Centuria Metropolitian REIT: Adding scale

About the author:

Fiona Buchanan
Author name:
By Fiona Buchanan
Job title:
Director of Research, Senior Analyst
Date posted:
22 October 2018, 10:10 AM
Sectors Covered:

Acquisitions funded via new equity + debt

Centuria Metropolitan REIT (CMA) has announced the acquisition of four office assets for A$521m (WACR 5.8% and initial yield 6.1%). The assets were acquired from Hines Global REIT Inc and were funded via an underwritten A$276m equity raising at A$2.43 (1 for 3 accelerated non-renounceable entitlement offer to raise A$197m and an institutional placement to raise A$79m).

Existing debt facilities will also increase by A$260m (total limit now A$580m) taking gearing to 36.6% from 28.3%. Centuria Capital (CNI) will contribute A$20m resulting in a net price payable of A$501m and has committed to take up its entitlement.

Portfolio now valued at A$1.45bn

CMA's new assets are underpinned by 90% fixed rental reviews averaging 3.7% per annum. The assets are located in Chatswood in Sydney, Fortitude Valley in Brisbane and Docklands in Melbourne.

Post-transaction the portfolio will be valued at A$1.45bn across 23 assets (cap rate 6.35%/previously 6.67%); occupancy 98.8% and WALE of 4.2 years. Lease expiries are currently 9.2% in FY19 and 12.2% in FY20. We note the timing for the acquisition of the Target HQ building in Williams Landing (Victoria) remains on track with rent commencement expected in January 2019 (valued at A$58.2m).

FY19 guidance reset post raising

CMA will now report on a Funds from Operations (FFO) basis with its payout ratio set at 90-100% of FFO. FY19 FFO guidance is forecast to be 18.7c and DPS 17.6c (was 18.1c) paid quarterly. Pro-forma NTA is A$2.42 (from A$2.49). Post the divestment of its remaining two industrial assets (cA$49m), gearing is expected to move to within the target range of 25-35%. New securities will also be eligible for the December quarter distribution of 4.5358c. FY19 guidance assumes the divestment of the remaining industrial assets.

We have updated our forecasts for the capital raising and acquisitions.

Investment view

Centuria Metropolitan REIT (CMA) is one of the few remaining pure play office REITs (metro focus) and offers an attractive FY19 distribution yield of 7.2%, which is underpinned by contracted rental income. Near-term catalysts relate to successful leasing outcomes and potential index inclusion. Key risks relate to material increases in bond yields and tenant default/non-renewal.

We retain our Add recommendation.

More information

Morgans clients can login to view our detailed report and share price target for Centuria Metropolitan REIT (CMA). Alternatively, please contact your nearest Morgans office for access.

Disclaimer(s): Morgans Corporate Limited was a Co-Lead Manager to the entitlement offer of shares in Centuria Metropolitan REIT and received fees in this regard.

The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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