Security price: $2.48
FY1 value: $2.41
Industry: Industrial REITs
FY18 forecast distribution: 21.7 cents per share
Some stocks appear tailor made for the Dividend Detective column, and in this mould we find Centuria Industrial REIT (ASX:CIP), offering long-term stability and an 8.5% yield. CIP was acquired from 360 Capital by Centuria Capital (ASX:CNI) at which point it was rebadged from TIX to CIP. You would be forgiven if CIP fell off your radar over the last few months as a result. One thing that has not changed is the quality of CIP’s underlying assets. Its 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 listed companies Woolworths, API and Orora with the top 10 accounting for 47% of gross rental income. Pleasingly, over 70% of rental revenue is also subject to annual reviews, currently averaging +3.2% p.a.
That being said, CNI has inherited a number of challenges from its predecessors. Chief amongst them being the REIT’s relatively high gearing (42%) and its impending lease expiries. To the first point, Centuria is expected to bring gearing below 40% 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 peers. With a weighted average lease expiry (WALE) 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 (NTA) 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/when CIP’s tenancy issues are resolved, it is likely its yield will compress towards its peer group, 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.
Originally published in The Australian on Tuesday, 18 April 2017.