Key points
- Centuria Metropolitan A-REIT has five office and three industrial assets worth $182.9 million.
- Will provide investors with income paid quarterly.
- Top five tenants are major corporations or government.
The listed property trust sector (A-REITS) is the best performing sector on the stock market this year, with a return of 21.7%. In an environment where yield is king and interest rates are expected to stay low for some time, A-REITS (or Australian Real Estate Investment Trusts) have flourished.
Not surprisingly, the IPO market in REITs has picked up as managers respond to the demand for listed property securities. General Property Trust (GPT) recently listed the GPT Metro Fund (ASX Code GMF) – the next cab off the ranks is the Centuria Metropolitan Fund.
Here is our road test of Centuria’s Metropolitan Fund.
Centuria Metropolitan
Centuria Metropolitan will be an ASX-listed REIT focused on investing in office and industrial assets in “metropolitan” areas. The fund will initially comprise five office and three industrial assets worth $182.9 million.
Approximately 65% of the commercial office market in Australia is located in the six CBDs – with 35% in the 13 major “metropolitan” areas. These include the Sydney, Melbourne and Brisbane fringes, Chatswood, Parramatta, West Perth and Melbourne’s South East Suburbs. According to JLL Research, yields on metropolitan offices historically average 0.82% higher than CBD offices.
Prime office yields – CBD (red) versus metropolitan (Blue)
Fund strategy
The strategy of the fund is to provide investors with income (paid quarterly), with the potential for capital growth through active management, which includes property repositioning, leasing and further investments in commercial and industrial properties in metropolitan markets. The fund will not undertake speculative developments.
Property portfolio
The five office and three industrial properties, in the metropolitan markets of Sydney, Brisbane and Adelaide, in the fund are valued at $182.9 million, which reflects a capitalisation rate of 8.9%. The properties are currently 99.5% occupied, with a weighted average lease expiry (WALE) of 5.5 years. The top five tenants are responsible for more than 50% of rental income, and are major corporations (or subsidiaries thereof) or government.
The Brisbane, Lane Cove, Carlingford and Artarmon properties are each viewed as having the potential in the medium term to be re-zoned for residential apartment development or conversion. The manager’s strategy for 9 Help St is to proactively manage pending lease expiries, and for the Bluescope tenanted buildings, to maintain the buildings in a condition that meets Bluescope’s needs, as well as developing a plan of subdivision to provide for multiple uses. With the Keswick property, the fund may seek to subdivide the almost 0.9ha of surplus land.
The manager
Centuria Property Funds Limited, a wholly owned subsidiary of the listed Centuria Capital Limited (ASX Code CNI), will manage the fund. Centuria currently has more than $1.6 billion of funds under management, and has been actively managing metropolitan properties for more than 15 years. Centuria will be paid a management fee of 0.55% pa of the gross asset value.
Nicholas Collishaw leads the listed property team at Centuria.
The Centuria Group also intends to be a co-investor in the fund and hold at least 10% of the securities on issue, which will help to foster an alignment between the interests of the investors and the manager.
The offer
The fund will be geared at 25%. With the offer to raise up to $143.8 million, $48.1 million will be borrowed and the interest rate hedged for between three and five years. Offer costs of approximately $3.2 million and stamp duty of $4.1 million, mean that the fund’s NTA (net tangible asset value) will be around $1.91, a discount of 4.5% to the offer price.
Details of the offer are as follows:
Distributions will be paid quarterly, with an estimated tax-deferred component of just over 30%. Assuming a payout ratio of around 94%, the manager has forecast a distribution yield of 8.25% pa for the period from 1 December 2014 to 30 June 2015, and 8.50% pa for FY 16.
Pros
- Attractive distribution yield. Despite the differences in property portfolios, this compares very favourably to the other A-REITS. For example, major funds such as GPT and Dexus are trading on CY15 forecast yields of 5.4% pa and 5.7% pa respectively;
- The manager has a workable repositioning strategy in place for most of the properties. In non-prime markets, which are also sometimes less liquid, this is critical;
- Gearing is conservative at 25% (target range is 25% to 35%);
- Properties are currently 99.5% occupied. By gross rental income, approximately 88% is subject to fixed rent reviews averaging 3.7% pa;
- Although this will be Centuria’s first listed fund, the manager has an impressive record in managing unlisted funds; and
- By market standards, the management fee of 0.55% is on the low side. Centuria is also co-investing.
Cons
- Metropolitan properties. While this type of property wouldn’t normally be on our radar, the yield differential, plus importantly the repositioning strategies and opportunities available within the specific precincts, mitigate this concern;
- This will be one of the smaller REITs – too small to be on the radar for index managers and some active managers;
- Like any newly listed REIT, due to transaction costs and stamp duties, the offer price is at a premium to the NTA (net tangible asset value).
Bottom line
Property investors will find the yield on this REIT pretty hard to resist. They should however be cognisant that as a small REIT, secondary market liquidity may be limited and invest accordingly.
The lead managers to the offer are UBS and CIMB.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.