markets of late, both in Australia
and the US. In Australia we saw the new head of the RBA, Philip Lowe, continue with
ex-governor Steven’s neutral bias, although there was a notable removal of a line from
the monthly meeting’s minutes, which suggested that lower rates were not fuelling the
property market.
In the US the market is now pricing in a rate hike as a 60 per cent probability. These
changes to market sentiment have occurred frequently in recent years, and can provide
the opportunity to acquire defensive, yielding equities at a more attractive price.
Centuria Metro REIT was floated in late 2014, and offers investors exposure to
commercial property in metropolitan areas outside major Australian cities. The REIT
is managed by Centuria Capital, ASX-listed specialist investment manager with 35
years of experience in property management. Metro commercial space has historically
not been in as high demand as those located in capital city CBDs, although the extra
risk is accounted for by a more lucrative yield. Since listing, the REIT has traded in a
relatively tight range between $1.90 and $2.35, reflecting its stable earnings stream
and yield support.
Centuria currently owns 13 office and industrial assets across four states, with 84 per
cent of the REIT’s asset value in office space and the remainder in industrial.
Centuria’s top metropolitan assets include office space in Chatswood and St Leonards,
two offices on Marcus St in Canberra and one of the largest office spaces in the town
of Robina, Queensland.
Centuria recently released its full-year results, with earnings per share of 18.4c ahead
of management’s guidance. Management also signalled that they expect further
earnings and distribution growth into FY17 of about 3 per cent. This is a conservative
estimate, given its improving leasing situation and almost 94 per cent of clients on
fixed annual rent reviews averaging closer to 4 per cent.
Compared to other listed REITs, Centuria’s attractive yield is an immediate standout.
This yield, however, reflects the risk profile of the assets that it holds. From a
valuation perspective, we see Centuria as trading at a discount to our intrinsic value.
An entry price below $2.20 offers an attractive yield and an appropriate margin of
safety.

Gareth Abernethy is an analyst at Clime Investment Management www.clime.com.au