ASX code: CMA
Share price: $2.19
Industry: Real Estate
Forecast FY2017 Distribution: 17.50c
Interest rates have come back to being front-of-mind in financial markets as of late, both in Australia and the U.S. In Australia we saw the new Governor 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 U.S., expectations shifted again with domestic job numbers coming out stronger than anticipated. This saw the odds of a rate hike in December shorten significantly, with the market now pricing it at a 60% 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 of major Australian cities. The REIT is managed by Centuria Capital Limited, 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 with 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% of the REIT’s asset value in office space and the remainder in industrial. Some of 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 to the market, with earnings per share of 18.4c coming out ahead of management’s guidance. Management also signalled that they expect further earnings and distribution growth into FY17 of ~3%. We believe this to be somewhat conservative given its improving leasing situation and almost 94% of clients on fixed annual rent reviews averaging closer to 4%. Another promising aspect of the result was the strong revaluations of Centuria’s properties, bringing Net Tangible Assets (NTA) up by 11% to $2.18.
Compared to other listed REITs, Centuria’s attractive yield is an immediate standout. This yield however is representative of 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. With occupancy rates recently strengthening to over 98%, a number of refurbishments now complete and continued earnings and distribution growth likely going forward, we believe an entry price below $2.20 offers an attractive yield of ~8% and an appropriate margin of safety.