Ask a Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In part one of this edition, we're joined by Jesse Curtis, fund manager of the $4.1 billion Centuria Industrial REIT (ASX: CIP), Australia's largest domestic pure-play industrial real estate investment trust. Today, Curtis explains how the REIT achieved revenue and dividend growth in FY22 and the impact of rising inflation and interest rates on the industrial and logistics sector moving forward.
The Motley Fool: CIP reported some solid FY22 results. The REIT increased total revenue by $44 million and bumped its dividend payout by 0.3 cents to 17.3 cents per share. How did you achieve that?
Jesse Curtis: The REIT produced a strong set of results in FY22. It comes down to the composition of this portfolio being only industrial assets that sit in urban infill markets that are land constrained and have access to a large population within a short drive time.
What that means is we own assets that are in high demand from tenants with limited competition in the market, leading to the ability to achieve strong rental growth. In owning these assets, we've been able to execute some great leasing across the portfolio. As well as our value add strategies.
The strong FY22 results are really a credit to our in-house management team. We've got a large team who focus on the industrial business, right across development, leasing and asset management. They're out there every day, understanding our customers' needs to get the best results for our investors.
MF: Data centres and cold storage facilities were among the big acquisitions for the REIT the last time we spoke in February 2021. What's the outlook for data centres today?
JC: With the continuing digitalisation of the world, we're also continuing to see significant demand from users of data centre space. Think about your mobile, your computer, or even your smart TV. Everything is now stored in the cloud. That's created a large amount of tenant demand in the data centre market to store this data.
More specifically, on our Telstra Corporation Ltd (ASX: TLS) data centre, that asset has been linked to CPI rent review. So we've been able to benefit from higher indexations as a result of a higher inflationary environment. Which, in turn, delivers more revenue to the REIT.
About 20% of our total portfolio is linked to CPI rent reviews. And the balance are fixed indexations within our contract leases.
MF: And what's the outlook for cold storage facilities?
JC: On the cold storage side, since the beginning of the pandemic we have seen the percentage of total retail sales made online in Australia increase by 50%. It's gone from about 9% of total retail sales made online to about 15% today.
One of the biggest drivers of that has been groceries. And in particular, fresh food. Think back to the lockdowns, a lot of people adopted e-commerce to get their groceries delivered to their front door. This has resulted in needing much more storage space in order to store those fresh products. So, we've seen a continued uptick in the amount of space required. Again, from the increased tenant demand, resulting in higher rents and higher revenues.
MF: The CIP share price reached all-time highs on 31 December. And it was still close to those highs shortly before the RBA announced its first interest rate hike in 11 years on 4 May. Following that announcement shares fell sharply. What do you think spooked investors?
JC: Rising interest rates and prevailing inflation have resulted in stock price adjustments right across global equity markets. So, it's not just an industrial theme, a REIT theme, or even an Australia theme. This has been an impact globally.
MF: How do you see this developing moving forward?
JC: I think our investors understand that property is a long-term play. A lot of people view property as an inflation hedge. So, when you get a higher inflation environment, you have more chance of keeping up with inflation or potentially even outperforming inflation with property backed assets.
If you think about where CIP is trading at its current price, we're delivering a dividend yield of over 5%. And we think that's very attractive given the strong fundamentals we're seeing in the industrial market.
MF: What impact has the new inflationary environment had on your short-term outlook for the logistics space?
JC: In the short term, the outlook is increasing revenue from our inflation-linked leases. As I mentioned earlier, 20% of our portfolio is linked to CPI rent reviews.
What's also going to happen in the short-term as inflation rises, is that it creates an environment where rents are also rising, at varying levels, across different markets. That provides really strong fundamentals for our re-leasing spreads as well.
We've been able to achieve 11% re-leasing spreads. What I mean by that is the difference between what the tenant was paying before their lease expired and what they're now paying on a new lease. As a result of that, we're seeing really strong rental growth in the market, and this is flowing through to the CIP portfolio.
MF: And have fast-rising inflation and interest rates changed your long-term outlook for industrial and logistics markets?
JC: In the longer term, the view on industrial and logistics markets is strong. Long-standing tailwinds such as the growth of e-commerce and occupiers increasing their inventory levels for supply chain resilience are providing a resilient stream of tenant demand. Couple this with limited land supply and near-zero vacancy in national industrial markets, and the outlook remains strong.
We take a very long-term view when we're buying industrial real estate and have focused on infill markets which are set to perform the strongest from these trends. As such we've built a great portfolio that we believe will continue to drive very good value for our investors.
What's also worth noting is that in a higher inflationary and interest rate environment, economic rents to build new industrial space become higher. And with the amount of demand we're seeing coming into the logistics market, that provides further upward pressure on rents.
As an existing asset owner, CIP has a portfolio of assets valued at over $4 billion. For existing asset owners, like CIP, we'll see the benefit of those rising rents because people are developing less space and when they do develop it is more expensive.
***
Tune in tomorrow for part two of our interview, where Centuria's Jesse Curtis looks at the threats and opportunities for investors in listed industrial and logistics space in the year ahead.
(You can find out more about the Centuria Industrial REIT here.)
