Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Jesse Curtis, Centuria Industrial REIT (ASX: CIP). The Fund Manager reveals the risks and opportunities ahead for ASX logistics investors, and why the demand for quality assets is likely to outstrip supply.
A spot of background
CIP is one of Centuria Capital Group‘s (ASX: CNI) 2 real estate investment trusts (REITs). It offers investors direct access to a high-quality logistics portfolio diversified across Australia’s capital cities. Centuria’s second listed property fund, the Centuria Office REIT (ASX: COF), invests in office assets. You can buy and sell shares in REITs just as you would any other shares on the ASX.
Now, read on for the interview with Jesse Curtis:
You’ve been on a strong asset purchase run this year. Can you give us a snapshot of the acquisitions, and why this was a good period for CIP to do this?
It’s been a very transformational half of transactions for us. We’ve done nearly $700 million of acquisitions over the last 6-month period. Two of the key areas we expanded was around the data centres and cold storage subsectors.
What we’ve seen in the data centres is a real digitalisation. A lot of people are moving from hard drive storage to cloud-based storage. Now all of that needs to get stored somewhere, not in the real clouds but in big data centres and facilities, which we see as a really resilient and growing sector.
The most notable transaction in data centres was the acquisition of the Telstra data centre. We bought that asset from Telstra on a 30-year, triple net sale and leaseback term. We felt it was a very good addition to the portfolio.
Can you explain what a triple net lease entails?
In a property context, it means that the tenant pays for all the maintenance. This includes all the outgoings, all the land tax, the operational expenses and any capital expenditure. That provides a really clear and reliable cash flow to the REIT.
Now you also mentioned cold storage facilities?
Right, the second big sector we expanded to was cold storage. We believe there are very good fundamentals for cold storage going forward. Where it really comes into its own is around fresh food distribution. What we’ve seen since the onset of the pandemic is fresh food consumption and consumer spending on fresh food has doubled.
We believe we’re going to continue to see a large amount of demand for these cold storage facilities. By volume, we’ve done $214 million worth of transactions across 4 cold storage acquisitions.
Is any of the cold storage demand related to the COVID-19 vaccine rollout?
None of our assets currently store or plan to store any of the vaccines. But that is another tailwind for the cold storage sector. Not only have we seen the explosion in fresh food consumption and the requirements for cold storage on the back of that, but you also have the health and pharmaceutical-related uses that will flow from that.
Anecdotally, what we see on the ground are 2 or 3 enquiries a week from tenants wanting to lease cold storage space. We’re seeing an environment where demand is truly outstripping supply as a result of all of this.
The rapid growth of e-commerce is one of the factors driving logistics demand. What’s been your experience here?
We see a very strong correlation between industrial space take-up and the increase in the percentage of online sales. 12 months ago, online penetration [in Australia] as a percentage of total retail sales was around 9%. Throughout the pandemic that increased over 30% to now be around 12%.
We calculate that 42% of all industrial take up over that same period was related to the various retail sectors.
How do you see the e-commerce trend playing out for logistics demand?
We’re currently at 12% of online penetration as a proportion of online sales. In the UK, they have 26% online penetration. In the US it’s 19%. The global average is around 15-16%. So Australia, as a market, really lags the world first in terms of our take up of online, and second on the requirement of industrial space that creates.
Every billion dollars spent online is going to translate into approximately three hundred thousand square metres of industrial space. We’ve still got a significant amount of headroom to where we’ll reach even the average for online penetration. So there’s a lot industrial take up that can happen over that next period.
How important is the existing tenancy to your investment decisions, compared to say location and quality of the physical infrastructure?
The way we assess our investments within CIP is we aim to have a cross-section across a number of different diversifications. We think that’s very important in providing a full suite of exposure. Especially being essentially a proxy for Australian industrial, with CIP being the only pure play, listed industrial REIT.
Our key diversifications would be the 5 subsectors of industrial. Industrial is not just a shed with 4 walls and a roof. It’s a far more dynamic asset class than that. We would like to provide our investor’s exposure across that full spectrum.
