The S&P/ASX 200 Index (ASX: XJO) share Centuria Industrial REIT (ASX: CIP) has seen a drop in its unit price by around 25% in 2022 to date. This has had the effect of boosting the prospective dividend yield for interested investors.
For readers that don't know, this real estate investment trust (REIT) is the largest Australian-focused industrial property trust on the ASX.
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Why the Centuria Industrial REIT share price has sunk
The key reason for the decline appears to be that interest rates have climbed so much. Warren Buffett once explained why the interest rate can have such a big effect on asset prices:
The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature…its intrinsic valuation is 100% sensitive to interest rates.
The Reserve Bank of Australia (RBA) cash rate target has gone from 0.10% to 2.85%, with the increases starting in May and the latest increase being 25 basis points (0.25%) earlier in November.
Why it could be a good time to buy
The lower Centuria Industrial REIT share price means the FY23 guided distribution now represents a higher yield from the ASX 200 dividend share.
It's expecting to pay an annual distribution of 16 cents per unit in the current financial year, which equates to a forward distribution yield of 5.1%. The estimated funds from operations (FFO) for FY23, essentially the cash rental profit, is 17 cents per unit. That means it's retaining a bit of the rental profit.
At the end of the first quarter of FY23, it had a portfolio occupancy rate of 99.6% and a weighted average lease expiry (WALE) of 8.1 years.
While inflation is leading to higher interest rates, it's also seeing exceptionally strong rental growth. In its FY23 first quarter update, it said that it has seen 18% positive re-leasing spreads, demonstrating "accelerated market rental growth". That growth figure is on a net rental basis, compared to prior passing rents.
The business also said that it's "capturing strong tenant demand" through its "new development pipeline within supply-constrained urban infill markets".
Essentially, interest rate costs are going up, but the rental income is jumping high enough to at least partially compensate.
With its portfolio leased to quality tenants, like Woolworths Group Ltd (ASX: WOW) and Telstra Group Ltd (ASX: TLS), I think the ASX 200 dividend share's rental income looks resilient.
Centuria Industrial REIT share price snapshot
Over the last month, the REIT has risen by around 10%.
