Centuria Industrial REIT (CIP) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Centuria Industrial REIT FY '26 results. [Operator Instructions] I would now like to hand the conference over to Mr. Grant Nichols, Centuria Head of Listed Funds and CIP Fund Manager. Please go ahead.

Good morning. Thank you for joining Centuria Industrial REIT's 2026 full year results presentation. My name is Grant Nichols, CIP's Fund Manager. Also presenting today is Kate Mitchell, Centuria Capital Group Data Center Fund Manager; and Michael Ching, CIP's Deputy Fund Manager. Starting on Slide 3, I would like to commence today's presentation with an acknowledgment of country. We are joining you from the lands of the Gadigal people of the Eora Nation. Centuria manages property throughout Australia and New Zealand and pays its respects to the traditional owners in each country, to their unique culture, and to their elders, past and present. In today's presentation, Kate, Michael, and I will provide an overview of CIP's 2026 financial performance, an update on our data center progress and opportunities within this subsector, analysis of the CIP's operational performance, an update on our development projects and pipeline, a summary of market conditions, and conclude with an outlook and guidance statement. Moving to Slide 4. Centuria Industrial REIT is managed by Centuria Capital Group. Centuria has over $22 billion of assets under management, and CIP is the largest fund managed by Centuria. CIP unitholders benefit from Centuria's deep real estate expertise, including a fully integrated property, facilities, and development management platform, synergies across the group's broader industrial real estate portfolio, and strong alignment, as Centuria is CIP's largest unitholder and the manager's interests are strongly aligned with yours as unitholders. On to Slide 6. CIP's longstanding vision and strategy remains unchanged. We aspire to be Australia's leading domestic pure-play industrial REIT with a primary focus on delivering income and capital growth to investors from a portfolio of high-quality Australian industrial assets. We believe we have distinguished CIP through this strategy by creating a portfolio focused on Australian urban infill industrial assets that maintains high levels of tenant demand in markets with limited or no land supply. We believe one of the defining features of CIP today is the disconnect between direct market evidence and its listed market valuation. The portfolio continues to be validated through leasing outcomes, independent valuations, and realized asset sales, yet the REIT continues to trade at a material discount to NTA. As management, we remain focused on converting operating performance into earnings growth, value creation, and ultimately improved recognition by capital markets. Turning to FY '26 highlights on Slide 7. It has been another impressive year for CIP, marked by near record-breaking leasing activity. The high volume of leasing, along with consistently strong re-leasing spreads, enabled CIP to achieve significant net operating income growth, which is translating into tangible growth in funds from operations. Throughout the year, CIP has continued to capitalize on persistently strong investment demand for Australian urban infill industrial real estate. in FY '26, CIP divested $200 million of assets at an average 17% premium to book value. Importantly, these outcomes are not isolated, as CIP has consistently realized sale prices at or above book value. We view this as powerful third-party validation of the portfolio's carrying values and further evidence of the disconnect between direct market pricing and CIP's listed market valuation. In FY '26, CIP completed 3 developments, securing strong leasing commitments for 2 and achieving an excellent internal rate of return from the sale of another. These results underscore the benefits of developing in constrained markets, as well as the expertise of Centuria's in-house development team. On the capital management front, CIP refinanced $450 million of debt on competitive terms, with margins secured between 10 and 20 bps lower than previous terms, while the weighted average debt maturity was extended to 4 years. The REIT also settled $320 million of exchangeable notes at an increasingly attractive fixed annual coupon of 3.5%. Turning to Slide 8. FFO and DPU were delivered in line with FY '26 guidance, and the portfolio maintains 95.2% occupancy and an attractive 7-year WALE. FY '27 guidance implies earnings growth, with FFO expected to be up to 5.5% higher than FY '26. Importantly, that growth is expected to be driven predominantly from embedded rent reversion, leasing execution, and operational initiatives rather than acquisition-driven expansion. We believe this highlights the strength of CIP's internal growth profile. Looking at this in more detail on Slide 9. We estimate the portfolio is approximately 17% under-rented on average, providing a significant runway for future earnings growth beyond FY '27. Put simply, a meaningful proportion of existing leases remain below prevailing market rents and provide a visible earnings growth opportunity. Approximately 55% of leases expiring over the next 3 years are currently under rented, creating a clear pathway to future earnings growth without requiring additional balance sheet deployment. Further, the Australian industrial market has relatively low vacancy rates, and we anticipate that future supply will decrease. This creates an excellent environment for medium-term rental growth, further enhancing the potential for future earnings and valuation growth across the CIP portfolio. These solid market conditions should also support increased occupancy, driving further like-for-like earnings growth in future years. We believe this embedded rental reversion remains one of the most unappreciated drivers of future earnings growth within our portfolio. Considering the disconnect between CIP's investment metrics and its trading price, along with the positive earnings potential that could be generated, we believe the value CIP currently offers is very compelling. Moving on, CIP continues to progress its data center strategy. I will now pass over to Kate to take you through that strategy and the opportunities that lie ahead.

