Centuria Industrial REIT (ASX: CIP) Falls 30% Since 2021

Highlights:

• Despite a 30% drop in share price since December 2021, Centuria Industrial REIT offers a solid 5.5% distribution yield in FY25, with a potential upside to 6%.
• With an occupancy rate of 97.1% and high-quality tenants such as Telstra and Woolworths, Centuria boasts a stable and defensive rental portfolio.
• E-commerce growth, population expansion, and onshoring trends are all expected to support Centuria’s rental and capital growth in the coming years.

Centuria Industrial REIT (ASX:CIP), one of Australia’s largest domestic pure-play industrial real estate investment trusts (REIT), has faced a challenging few years. Its share price has dropped nearly 13% since September 20 and a substantial 30% from its peak in December 2021. However, despite this downturn, Centuria remains an appealing investment, particularly for those looking for a defensive stock with solid dividend yield and long-term growth potential.

The REIT's portfolio consists of high-quality industrial properties located in key metropolitan areas across Australia. These properties provide a mix of passive income and capital growth, which could make Centuria an attractive option in uncertain economic conditions.

Dividend Yield and Value

Centuria Industrial REIT’s strong fundamentals make it an appealing option for income-focused investors. The trust expects to pay a distribution of 16.3 cents per unit in FY25, translating to a distribution yield of 5.5%. While not an exceptionally high yield, it is considered solid, especially given the quality of the industrial properties in Centuria’s portfolio. If Centuria were to distribute all its projected FY25 rental profit, the distribution yield could rise to 6%.

Additionally, the REIT’s share price is currently trading at a 24% discount to its reported net tangible assets (NTA). As of June 30, 2024, Centuria’s NTA stood at $3.87, but the stock is currently priced lower than this figure. This discount offers an opportunity for potential investors to buy the stock at a lower valuation than the underlying assets would suggest.

Looking ahead, when Australian interest rates eventually fall, both the NTA and the share price of Centuria could react positively, making the current valuation more attractive.

Healthy Fundamentals and High-Quality Tenant Base

Centuria has a portfolio occupancy rate of 97.1%, a testament to the high demand for its industrial properties. The REIT boasts a quality tenant base that includes major corporations such as Telstra Group Ltd (ASX:TLS), Woolworths Group Ltd (ASX:WOW), and Arnott's. The weighted average lease expiry (WALE) for its tenants is 7.6 years, which is relatively long for rental contracts and provides income stability.

Given its strong fundamentals, Centuria Industrial REIT offers investors a level of stability, making it an attractive defensive play in uncertain times. The REIT’s focus on high-quality properties and tenants positions it well to weather potential economic volatility.

Underlying Growth Drivers and Positive Leasing Spread

Centuria is well-positioned to benefit from several growth tailwinds in the industrial real estate sector. The continued rise in e-commerce is a major driver for the demand for industrial logistics space. According to Centuria, every additional $1 billion in online sales requires about 70,000 square meters of logistics space. Australian e-commerce is forecast to increase by $15 billion by 2027, necessitating an additional 1.1 million square meters of logistics space.

In addition, Australia’s growing population will require more industrial space, with estimates suggesting that 4.5 million square meters will be needed by 2025. The trend of onshoring, accelerated by the COVID-19 pandemic, is also creating demand for more industrial properties as companies seek to build supply chain resilience.

Moreover, the growth of data centers and advancements in cloud computing, content delivery, and AI are further increasing the demand for industrial real estate. These long-term growth drivers are contributing to Centuria’s rental potential, evidenced by a positive re-leasing spread of 54% reported in the first quarter of FY25. This indicates that new leases are generating significantly higher rental income compared to previous agreements, a positive sign for future growth.

Centuria Industrial REIT (ASX:CIP) presents a compelling opportunity for investors looking for a high-quality, defensive investment with solid growth potential. Despite a 30% drop in share price since December 2021, the REIT’s strong dividend yield, high-quality tenant base, and exposure to key growth trends in the industrial property market make it an appealing option for those looking to invest in Australian real estate.