Nicholas Blake

Centuria Metropolitan REIT (CMA) yesterday announced the sale of 3 Carlingford Road, Epping, for $36 million to a private buyer. The sale price represented a 118% increase on the purchase price of $16.5 million in December 2014.

The fully-leased office building sold with a tight passing yield of 5.4%, demonstrating the strength of suburban markets. The property gained a 27.2% premium between its last independent valuation in November 2017 and the sale.

CMA Trust Manager Nicholas Blake explained “With more than a dozen bidders competing for the asset, we are clearly continuing to see a strong demand for metropolitan property – and in particular for high quality properties with development potential.

“We usually look for and manage properties with an eye to leaving their purpose and use open-ended. Such flexibility is the best strategy to future-proof assets for investors, as well as addressing the need for high quality suburban stock.”

It’s clear that investors have sustaining appetite for such stock, against a limited supply of the same.

The sale campaign was run by Guillaume Volz and Henry Burke of Colliers International, and Tim Grosmann and Graeme Russell from Savills.

Grosmann, Director, Capital Transactions at Savills, said “The excellent result on Epping is a direct result of prime property fundamentals; a corner block, close proximity to a train station and strong rental reversion in a market that is starved of commercial suburban stock.”

Guillame Volz, National Director, Development Sites – Residential for Colliers, affirmed that “The sale demonstrates that strong buyer interest still exists from both local and offshore buyers for well-located suburban properties, with passing income and good development potential.”

Blake went on to say that “Applying a forward-looking lens is key to our acquisition strategy, and it pays dividends when done well. On this occasion, we have been able to realise a premium on the asset, and achieve a tight passing yield of 5.4% which compares positively against typical yields we see in key NSW metro markets of around 6% to 7%.”

For investors in this REIT, the success is testament to the importance of fund managers with deep market knowledge and the skill of identifying good opportunities with the potential for capital gain, and of actively managing assets to capitalise for significant upside. With this arsenal, CMA continues to deliver value to its investors with significant return on investment.

Contracts have been exchanged and settlement is expected in September 2018. The proceeds will be used to unlock select, accretive acquisition targets and further capital management initiatives.

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Nicholas Blake

Centuria Property Funds Limited (CPFL), as Responsible Entity of Centuria Metropolitan REIT (ASX: CMA), is pleased to announce the following:

• Acquisition of two NSW metropolitan office assets for $119.1 million[1] (Acquisitions);
• An underwritten[2] accelerated entitlement offer to raise approximately $60 million (Equity Raising) at an issue price of $2.39 per CMA security (Issue Price);
• Independent valuations providing an uplift of $33.8m driven by strong market fundamentals, active asset management and increased investor appetite for non-CBD office assets; and
• Entered into an unconditional contract for the sale of 44 Hampden Road, Artarmon for $10.3 million, a 14.4% premium to book value generating an 18.4% IRR since acquisition

CMA Trust Manager, Mr Nicholas Blake commented: “Metropolitan markets are core to Centuria’s DNA, and these acquisitions increase CMA’s exposure to some of the highest performing submarkets in the nation at attractive pricing.”

“We see significant potential in St Leonards, with Sydney’s North Shore experiencing tightening vacancy rates, limited supply and strengthening rentals. St Leonards benefits from these strong fundamentals but has lagged the neighbouring North Sydney and Chatswood submarkets due to significant stock withdrawal for residential conversion. Accordingly, we expect this market to re-position as the residential development cycle abates.”

“Our investment in the A Grade asset 201 Pacific Highway, St Leonards, which is adjacent to CMA’s existing asset at 203 Pacific Highway consolidates our footprint in this near CBD market. Both assets are well-located above the St Leonards rail station with significant in-place amenity.”

“Similarly, 77 Market Street Wollongong is a high-quality, fit-for-purpose building in a well-defined market, anchored by strong commercial tenants.”

“Both acquisitions are highly complementary to our portfolio, and well positioned to deliver value for our securityholders”.

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Nicholas Blake

Centuria Property Funds has announced that its listed office fund, Centuria Metropolitan REIT (ASX: CMA), has made three major acquisitions in Perth and Melbourne. The acquisitions mark Centuria’s first foray into the Perth office market, and strengthen CMA’s lead as the largest pure-play metropolitan fund manager in the market.