Thanks, Grant. Starting on Slide 11. To set the scene, Australia's data center market is being shaped by 3 forces. First, supply is generally constrained, with limited new large-scale power capacity realistically deliverable over the next few years. Second, Australia has real structural advantages, a competitive cost base, sovereign and regulatory positioning, a strong renewable energy pipeline, land availability, and sub-sea connectivity, providing low latency access to Asia and North America. Third, Australia is well-positioned to capture the next wave of AI-driven demand. AI is creating incremental workflow growth, not simply replacing existing compute demand. Capital is already flowing, with major global platforms, including Amazon and Microsoft, committing substantial capital to their Australian AI infrastructure rollouts. In this context, the greatest strategic risk is not oversupply, but that AI value is created offshore, leaving Australia a consumer rather than a producer of digital intelligence. For owners of industrial land with proximity to power and connectivity infrastructure, increasing scarcity is materially enhancing the strategic value of suitable development sites. In our view, the value creation opportunity increasingly sits not simply with the operating data center, but in controlling scarce power-enabled real estate. That gap is precisely the opportunity CIP is positioned to capture. Turning to Slide 12. CIP's strategy is to generate real estate returns from the data center opportunity without operating risk. CIP does not operate data centers. It owns and leases the underlying data center assets. The strategy has 2 core pathways. The first is existing operational data centers, which provide long, secure income streams without exposure to operating performance. The second is asset conversion, taking large land holdings and unlocking their highest and best use through obtaining power allocations and planning approvals, then taking advantage of tenant-led demand. These assets can then be structured as powered land, powered shell, or fully fitted leases, depending on the risk-return profile and the end tenant requirements. CIP already has multiple development opportunities capable of delivering new operational capacity over the next few years, with further upside beyond. From a funding perspective, the approach is deliberately flexible, ranging from powered land leases and asset sales post-approval through to capital partners, joint ventures with operators or hyperscalers, and potentially a future demerger of CIP's data center assets. This optionality allows CIP to fund growth in a disciplined way without overextending. Importantly, management believes a significant portion of this future data center optionality is not reflected in current carrying values or in the REIT's current market value. Our objective is to unlock this value in a disciplined manner while retaining flexibility around funding structures and risk allocation. Slide 13 shows a map of the national platform CIP is building. CIP already has live capacity today, 10 megawatts in Western Australia, 12 megawatts in Victoria, and 2.5 megawatts in Queensland. Sitting above that existing capacity is an identified substantial development pipeline of more than 250 megawatts across Australia. Final capacity remains subject to design and approvals, but the message is clear. This is a geographically diversified footprint, combining income-producing assets today with significant growth optionality. This footprint provides the platform for CIP's strategy and leads directly into the asset-level opportunities that support the investment thesis. Slide 14 provides tangible proof points for the strategy. The Telstra data center has a triple net lease over existing data center through to 2050. A partial surrender of underutilized land has created opportunity for a standalone second facility with a development application already lodged for circa 40 megawatts and approval expected in the near term. The site also benefits from the ability to leverage Telstra's existing connectivity ecosystem. Thomastown is arguably the largest prospect. A 10-hectare holding, less than 100 meters from a terminal station with existing capacity. Power applications are well progressed on the site for what we expect to be a significant power allocation. The Centuria DC asset in Toowoomba is operational today, leased to 2041, with 2.5 megawatts of life capacity and room to expand within the existing facility and adjoining CIP-owned land. Yarraville and Hazelmere are early-stage industrial holdings, both close to terminal stations and leased through to 2028 and 2027 respectively, providing future conversion optionality. The Fujitsu asset is a live 10-megawatt co-location facility leased to late 2030 with additional power and densification upside after expiry. Across all 6 assets, the common thread is proximity to power and connectivity, secure income today, and stage leasing expiries that allow data center value to be unlocked in a disciplined way over time. I will hand it over to Michael, who will run through the FY '26 financial results and operational highlights.

