Dividend Detective: Centuria Industrial leases underpin property

18 April 2017

Publication: The Australian
Author: Damen Kloeckner
Date: 18 April 2017

Dividend Detective: Centuria Industrial leases underpin property

Some stocks appear tailor-made for our purposes as a dividend detective. This week we find Centuria Industrial REIT offering long-term stability and an 8.5 per cent yield. CIP was acquired from 360 Capital by Centuria Capital (CNI) at which point it was rebadged as CIP. CIP fell off the radar over the past few months as a result, but one thing that hasn’t changed is the quality of CIP’s underlying assets.

The portfolio consists of 37 mostly modern industrial properties primarily within NSW, Victoria and Queensland, servicing a diverse client base in transport logistics, consumer goods and manufacturing, among others. CIP’s largest tenants include Woolworths, API and Orora with the top 10 accounting for 47 per cent of gross rental income. Pleasingly, more than 70 per cent of rental revenue is also subject to annual reviews, currently averaging 3.2 per cent per annum.

Nonetheless, new parent company Centuria has inherited a number of challenges, chief among them being the REIT’s relatively high gearing of 42 per cent and a series of leases due to expire. In dealing with these issues, Centuria is expected to bring gearing below 40 per cent in FY17 with further reductions to come, as non-core assets are disposed over time. Releasing tenants will require more active management and may be the primary reason CIP is trading on an elevated yield relative to industry sector peers. With a weighted average lease expiry of 4.3 years and roughly a third of its leases expiring within the next three years, the focus is firmly on vacancy risk.

Given its above average short-term risk profile, CIP’s higher yield seems appropriate. It is trading broadly in line with its forecast net tangible assets per share of $2.41, which also appears fair. Though the share price has proven remarkably stable over the years, concerns over lease expiry may provide opportunities to purchase the stock below NTA.

If or when CIP’s tenancy issues are resolved, it is likely the yield will drop, resulting in a premium to NTA and capital appreciation. Another viable strategy for those purely looking for a yield would be to wait for CIP to resolve its vacancy risk, taking what may be a lower yield but with less uncertainty.

Centuria Industrial REIT
Security price: $2.48
FY1 value: $2.41

Industry: Industrial REITs
FY18 forecast distribution: 21.7c per share

Damen Kloeckner is an analyst at Clime Asset Management.

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