Centuria Industrial: Defensive with a great dividend

Centuria Industrial REIT (ASX:CIP) is a stock that performs well in tough markets and pays an attractive dividend. Not only that, but when share markets head higher, it doesn’t get left behind. Since we sent out our research report to clients on 7 May, the CIP share price has increased by 5.6% compared to 4.1% for the S&P/ASX 200. CIP also yields 5.82%. Despite the recent lift in the share price, we still like the company. It is a stock that investors who want reliable dividends should consider.

This is a summary of what we think about the fundamentals and technicals (If you want to get in first with our best ideas, make sure you CLICK HERE to sign up to an 8-week FREE TRIAL of our client research, or contact us to start purchasing now).

About Centuria Industrial

Centuria Industrial operates as a property investor and fund manager. Its core business being the acquisition and management of industrial properties in key metropolitan locations throughout Australia. Currently, CIP owns a portfolio of 42 high-quality industrial assets. They have a total Gross Leasable Area (GLA) of ~810,000m2 and a current value of $1.173b.

CIP, which has a 30 June balance date, is managed by CPF2L. This is a wholly owned subsidiary of Centuria Capital Group (ASX:CNI). CNI is a long-standing, experienced fund manager with more than 20 years’ operating history and has a strong alignment with CIP unitholders. They have over $125m co-invested in the REIT, making it the largest unitholder in CIP, with a 24.15% stake.

Why We Like the Fundamentals

1. An Attractive and Well-Managed Leasing Profile

In a trading update for the 3rd quarter of FY19 (3Q19) released to the ASX on 29 April, the Company reported a slight increase in occupancy level, to 97.3%. This is while the portfolio’s Weighted Average Lease Expiry (WALE) reduced to 4.5 years, from 4.7 years as at 31 December 2018).

As at 31 December 2018, the WALE for FY19 and FY20 was 1.5% and 12.3%. Hence, a priority for the Company has been the renegotiation of leases in order to reduce the leasing expiry profile over the short term. To this end, Centuria Industrial secured significant leasing extensions during 3Q19. This has resulted in the portfolio’s FY19 expiry profile reducing to just 0.2% (from 1.5%) while all expiries within the period were either renewed or leased with no downtime. In addition, the portfolio’s FY20 lease expiry profile has been reduced to 9.8% (from 12.3% as at 31 December 2018), with 76% of these expiries located in strong performing Sydney and Melbourne markets.

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The Company also managed its lease expiry well. CIP typically has (mostly effective) plans to increase the occupancy of properties where there are vacancies.

2. Acquisitions Are Improving Portfolio Quality

The Company has recently been active in making acquisitions. Firstly, to fit into CIP’s strategy to achieve diversification within the portfolio. Secondly, to increase CIP’s footprint within core industrial markets across Australia. And thirdly, generate an attractive initial yield. A summary of recent transactions, all of which have met these criteria, is included below.

Summary of Recent Acquisitions (Source: Fairmont Equities, Company Reports)

3. Gearing A Little High But Reducing

After a lift in gearing as a result of recent acquisitions, the Company completed an equity raising in the first half of this financial year. This will be used to reduce gearing to ~36%. While this level of gearing is higher than that for other listed REITs, it is worth noting that CIP’s next debt maturity is in May 2020 and interest cover is also strong, at ~4x.

Fundamental View of CIP

Overall, we are positive on CIP’s fundamentals and consider the Company to be an attractive yield play. Earlier in the current financial year, CIP provided FY19 distribution guidance of 18.4c. This was maintained at the recent 3rd quarter trading update. Despite the recent strength in the share price, at current levels, CIP is offering a yield of 5.8%.

We note that market sentiment towards the industrial real estate sector remains strong. Centuria Industrial, as a pure-play industrial REIT, is in a strong position to benefit from the increasing demand (driven by e-commerce, logistics and manufacturing) for infill assets or assets closely located near key infrastructure. The latter is a theme we have previously noted in our research and recommendation of, Goodman Group (ASX:GMG). Goodman Group is a core holding for our Portfolio clients. Accordingly, we consider CIP to be an attractive alternative play to GMG.

CIP has corporate appeal given the nature of its share register and its relatively small market capitalisation

Charting View of CIP

In our client research on 7 May, we commented that good support near $3 suggested that CIP was a good buying opportunity. Last week we saw CIP break out of its recent trading range to close the week near its highs. This is a positive sign and means that holders should feel more confident now in holding on. Any dips are a buying opportunity. Ideally we would like to see CIP hold above the $3.05 region. 

Centuria Industrial REIT (ASX:CIP) daily chart
Centuria Industrial REIT (ASX:CIP) daily chart

 

Michael Gable is managing director of Fairmont Equities.

 

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