Thanks, Kate, and good morning, everyone. Turning to Slide 16 and the financial results. Net property income rose to $204 million for the year, an increase of $11.7 million on the prior year. Strong re-leasing spreads and capturing of rental reversion resulted in like-for-like net operating income growth of 5.2%, despite CIP carrying lower occupancy in FY '26 compared to FY '25. Finance costs increased by $6.9 million to $65.9 million, reflecting the higher average cost of debt. CIP delivered funds from operations of $114.1 million, or $0.182 per unit, representing 4% earnings growth on FY '25, and declared distributions of $0.168 per unit in FY '26, in line with guidance. Moving to capital management on Slide 17. During the year, CIP completed a significant refinancing program with approximately $450 million of debt refinanced on improved terms. Margins tightened by around 10 to 20 basis points compared to prior facilities, while the debt duration was extended. CIP continues to benefit from strong support from its lending group. This materially reduces refinancing risk and enhances financial flexibility entering FY '27. Another key capital management initiative over the year was the issue of a new $325 million exchangeable note to fund the repurchase of the prior notes. The new issuance lowered the all-in coupon to 3.5%, a substantial discount relative to the current marginal cost of debt. CIP maintains substantial liquidity of over $450 million, which covers pending FY '27 debt maturity. The $100 million fixed rate facility matures in December, and at this stage, we expect to repay this facility using available liquidity. Approximately 54% of debt is hedged, and we continue to monitor interest rate movements and manage our interest rate exposure to balance earnings stability with some flexibility as the interest rate cycle evolves. Moving on to Slide 19. CIP's portfolio has been deliberately constructed to benefit from structural demand drivers. 86% of our assets are located in core urban infill markets in close proximity to population centers and critical infrastructure. These are markets which benefit from the deepest tenant demand while supply is most constrained, and have historically demonstrated strong rental growth, low vacancy, and superior liquidity in broader industrial markets. CIP's average tenancy size of approximately 8,000 square meters aligns with the most active segment of the leasing market. Average portfolio site coverage of 44% provides opportunities for select redevelopment, generating earnings and NTA accretion while improving overall portfolio quality. This portfolio composition continues to underpin CIP's ability to generate strong leasing outcomes through cycles, while also providing multiple avenues for future value creation through asset repositioning and select development. Slide 20 presents a case study on CIP's success within our Melbourne portfolio. Conditions in the broader Melbourne industrial market have been challenging, with vacancy increasing to approximately 4.7% during the year, the highest nationally. Despite these conditions, CIP completed nearly 125,000 square meters of leasing across its Melbourne assets, representing around 29% of the portfolio by area, and lifting Melbourne occupancy to 97%. As noted in the half-year presentation, a notable transaction was the new 10-year lease to Tesla at 346 Boundary Road in Derrimut. This is an example of the flexibility our sites offer, where we pivoted strategy to defer a larger redevelopment project to lease the asset as is to a global covenant, delivering 130% re-leasing spread and resulting in a $21 million value uplift. Another noteworthy outcome was the successful renewal of the tenant at 324 Frankston-Dandenong Road in Dandenong South. This 7-year renewal across 29,000 square meters achieved a 45% re-leasing spread and materially mitigates our FY '28 expire profile. These results highlight the benefit of CIP's in-house asset management capabilities, as well as the benefits of a deliberately constructed portfolio focusing on smaller functional assets in established infill locations. Turning to divestments on Slide 21. During FY '26, CIP divested $200 million of assets at an average 17% premium to book value. Individual transactions included 67 to 69 Mandoon Road in Girraween in New South Wales, sold for $98 million at a 15% premium, and 50 to 64 Mirage Road, Direk, in South Australia, a recently completed development which sold for $50 million at a 33% premium to total project costs. The opportunistic transactions completed during the year comprised both on-market and off-market deals and were executed with a diverse range of counterparties. These divestments are not a one-off. Since FY '23, CIP has divested approximately $460 million of assets, all at or above book value, achieving an average premium of 12%. This further demonstrates the underlying demand and liquidity for the type of assets within CIP. Despite repeatedly demonstrating direct market demand, liquidity, and pricing above book value, CIP continues to trade at approximately 25% discount to NTA. We believe this represents substantial disconnect between direct market evidence and listed market pricing. Looking at valuations on Slide 22. Approximately half of the portfolio by value was externally revalued in June 2026, and with the portfolio recording a like-for-like valuation uplift of $116 million. This marks the fifth consecutive period of valuation growth, while the weighted average capitalization rate remained broadly stable at 5.8%. Importantly, valuations continue to be supported by direct market transactions. Recent sales were completed at an average passing yield of 4.9% compared to the portfolio's weighted average capitalization rate of 5.8%. Slide 23 further reinforces this point. CIP's portfolio valuations remain significantly below estimated replacement costs. We estimate the current average portfolio value to be approximately 50% below replacement cost estimates, while around 60% of the portfolio's value is underpinned by land alone. In our view, it is increasingly difficult to reconcile the REIT's current trading price with either replacement cost estimates or recent direct market transactional evidence. We believe this valuation disconnect creates a compelling proposition for long-term investors. I will now hand back to Grant to talk through CIP's development pipeline.

