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 two 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 looks at the threats and opportunities ahead for investors in listed industrial property.
The Motley Fool: In the first part of our interview, you mentioned property can act as an inflation hedge. And that 20% of the Centuria Industrial REIT's portfolio is linked to CPI rent reviews. How do you see interest rates playing out over the next 12 to 24 months?
Jesse Curtis: We acknowledge that inflation has changed the interest rate environment and created a level of uncertainty right across the market. What we're assuming in our FY23 funds from operation [FFO] guidance is an average interest rate of 3% over the course of FY23. Whilst we might see short-term volatility, we expect that we'll see interest rates normalise towards the back end of next year.
It's also important to note that our gearing currently sits at 33% at an average interest coverage ratio of 5.4%. Both provide significant headroom to our debt covenants.
MF: In FY23, CIP expects to pay a dividend yield of 16 cents per share (cps). That would mark another year with a yield above 5%. Are you adjusting your investment and leasing strategies in the logistics markets to achieve this with higher rates and inflation in mind?
JC: We've maintained a consistent strategy since taking over management of the industrial fund five years ago. And that's to own a high-quality portfolio of urban industrial infill assets where we see the highest tenant demand and the lowest amount of supply that can be added. And that's enabled us to deliver income and capital growth to our investors.
But in the higher inflation environment with limited vacancy across industrial markets, what we're finding is the opportunity to extract higher rental growth across the portfolio. That can be done via re-leasing or by executing on our value add strategies. With near zero vacancy in our portfolio, we're finding we can really stretch that rental growth theme.
MF: Have you noticed an increase in tenants struggling to meet their rental obligations?
JC: We've focused on building a portfolio with very strong customers paying the rent. The likes of Woolworths Group Ltd (ASX: WOW), Telstra Corp Ltd (ASX: TLS), Australia Post and Arnott's. We have blue-chip customers paying the rent.
As part of our strategy, we've sought to add short WALE [weighted average lease expiry] urban infill assets in the portfolio that give our investors the opportunity to capture that rental growth.
So, we have a nice balance of secure income and also the opportunity to capitalise on our near-term expiring leases to capture strong rental growth in the market.
Overall, we have occupancy of over 99% and a WALE of more than eight years providing good income certainty.
MF: Can you share some of your other successful strategies?
JC: What's been a really successful strategy for us has been consolidating landholdings in these urban infill markets. We now have 10 examples across the portfolio where we've consolidated either neighbouring or precinct assets.
This provides our investors with a number of opportunities. On one side, it allows us to leverage our network, in effect, by being able to move tenants within the portfolio and within markets by having diversity in both size and asset type. This strategy reduces downtime and increases our tenant retention.
On the other side, it also provides our investors with long-term development opportunities. By consolidating sites of scale, not only does this provide the opportunity to develop more modern industrial facilities but also maintains holding income on the existing buildings, providing us with great flexibility.
MF: What's the biggest threat for investors in listed industrial assets in the year ahead?
JC: No one can hide from higher interest rates. The biggest risk is if the RBA doesn't provide a soft landing and if we start to see inflation tick up.
MF: And what's the biggest opportunity?
JC: The market for industrial remains extremely strong.
We've got structural tailwinds, such as e-commerce, that will continue to drive tenant demand. There's no greater correlation than increased e-commerce spend and the need for warehousing to store products. We're going to continue to see that demand coming through the market.
We've also seen a trend of onshoring or re-shoring of both manufacturing and storage operations. Every tenant we speak to needs more space to store more inventory on hand and prevent supply chain disruptions.
We're seeing very large e-commerce brands, as well as local brands, making next day or second-day delivery promises within their product range. They need warehousing space close to a population in order to be able to deliver on those promises. That's resulted in a lot more storage happening in infill industrial markets, where CIP has focused its portfolio, due to proximity to a large population within a short drive time.
These are all long-standing trends that will provide the environment for strong industrial rental growth.
**
If you missed part one of our interview series with Jesse Curtis, you can find that here.
(You can find out more about the Centuria Industrial REIT here.)
