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Occupier demand, rising rents continue to fuel urban infill industrial

Centuria Industrial REIT HY23 results harness sector tailwinds

  • 19% re-leasing spreads1 across 19 deals in HY23, 88,517sqm2 lease terms agreed, 7% of GLA
  • $215m in proceeds from strategic transactions reduced gearing to 31.6%3, bottom of target range
    • Investment partnership established with Morgan Stanley Real Estate Investing investment vehicle
  • Dandenong South development completed, 40,500sqm 100% leased five months prior to completion
  • Reiterated FY23 FFO guidance of 17.0 cents per unit (cpu) and distribution guidance of 16.0cpu4

Australia’s largest listed pure-play industrial fund, Centuria Industrial REIT (ASX:CIP), has reported strong HY23 results underpinned by exceptional re-leasing spreads of 19%1, up 8% on FY225 , reflecting continuous industrial occupier demand within urban infill markets across Australia.

Approximately 83% of CIP’s portfolio is based in urban infill markets, which are in proximity to densely populated areas where occupier demand remains highest as these markets lend themselves to fast delivery times for ecommerce and logistics operators.

During the period, CIP leased 88,517sqm2 across 19 transactions, representing 7% of the portfolio’s Gross Lettable Area (GLA)2.

Key leasing transactions included the final 13,604sqm of CIP’s recently opened, multi-unit Dandenong South development, Southside Industrial Estate. The 40,500sqm estate was 100% occupied five months prior to practical completion in November 2022. Additionally CIP completed an early lease renewal across 22,481sqm at 82 Rodeo Road, Gregory Hills NSW bringing forward an uplift in rental income.

Jesse Curtis, CIP Fund Manager and Centuria Head of Industrial, said, “Industrial market rents accelerated during the period due to record low national vacancy and continuous tenant demand, particularly in urban infill markets. This demand is reflected in CIP’s leasing activity and re-leasing spreads. CIP has further opportunities to execute new leasing and value-add initiatives to capitalise on the domestic market’s strong rental growth trajectory with nearly one-third of its portfolio expiring or value-add developments being delivered by FY25.”

Currently, 20% of CIP’s portfolio income is linked to CPI rent reviews providing additional strength to income growth. Additionally, 87% of CIP’s income is secured by blue chip national, multi-national or listed tenant customers.

Strong leasing activity also contributed to offsetting the REIT’s capitalisation rate expansion. Though CIP’s Weighted Average Capitalisation Rate (WACR) expanded 47bps to 4.66%, resulting in a 1.9% valuation decrease on a like for like basis, the reduction was primarily concentrated on two long WALE assets6.

Valuations across the remainder of CIP’s active portfolio remained broadly unchanged. CIP’s portfolio is valued at $3.9 billion7 across 88 high quality assets as at 31 December 2022. CIP maintains an 8.1 year portfolio WALE and high 98.7% occupancy8.

Lower portfolio value is also partially credited to $215.4 million of strategic transactions executed during the period, including the sale of a c.50% interest in eight existing assets to an investment vehicle sponsored by Morgan Stanley Real Estate Investing (MSREI) for $180.9 million resulting in a partnership known as Centuria Prime Logistics Partnership (CPLP). Additionally, CIP divested the $34.5 million 30 Clay Place, Eastern Creek NSW asset during the period.

Proceeds from these transactions helped decrease CIP’s debt and gearing reduced to 31.6%, at the bottom end of CIP’s target gearing range.

Jesse Curtis, concluded, “With a substantially strengthened balance sheet CIP will continue to execute its core strategies across its urban infill industrial portfolio during the remainder of FY23. The portfolio is well positioned with high occupancy and strong, reliable rental streams. Though transaction volumes have moderated during 2022, industrial asset values are continuing to hold with uplift in market rental growth counteracting capitalisation rate expansion. CIP maintains its guidance while continuing to monitor broader economic conditions.”

CIP reaffirmed its FY23 FFO guidance of 17.0cpu and distribution guidance of 16.0cpu4, paid in equal quarterly instalments, representing a 4.8% distribution yield9.

1. On a net rent basis compared to prior passing rents
2. Includes heads of agreement (HOA)
3. Gearing is defined as total interest bearing liabilities divided by total assets
4. Guidance remains subject to unforeseen circumstances and material changes in operating conditions
5. FY22 period reported 11% re-leasing spreads
6. CIP Active portfolio excludes assets with a WALE of greater than 15 years, being Telstra Data Centre, Clayton VIC and 46 Robinson Road East, Virginia QLD
7. At CIP ownership share of joint venture assets
8. By income
9. Annualised yield based on CIP unit closing price of $3.33 on 27 January 2023