Thanks, Michael. Picking up on Slide 24. A key feature of CIP's development strategy is flexibility. Our entire future pipeline are income-producing assets, allowing projects to be sequenced and delivered at optimal points in the cycle rather than being forced by mounting holding costs. In addition to flexibility, all identified development projects are located in infill markets where supply is severely constrained, supporting feasibility and future rental outcomes. CIP has one current project under construction, 51 Musgrave Road, located in the Brisbane infill market of Coopers Plains. This development is a multi-unit estate that will deliver high-quality units between 1,500 and 3,000 square meters. This segment of the market maintains the deepest term demand, and we expect to leverage strong leasing and rental outcomes. For all of our development pipeline, we aim for a minimum yield on cost of 6.5%. Our FY '26 completed projects exceeded this target, generally delivering yields of 7% plus. Turning to ESG on Slide 25. Under Centuria's management, CIP has established a flexible and relevant sustainability framework that includes a target of achieving zero scope 2 emissions by the year 2028, a goal to attain a 5-star Green Star design for all future industrial developments, participation in the Global Real Estate Sustainability Benchmark, an ongoing partnership with Healthy Heads in Trucks & Sheds, an organization dedicated to promoting mental health in the transport and logistics industries, and the continued evaluation of how to optimize roof space for solar panel installations across CIP assets. Moving to an overview of Australian industrial markets on Slide 27. The ongoing Middle East conflict, which escalated in February, created uncertainty among tenants, particularly in relation to diesel and transport pricing. This curtailed the improvements in tenant inquiry and leasing activity evident from October 2025 to February 2026. As the uncertainty dissipated, we have seen an increase in tenant activity, particularly in Perth and Brisbane, and expect net absorption to improve in the remainder of calendar year '26 before normalizing in '27 and '28. Despite the temporary blip in demand, the Australian industrial vacancy rate remains anchored at a relatively low level below 4%, and supply is becoming increasingly constrained. Economic rents remain cemented above prevailing market rents for the majority of development sites, impairing development feasibilities. As a result, many proposed developments are being deferred, muting supply. Continuing on Slide 28, these conditions present an optimistic outlook for Australian industrial markets. The expected improvement in net absorption and reduction in vacancy will in turn see incentives begin to contract, particularly in infill markets with limited supply, markets consistent with the broader CIP portfolio. As a result, it is expected that effective rental growth will trend decidedly higher over the medium term, supporting future NOI and earnings growth. These conditions should support further earnings growth, valuation stability, and ongoing rental reversion opportunities across the CIP portfolio. Concluding on Slide 29, for FY '27 and beyond, CIP's focus is on maximizing value add opportunities from leasing, development, and asset repositioning while maintaining balance sheet capacity. Looking beyond FY '27, we believe CIP is particularly well-positioned given the combination of embedded rent reversion, active asset management opportunities, development potential, and identified data center optionality. We are pleased to provide FY '27 FFO guidance of between $0.188 and $0.192 per unit, and distribution guidance of $0.173 per unit. Portfolio valuations continue to be supported by direct market transactions. The balance sheet remains well capitalized, and management remains focused on converting operational performance into sustainable earnings and value growth for unitholders. This concludes the formal part of this presentation. We thank everyone for listening and for their interest in CIP. I will now hand back to the operator for any questions.

