Company Interview / Strong tenant demand boosts Centuria's earnings

Key points:

Centuria Industrial REIT (ASX: CIP) posts a profit of $48 million in FY 24 after a previous loss of $76.5 million - strong leasing activity credited for this turnaroundGrant Nichols forecasts funds from operations of 17.5 cents per unit in FY 25, generating optimism for continued growthIndustrial property remains promising due to e-commerce growth and the resurgence of Australian manufacturing serving as strong competitive tailwinds

Overcoming a considerable loss in the previous year, Grant Nichols of Centuria Industrial REIT reports a profit of $48 million in FY 24, thanks to robust leasing activity. Grant anticipates FY 25 to bring funds from operations of 17.5 cents per unit, following on from the upgraded forecast of 17.2 cents per unit in FY 24. Reflecting on the corporation's journey, Grant highlights three consecutive years of earnings growth despite the economic challenge presented by increased debt costs.

On the property front, Centuria Industrial REIT, an industrial fund, gained significant support from strong tenant demand for industrial spaces. Relaying specifics, Grant states the fund leased over 300,000m² in FY 24, earning a record for the company. Additionally, increased subleasing and a conspicuous division in tenant preferences indicate considerable movement within the industrial property sector. While larger spaces attract some tenants, several others are drawn to spaces from 3,000-10,000m².

Turning his attention to the larger economic scene, Grant mentions that industrial property continues to be bolstered by key supportive trends. E-commerce growth is projected to add $15 billion by 2027 and may drive demand for around 1,000,000m² of industrial property. On top of this, manufacturing within Australia makes a comeback, backed by federal government support and automation benefits. Grant believes that these positive movements should maintain their momentum, yielding more opportunities in the industrial property segment.

Full unedited transcript:

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Property investment trusts and Surya REIT's has industrial units, ensuring industrial rate has posted a profit of $48 million in FY 24, following a loss of 76.5 in the previous year. In its head of listed funds, Grant Nicholls attributes the gains to a strong leasing activity. The group, outlining a guidance of funds from operations in FY 25 of 17.5 cents a unit. Let's get some further detail now. CLP fund manager and Centurion head of listed funds Grant Nicholls joins us now. Great welcome. Thanks, Andrew. Good to be here. How would you describe that result. So we're very happy with the results for FY 24. As mentioned, we delivered guidance in line with our upgraded forecast in the half year. So it's 17.2 cents per unit. Now the same time we provided guidance for FY 25 of 17.5 cents. So what's most pleasing about the result is that we are providing guidance. It's our third year of earnings growth, which is really quite an achievement considering the higher debt

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cost environment we're in now compared to FY 22. What are you seeing in terms of property income at the moment? So for CRP is a industrial fund. We've had a really good year of leasing. We're still seeing very, very strong tenant demand across the industrial portfolios of Australia. So we leased in excess of 300,000m² to re FY 24, which is our record leasing year. And we're still seeing very, very strong demand for the type of product with CRP ions. So CRP is predominantly a urban infill industrial landlord. And what we mean by that is we generally own in markets that have got constraints in regards to being surrounded by residential areas.

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What are you seeing for demand right now and particularly as far as subleasing is concerned? Yeah, there has been an increase in subleasing, but at the same time for leasing of industrial property, what we're seeing there is a bit of a bifurcation in terms of tenants that are looking for larger space. So in excess of 20,000m² compared to generally in between sort of 3 to 10,000m² of space. So we call them sort of the mid mid-size tenants within the industrial portfolio. That is still a very active part of the market, and they're still very, very limited vacancy. So from the perspective of CRP, our average tenancy size is about 7500m². We're still very much in the sweet spot of where we're seeing most active tenant demand. When you take a look at more broadly what's going on with the Australian economy, do you have concerns? There is evidence, perhaps of a slowdown. We of course we had that latest inflationary. But you know, we know the consumer is under pressure. What are we seeing in the business sectors and how that's likely to affect your operations. Look

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I think this there's very strong tailwinds for industrial property at the moment. So if you think about e-commerce penetration, it's forecast to increase by about $15 billion by 2027. That in itself is potentially going to create about 1,000,000m² of industrial demand. So even if there was a slowdown in the the total economy, I think you're going to continue to see growth in e-commerce penetration, which would be very good for logistics providers outside of that too. We're also seeing things like onshore and coming back into Australia. Now, the federal government has been very strong on trying to get more jobs within Australia, but things like automation make it more feasible to have manufacturing back within Australia. And we're seeing some growth within manufacturing as well. So I think there's a number of tailwinds that will contribute to a strong outlook for industrial property into the future. And in fact, that trend would appear to be accelerating, particularly in the light of what we're seeing in the States at the moment. With uh, that globalization process very much underway. Um, you you spoke there of, uh,

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that urban infill that, that you're involved with. How difficult is that in particularly in some of the larger cities and the regulatory hurdles you need to come up against? So the benefit of an existing landlord that's got a large urban infill footprint is that it can't be replicated. So the urban infill, they're not creating more industrial land where they're doing industrial supply at the moment or creating more industrial land. It's generally on the outskirts of cities, and that's where we're also seeing the larger industrial boxes. So in excess of 20,000 square meter industrial facilities. So by having a portfolio that's predominantly located in that urban infill, it's it's providing us with a clear advantage in that there is very limited supply that can be built within those markets. But also that is where the majority of the demand is directed at the moment, beyond high density urban spaces. Where else are you looking at at the moment particularly? Are you operating in the regions? So we've got a development pipeline across our portfolio, and what we're looking at doing is things like for those constrained markets, the urban infill, things like multi-storey development is

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something we'll consider down the track because that obviously will create a bit more supply within those urban infill markets where there is not greenfield land to create traditional industrial facilities.

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And what's your have you given guidance on your dividend. What's the outlook. So our guidance for FY 25, we provided FFO guidance or earnings guidance is 17.5 cents per unit and distribution guidance of 16.3 cents per unit. All right. Overall, um, Grant, what would you say the biggest headwinds that you're you're facing at the moment? Look, I think the biggest challenge for I think there's a lot of tailwinds for industrial property. I think the ongoing largest headwind for, for real estate generally has been interest rates. So I think when you're talking previously, there's a couple of things that, you know, people need to consider when they're looking at rates, things like the fed coming out indicating they are more likely to cut interest rates into the future. We've seen other overseas jurisdictions like Europe and Canada already start to cut rates. I think when you start to see that come into Australia and and hopefully that's something that we'll see through the next 12 months. That will be a strong tailwind for for reach generally, but within that industrial property as well, mind you, when you look across the streets, industrial has certainly been the outperformer. Can that continue, do you

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think particularly once interest rates start to fall? Look, I think the national vacancy rates are about 2% for industrial. It's well below the other commercial sectors. And I think there is to the tailwinds we were talking about previously, I think there are still some really good, really good tailwinds for industrial property looking forward.