In Perth, Centuria has acquired two new commercial assets: The Hatch Building at 144 Sterling Street, and 42-46 Colin Street, for a combined sum of $91.8 million. Combined with Centuria’s acquisition of the Target Head Office at Williams Landing late last month, the deals are valued at $150 million, and will increase Centuria Capital Group’s (ASX: CNI) entire funds under management to $4.15 billion.

CMA Trust Manager, Nicholas Blake, said the group is always looking for opportunities that will benefit from CMA’s active management approach and thereby deliver strong returns to shareholders.

“We are asset-driven investors, and have purchased these properties on the basis that they are highly complementary to CMA’s current portfolio and our active management strategy. Centuria’s approach is to pay the fee and to take over the management from the agent, freeing them up to work on the next property, which enables us to generate income returns alongside the potential for capital growth.

“The two Perth assets are 100% leased, with the major occupiers being WA Police, Insurance Australia Group Ltd, and consulting firm Hatch. This diverse range of high-quality tenants, from government-owned and listed companies to international firms, means shareholders can feel confident in securing attractive and stable yield. Looking to Victoria, the new Target HQ at Williams Landing will be 100% leased and stands to benefit as the Williams Landing population grows, alongside ongoing infrastructure improvements in the area.”

The combined WALE of the three properties is 6.5 years and their fixed rental reviews sit between 3.25% and 3.75%.

The acquisitions have been partially funded by a $90 million equity raising, which will see CMA extend its lead as the market’s largest listed metropolitan market office fund, and the leading specialist manager within the space. The REIT’s property portfolio will increase in value by 25% to $760 million. It will see the trust’s market capitalisation increase from approximately $430 million to more than $520 million, improving its potential for S&P/ASX300 index inclusion (based on securities prices at 12 July 2017).

In addition, CMA has entered exclusive due diligence to acquire a development site for the construction of an A-Grade commercial office building in South West Sydney, expected to be valued at around $75 million.

Mr Blake said the Perth metro market was beginning to show excellent fundamentals, while AREITs in general are proving attractive to risk-averse investors, informing his approach and pipeline of deals.

“At CMA, we believe a truly quality property can provide unitholders with returns and yields over time in any market. CMA’s west-coast expansion, in line with our asset-driven and active management approach, will see shareholders benefit from the significant east/west pricing disconnect in the office market.

“Looking to AREITs in general, the transparency and certainty of earnings from solid property portfolios are perennially attractive to investors, particularly in light of continuing uncertainty in the global markets. We are confident these latest additions to our portfolio will meet investor appetite, via a complementary mix of income streams from long-term leases, high-quality tenants and the potential for value creation via CMA’s active management.”

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Nicholas Blake

Centuria Property Funds Limited (CPFL), as Responsible Entity of Centuria Metropolitan REIT (CMA) has announced CMA’s half year financial results ended 31 December 2016.

Key Highlights

• Statutory net profit of $27.1 million
• Distributable earnings1 of $10.9 million representing 9.1 cents per security (“cps”)
• Increase in total assets of 14.2% to $440.6 million
• Net tangible assets (“NTA”) has increased by 14 cps to $2.32 per security
• CMA’s portfolio value has increased by 4.7% to $417.5 million2
• Gearing 33.8%3, remains within the target range of 25 to 35%
• Secured 22 leasing transactions across 7,750 sqm, including key leases at 1 Richmond Road, Keswick and 555 Coronation Drive, Toowong
• CMA’s portfolio 98.9%4 occupied with a 4.2 year WALE4
• Agreed sale of 14 Mars Road, Lane Cove at a 21%5 premium to book value
• Acquired an 8.8% strategic interest in Centuria Urban REIT (CUA)6 alongside Centuria Capital Limited (CNI) acquiring the Responsible Entity of CUA and a further 19.9% investment in CUA
• FY17 earnings guidance of 18.7 – 19.0 cps and distribution guidance of 17.5 cps reaffirmed

Nicholas Blake, Trust Manager – CMA said “The first half of FY17 was a positive one for CMA with significant leasing success across 22 transactions, or 6.9% of the portfolio, including the elimination of key near term expiries and vacant space.

CMA’s portfolio is well positioned with nearly 99% occupancy and over 4 years of weighted lease duration from a diverse tenancy base, ensuring regular and predictable earnings. We remain focussed on actively managing the portfolio’s lease expiries to mitigate earnings risk over the next 1 to 3 years.”