[Operator Instructions] Your first question today comes from Cody Shield with UBS. Please go ahead.

Just starting with some of the vacancy there. Fairfield East and Bundamba obviously been a little bit stubborn. You had an HOA on Bundamba, I believe, at the half, which looks like it has fallen over. What do you think you will need to see to get some of that vacancy filled?

Yes, thanks, Cody. As mentioned on the call, the geopolitical uncertainty that occurred through February into March certainly curtailed tenant demand. If it was not for that, I would have been confident that we would have leased both Bundamba and Fairfield. If you recall, at the half, we had leased half of Fairfield on a short-term lease. That tenant was expecting to grow into the facility in totality. Unfortunately, particularly the increase in diesel costs had an impact on their foresight. They were unable to make that commitment at that stage. As we have moved ahead, we have certainly seen an improvement in tenant demand over the last couple of months, particularly in Brisbane. We remain optimistic for the leasing prospect of both Fairfield and Bundamba of getting done within FY '27. Just in terms of guidance, because this question will come up, apologies to the equity analyst who are going to ask it anyway. The range that we have provided for FFO guidance is pretty much dependent on the leasing of Bundamba and Fairfield. We have forecast that they will be leased in the second half of FY '27, which would enable us to meet budget, which is at $0.19. Obviously, if we do better than that, we will be able to upscale that FFO guidance.

Okay, that is great. Just on the buyback. You have extended the timeframe there. Would you look to push that beyond $60 million if that gap to NTA persists?

Yes, I think that's the fact that we have extended the buyback. We are continuing to give consideration to it. Obviously, we did announce an $60 million buyback, and we have completed $36 million of that. That was accretive up to $0.01 to NTA through the course of FY '26. I think it remains one of the capital allocation options that we have available to us. Obviously, CIP is trading at a 25% discount, which makes it very attractive from a value perspective. The counter to that is that with the rise in debt costs, it is not as accretive to earnings as it once was when we contemplated commencing the buyback 12 months ago.

Your next question comes from Richard Jones with JP Morgan. Please go ahead.

Grant, just on Wetherill Park development, can you also just give us a bit more color on leasing demand and when that may kick off pending pre-commitment?

Yes. Thanks, Richard. Look, we would certainly be hopeful that we have commenced construction through the course of FY '27. We are seeking pre-commitments at this stage, and we have got at least a couple of parties that are showing genuine interest in the site. So I will certainly be hopeful that in the coming 6 months, we get much closer to getting that pre-commitment done so that we can commence through the second half of FY '27. I would make mention that tenant demand that we have seen across the country over the last 12 months, Sydney probably has been one of the weaker markets. We are certainly seeing improved market activity, particularly in Perth and Brisbane. Melbourne has probably been superior to Sydney in terms of tenant demand. Notwithstanding that, Wetherill Park is infill location within Sydney. There are very limited opportunities to get high-quality industrial facilities of scale in that market. We think that the proposed development that we have within CIP will do very well.

Okay. Second question, just for Kate. Just wondering if you can just talk us through best case scenarios around both Clayton and Thomastown. When could, conceivably, construction commence?

