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.
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.
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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.
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