Mr. Blake continued, “The portfolio’s value continues to strengthen demonstrating the strong fundamentals and underlying investor demand for quality metropolitan assets. As a result, CMA’s NTA has increased 6.4% to $2.32 per security.

Gearing remains conservative at 33.8% after taking into account the acquisition of an 8.8% strategic interest in CUA and before applying the net proceeds from the sale of 14 Mars Road, Lane Cove, which will reduce gearing to approximately 30%.

CMA remains well positioned to deliver on its FY17 earnings forecasts with earnings skewed towards 2H17 due to the delayed rent commencement of leasing deals struck in late 1H17.”

Significant Leasing Success

Significant leasing activity continues to be achieved across CMA’s portfolio. Since 30 June 2016 CMA has secured 22 leasing transactions across a total 7,750 sqm, comprising 14 new leases over 4,640 sqm and 8 renewals over 3,110 sqm. At 31 December 2016 CMA’s portfolio was 98.9%7 occupied with a 4.2 year WALE4.

Of the 7,750 sqm of transactions secured, 2,420 sqm represents new leasing over previously vacant space, 4,198 sqm relates to upcoming FY17 expiries, and 1,132 sqm relates to FY18 and beyond expiries.

Key leasing highlights include:

Occupancy in the Fund’s Canberra sub-portfolio has increased to approximately 92.5% at 31 December 2016 following the completion of refurbishment works at 54 & 60 Marcus Clarke Street in August 2016 and subsequent let-up of the ground floor retail tenancies.

Refurbishment works at 1 Richmond Road, Keswick, completed leading to the execution of a new 3 + 3 year lease with DCNS Australia Pty. Ltd. (DCNS Australia) over 1,705 sqm commencing 1 February 2017. This space was previously occupied by the Minister for Transport and Infrastructure who had indicated their intention to vacate at lease expiry being 30 June 2017.

DCNS Australia is a subsidiary of DCNS Group, a French naval shipbuilding company and European leader in naval defence. DCNS Australia has been selected as the preferred international partner for the design of 12 submarines for the Royal Australian Navy, a $50 billion project spanning 25 years.

In order to mitigate any potential downtime CMA remains focused on proactively marketing the remaining 2,975 sqm Minister for Transport and Infrastructure tenancy ahead of the 30 June 2017 lease expiry.

At 555 Coronation Drive, Toowong, CMA successfully leased the 891 sqm tenancy previously occupied by Advisian to State Mercantile Pty Ltd for a term of 7 years in addition to extending State Mercantile’s existing lease over 921 sqm to be co-terminus with the new 7 year lease. Consequently, asset occupancy and WALE improves to 100% and 3.8 years respectively, eliminating near term Queensland expiry risk from CMA’s portfolio.

Average fixed rental growth across the portfolio remains underpinned with 94% of CMA’s leases having fixed annual reviews at an average increase of 3.7% p.a.

Mr. Blake said, “The leases executed at 1 Richmond Road, Keswick and 555 Coronation Drive, Toowong demonstrate the benefit of pre-emptive marketing and asset positioning in securing the interest and commitment of new tenants. These transactions mitigate significant near term expiry and vacancy risk in CMA’s portfolio”.

Strengthening Asset Valuations

At 31 December 2016, CMA’s portfolio was valued at $417.5 million representing an increase of 4.7 per cent since 30 June 2016. Consequently, NTA has increased 14 cents (6.4%) to $2.32 per security.

One asset was independently valued at 31 December 2016 being 9 Help Street, Chatswood, where the value increased by $7.1 million (12.9%) to $62.2 million. The balance of CMA’s portfolio was independently valued earlier in 2016.

The weighted average capitalisation rate of CMA’s portfolio has firmed 34 basis points to 7.52%8 at 31 December 2016.

Mr. Blake continued, “We expect 2017 will continue to be a strong year for valuation growth with capitalisation rates for metropolitan assets continuing to firm relative to prime grade CBD assets and additional upside to be extracted through active management and repositioning strategies. Importantly, most metropolitan markets are experiencing real rental rate growth coupled with contracting incentives and continuing strong tenant demand”.

Disciplined Capital Transactions

Sale of 14 Mars Road, Lane Cove

On 21 December 2016 CMA announced that it had entered into an unconditional contract for the sale of 14 Mars Road, Lane Cove, with the incumbent tenant Cochlear Limited. The sale price of $26.0 million4 represents a 20.9% premium to the 30 June 2016 book value of $21.5 million.