That includes the manufacturing industry, those who are actually producing products here in Australia. This represents a fairly large percentage of our portfolio. It’s also one of the more resilient tenant bases within our portfolio.
The second subsector is warehouses and distribution centres. You then have transport and logistics, data centres, and the fifth key subsector is cold storage.
We then look at the quality of the tenants paying the rent in those types of facilities. We look at that from a geographic diversity perspective. Our current skew is towards the eastern seaboard markets. We believe those have the highest amount of growth. So we’re 89% weighted to eastern seaboard markets. We’ll continue to maintain a national exposure for the REIT, but with a preference for the eastern seaboard markets.
Lastly, certainly not least, it’s important that you go into business with high-quality tenants that can continue to pay the rent. Over 85% of our portfolio’s rent is paid by tenants that are either listed, multi-national or national tenants. Only a small percentage of our portfolio is exposed to what we’d consider small to medium-sized enterprises.
We’ve talked about the acquisition side. When would you dispose of assets?
Over the past half year, we divested a $40 million asset. That facilitated some recycling of capital. When we’re assessing the portfolio, we’re always looking to optimise the balance of assets, both from a geographic sense and a tenant sense and also in a submarket sense.
Often we’ll look to recycle capital where we feel that an asset may be non-core to our strategy. Or where we’ve received a great leasing outcome, and that facilitates the divestment of the asset where we feel we’ve maximised the value at that point in time.
CIP became part of the S&P/ASX 200 Index (ASX: XJO) on 22 June? How has this impacted the Trust?
We think this has had a very positive impact. What it’s done is provide our investors with more relevance in the market. It’s really a demonstration of the scale of CIP. It’s brought the share on the radar of a lot more investors in the market, and we’ve seen a greater interest in this stock as a result.
Looking back over the past 12 months, what are some of the big success stories?
We’ve had a number of great successes over the last 12 months.
I’m very proud of the number of transactions we’ve been able to achieve. The quality of the assets we’ve been able to acquire. And then the flow on into the portfolio, which has resulted in an occupancy of 97.7%. At Centuria, we have a WALE [weighted average lease expiry] now of 9.8 years, which we believe is market-leading for an industrial fund.
On the leasing front, we’ve also had a very successful half-year. We’ve leased over 140,000 square metres. That represents about 13% of the portfolio income. Of that 140,000 square metres, we’ve de-risked a number of key lease expiries in that period. That means that over the next 4 years no more than 8.5% of the portfolio expires in any one year. We now also have no single customer representing more than 2.5% of income expiring in that next 4-year period.
Another highlight, as we talked about, was our inclusion in the S&P/ASX 200 index. We at Centuria were really proud to upgrade our guidance, from 17.4 cents at the beginning of FY21 to now no less than 17.6 cents.
What difficulties did you encounter over the past 12 months?
While COVID had a minimum impact on the portfolio, or even a somewhat positive impact on parts of the portfolio, some of our customers did suffer.
Centuria reported rent collections of over 98%. However, we did have a number of customers who received rent relief as a result of COVID. These were small to medium-sized enterprises. But the rent relief we’re providing is less than 1% of income.
What’s the greatest risk facing logistics investors in the year ahead?
We think the biggest risk is going to be people’s ability to grow their portfolio and gain exposure to the industrial sector. Demand is going to remain extremely competitive for industrial product. We’re going to continue to see low transaction volumes compared to the amount of capital chasing exposure to the sector.
One of the challenges across the market is going to be a team’s ability to continue to grow and to put their foot on great industrial assets.
And what’s the biggest opportunity ahead for logistics investors?
The biggest opportunity really sits in that e-commerce space. We are still in our infancy in terms of our online penetration of total retail sales. I think that translates to a significant amount of demand for industrial space. That’s going to have a really positive impact on the portfolio, both from a rental growth perspective and the quality of tenants as we see more people enter into either omni-channel or pure online.