Company Reports

We make minor changes to our forecasts for no-moat-rated Centuria Industrial REIT, mainly delaying development expenditure and reducing distribution payout ratio. We maintain our AUD 3.50 per share fair value estimate and consider the stock modestly undervalued at current prices, offering a forecast 5.2% distribution yield.

Centuria Industrial REIT is an externally managed Australian real estate investment trust. It owns a portfolio of 89 industrial properties, including distribution centers, manufacturing facilities, and data centers. About 83% of the portfolio by value is in urban infill areas of the major cities, with good prospects for rental growth and potentially redevelopment over the long term for higher and better use, including multistory industrial, mixed use, residential, healthcare, or bulky goods retail.

No-moat Centuria Industrial REIT reported fiscal 2024 funds from operations, or FFO, of AUD 109 million, or AUD 17.2 cents per unit, up 1% on the prior year. The AUD 16 cent per unit distribution was flat on fiscal 2023. The result met our expectations, and our AUD 3.50 per unit fair value estimate stands. Shares in Centuria Industrial REIT trade at a modest discount to our intrinsic assessment, with a yield of 5%.

Centuria Industrial REIT is an externally managed Australian real estate investment trust. It owns a portfolio of 89 industrial properties, including distribution centers, manufacturing facilities, and data centers. About 83% of the portfolio by value is in urban infill areas of the major cities, with good prospects for rental growth and potentially redevelopment over the long term for higher and better use, including multistory industrial, mixed use, residential, healthcare, or bulky goods retail.

Centuria Industrial REIT is an externally managed Australian real estate investment trust. It owns a portfolio of 88 industrial properties, including distribution centers, manufacturing facilities, and data centers. About 82% of the portfolio by value is in urban infill areas of the major cities, with good prospects for rental growth and potentially redevelopment over the long term for higher and better use, including multistory industrial, mixed use, residential, healthcare, or bulky goods retail.

No-moat-rated Centuria Industrial REIT is benefitting from strong tenant demand for industrial space. In the fiscal year to date, new lease terms for 11% of the portfolio gross leasable area were agreed upon, with a very strong average rent growth of about 50%. Management thinks rents across the portfolio are about 30% below fair market rates, suggesting relatively strong market rent reviews will continue. Overall rent growth will be much more modest because rents on most of the portfolio grow at a fixed rate of just under 3% per year on average or with the Consumer Price Index. We forecast average rent growth of 6% per year on average for the medium term, but with rising debt costs, we forecast distributions per unit increasing just 1% per year.

Centuria Industrial REIT reported flat funds from operations, or FFO, of AUD 54 million in the first half of fiscal 2024, with like-for-like rental growth of 6% offsetting asset sales and higher debt costs. We increase our fair value estimate by 6% to AUD 3.30 per unit after upgrading earnings forecasts by mid-single-digit percentage, mainly stemming from strong growth in market rents likely to flow through to the trust as leases expire in the medium term. At current prices, no-moat-rated Centuria Industrial REIT is fairly valued.

Centuria Industrial REIT is an externally managed Australian real estate investment trust. It owns a portfolio of 88 industrial properties, including distribution centers, manufacturing facilities, and data centers. About 82% of the portfolio by value is in urban infill areas of the major cities, with good prospects for rental growth and potentially redevelopment over the long term for higher and better use, including multistory industrial, mixed use, residential, healthcare, or bulky goods retail.

The federal government’s migration review was released on Dec. 11 and it suggests high population growth remains the status quo. The review tinkers with various visa rules, but contains no major reduction in migrant numbers, suggesting high migration will persist, relative to precoronavirus levels and versus other developed countries.

After a selloff in recent months caused by rising bond yields, most AREITs look cheap. Two such trusts are Waypoint REIT and Hotel Property Investments, which are 4-star-rated and trade at 17% discounts to their unchanged fair value estimates of AUD 2.80 and AUD 3.30, respectively. The narrow-moat-rated and conservatively geared BWP Trust also appeals though it is less undervalued, trading at just a 6% discount to its AUD 3.60 fair value estimate. All offer solid forecast distribution yields of between 5.3% and 7.3%, albeit with limited distribution growth potential in the medium term as higher debt costs offset rental growth. No-moat-rated Centuria Industrial REIT's security price is down 30% from the late 2021 peak and the trust is well-placed to benefit from strong leasing conditions in industrial markets, but we have some reservations about its financial health and consider it fairly valued.

Centuria Industrial REIT is an externally managed Australian real estate investment trust. It owns a portfolio of 88 industrial properties, including distribution centers, manufacturing facilities, and data centers. About 82% of the portfolio by value is in urban infill areas of the major cities, with good prospects for rental growth and potentially redevelopment over the long term for higher and better use, including multistory industrial, mixed use, residential, healthcare, or bulky goods retail.