The S&P/ASX 200 Index (ASX: XJO) stock Centuria Industrial REIT (ASX: CIP) has seen its share price fall close to 13% since 20 September, and it's down a hefty 30% from December 2021. I get excited when I see declines of this scale for a compelling company.
What type of business is it? CIP describes itself as Australia's largest domestic pure-play industrial real estate investment trust (REIT). Its industrial properties are situated in key metropolitan locations throughout Australia. The ASX 200 stock aims to provide a mixture of passive income and capital growth.
It's a defensive business that could appeal in an uncertain economic time because of the high-quality nature of its rental portfolio.
At the end of FY24, the REIT advised it had a portfolio occupancy rate of 97.1% and a high-quality tenant base. Some of its tenants include Telstra Group Ltd (ASX: TLS), Woolworths Group Ltd (ASX: WOW) and Arnott's. Its weighted average lease expiry (WALE) is 7.6 years, which is a good length of time for a rental contract, in my eyes.
Noting all of these elements, here's why I think Centuria Industrial REIT is an appealing investment.
Dividend yield
Commercial properties tend to offer a higher level of passive income than residential properties, allowing REITs to deliver a pleasing distribution yield.
Centuria Industrial REIT expects to pay a distribution of 16.3 cents per unit in FY25, which currently translates into a distribution yield of 5.5%.
While that's not a huge starting yield, I think it's solid, considering we're talking about quality industrial properties. It's not paying out all of its projected FY25 rental profit, but if it did, the distribution yield would be 6%.
The ASX 200 stock is good value
For each result, the business tells investors its underlying value using a figure called net tangible assets (NTA). That adds up the assets (such as property values) and liabilities (such as debt). At 30 June 2024, it had a reported NTA of $3.87.
At the current Centuria Industrial REIT share price, it's trading at a 24% discount to its reported value. We can only truly know what the property values are if the REIT were to sell them, but the property values are independently valued, so it's the best estimate for now.
When interest rates in Australia eventually fall, I think both the ASX 200 stock's NTA and the share price could positively react.
Underlying growth
A number of themes are providing tailwinds for industrial real estate.
One key driver is increased e-commerce adoption. According to Centuria, each additional $1 billion of online sales requires around 70,000 square metres of logistics space. Australian e-commerce is forecast to increase by $15 billion by 2027, requiring an additional 1.1 million sqm to support the growth, according to the REIT.
Population growth is another tailwind. With around 4.5 sqm of Australian industrial space required per person, population growth is expected to require an additional 4.5 million sqm of industrial space by 2025.
Another tailwind is the onshoring of production and assembly following COVID-19. Centuria said organisations continue to build supply chain resilience and reduce cost volatility through onshoring/reshoring elements of production and assembly. It noted that advances in technology and automation were making onshoring more efficient and cost-effective.
The rapid growth of data centre demand is also increasing the demand for real estate, thanks to the growth of generative AI and related industries, cloud computing, content, and gaming.
Putting all of these together is driving the business's rental potential. A re-leasing spread tells investors how much rental income a new lease is making compared to the old one. In the first quarter of FY25, the ASX 200 stock reported a positive re-leasing spread of 54%, which is a huge increase.
I think the Centuria Industrial REIT has a lot of potential to deliver both rental and capital growth potential.