The contract provides for settlement to occur on or before 31 March 2017 at CMA’s election. CMA intends to use the proceeds from the sale to reduce debt pending identification of a suitable reinvestment opportunity. Gearing is expected to reduce to approximately 30% following the repayment of debt from the proceeds of sale.

Based on the proposed timing of settlement the asset will have a property IRR of 23.8% since CMA’s listing in December of 2014.

Mr. Blake said “The high level of return bears out the value proposition to be found in metropolitan markets and supports the investment strategy CMA has adopted to generate value for its investors.”

Acquisition of an 8.8% strategic interest in Centuria Urban REIT

On 9 January 2017 CMA acquired a strategic holding of 8.8% in the ASX listed Centuria Urban REIT (CUA)6 for approximately $14.5 million. This was alongside Centuria Capital Limited’s (CNI) acquisition of the Responsible entity of CUA and a further 19.9% investment in CUA. Combined, CNI and CMA’s interests total 28.8% of the issued capital in CUA.

CUA owns three modern, well leased metropolitan office buildings in QLD and VIC with a portfolio occupancy of 99.2% and WALE of 4.6 years. The CUA portfolio is complementary to CMA’s property portfolio. Accordingly, the acquisition of the 8.8% strategic holding in CUA represents an investment in, and exposure to, similar underlying assets for CMA securityholders.

CMA’s intention in relation to its 8.8% stake is to maintain the investment as a long term strategic investment, to maximise the return on CMA’s investment through supporting active asset management initiatives by CUA and to support the ongoing management of CUA.

Nicholas Collishaw, Centuria’s CEO Listed Property noted “The Responsible Entities of CMA and CUA may consider the possible merger of CMA and CUA, given the complementary nature of the CMA and CUA portfolios. The two REITs may pursue a mutually beneficial merger in the future but no decision has been made in this regard at this point. Any merger proposal would need to be in the best interests of respective investors and subject to any necessary approvals.”

Prudent Capital Management

CMA remains conservatively geared at 33.8%9. CMA’s weighted average debt maturity is 3.7 years, with an ‘all in’ interest cost of 3.9% p.a.10

CMA has hedged approximately 60 per cent of its debt facilities, co-terminus with facility maturities, ensuring exposure to interest rate risk is prudently managed in line with CMA’s conservative capital management philosophy.

CMA’s Interest Cover Ratio is approximately 5.3 times relative to its facility covenant of 2.0 times, demonstrating adequate covenant headroom.

Following the acquisition of an 8.8% strategic interest in CUA for $14.5 million on 9 January, 2017 CMA has total debt facilities of $180 million with $25.5 million in undrawn capacity. CMA’s debt facilities are well diversified with multiple lenders and maturities, with CMA’s next maturity being December 2019.

Upon settlement of the sale of 14 Mars Road, Lane Cove, CMA intends to use the proceeds to repay debt pending identification of a suitable reinvestment opportunity. This will reduce gearing to approximately 30%.

Earnings and Distribution Reaffirmed

CMA’s FY17 earnings guidance of 18.7 – 19.0 and distribution guidance of 17.5 cents per security remain unchanged.

2H17 distributions totaling 8.75 cents per security are forecast to be paid in two quarterly instalments of 4.375 cents per security with record dates of 31 March 2017 and 30 June 2017, respectively.

Mr. Blake said, “CMA’s underlying portfolio remains well placed to deliver stable, predictable rental income into the future, providing quarterly distributions to our securityholders and the potential for additional value creation through active asset management.”

Corporate Simplification

CMA is currently structured as a stapled trust scheme, where securityholders own securities in each of Centuria Metropolitan REIT #1 and Centuria Metropolitan REIT #2. This gives rise to a number of operational and cost inefficiencies, for example CMA currently produces two sets of audited financial statements, one for each of the stapled entities.

CPFL has taken advice from Ernst & Young in relation to a proposed simplification of CMA’s corporate structure (Simplification Proposal). The Simplification Proposal will require the approval of CMA securityholders. A separate Explanatory Memorandum and Notice of Meeting will be mailed to CMA securityholders in February 2017 explaining the Simplification Proposal in detail.

The Explanatory Memorandum and Notice of Meeting will include details of the proposed meeting CMA securityholder meeting which is anticipated to be held in March 2017.

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