Yes. They are on different paths at the moment. We are progressing power applications and DA on the 2 of them. We are going to be customer-led on these, so it will be dependent on those customer negotiations that we have or tenant negotiations in the background. Just to confirm, they have to be co-designed with those end customers. So, that is happening in the background. But on an actual time to market, we do have some forecasts on RFS, so we can work to with the power supply, which is around 2028, 2029. But as I said, it is going to be a customer-led development.

Richard, just to provide a bit more context on that. If you think about Thomastown, leases are in place until June 30, 2027, so we cannot commence construction until those leases expire. In Clayton, Telstra is still decanting from some of the sites that form part of our development site. That will probably progress for the next 9 to 12 months. So again, I think both for Clayton and Thomastown, the construction is probably more of a FY '28 thematic rather than FY '27.

Your next question comes from Lauren Berry with Morgan Stanley. Please go ahead.

Just a follow-up on Clayton. How are you thinking about funding this one? I know you've given a range of options, but when do you think you'll make the decision whether to go ahead with a land sale, a JV, or something a bit more dramatic like a demerger? How are you thinking about the timeline?

Yes. Thanks, Lauren. I think Kate articulated this pretty well on the call, in that at the moment, there is nothing material to fund, and we are keeping all options open. The point that these things become a decision in terms of what to fund, firstly, we have to consolidate both planning and power outcomes on both Clayton and Thomastown before you get to a point where you'd need to make a decision on funding. At the moment, our focus is about maximizing the highest and best use of these sites and increasing underlying land value. Once we do get further down the track, we'll become more prescriptive as to what we do next. But at this stage, and as Kate articulated, all options are on the table. There are a number of options we could explore that don't require significant funding from the CIP balance sheet.

Okay, sure. Second one is just the decision to reduce your debt headroom when you've got a data center pipeline, you've got developments, and you've also got the buyback as an option as well. Can you talk about why you want to do that right now?

Look, I think you're asking about our current hedge rate at 54%. We're happy to have a bit more exposure at this point in the rate cycle. We'll continue to look at opportunities throughout the course of the year and put hedging in place when we think it deemed appropriate. I think through FY '26, we did put in some hedging, but more certainly, we also completed the exchangeable note, which gives us debt at 3.5% across $325 million. So it's something that we are continuing to monitor. We know where the yield curve currently is, but as mentioned, we're happy to have a bit more exposure at this point in the rate cycle. But it's something we'll actively manage through FY '27.

The next question comes from Andrew Dodds with Jefferies. Please go ahead.

Just one from me. Just if you look at the FY '26 leasing spreads of 30%, it implies a pretty, I guess, sharp moderation in the second half. You have also called out that spreads exclude a number of things, including a deal following an unexpected tenant liquidation. Are you just able to provide some color around this? Also, what spreads would have been if you included everything?

Yes. Thanks, Doddy. I appreciate this question because I think it is worth working this out a bit. We have been saying for a number of reporting periods that do not get fixated on the re-leasing spreads because it is going to be dependent on the geographic location in which leasing is completed. Across all of FY '26, which was a near on record leasing year for CIP, near on 60% of that leasing was completed in Victoria, which has not had as strong a leasing spreads as what we have seen in New South Wales, and to a lesser extent in Queensland and Brisbane. The fact that the concentration of the leasing that we completed through the course of that year was in Victoria meant that our re-leasing spreads were not as strong as what we incurred in FY '25. Looking forward, again, I think leasing spreads will bounce around. Obviously, we have a lot of under renting still to unwind across the CIP portfolio. There is very, very good opportunity for very strong leasing spreads to continue into the future. In terms of the question you asked, what would the re-leasing spreads be if we included the other 3 mills that were excluded? They will be slightly over 20%, which I think would still be a very, very good outcome when you compare to other commercial real estate vehicles out there at the moment.

Your next question comes from Andy MacFarlane with Bell Potter. Please go ahead.

Give me a minute. I dialed in an hour before. I wonder if it is not been registered.......

Hi, Andy. How are you, mate?

Pardon me. We'll move on to the next question. This is from Tom Bodor with Jarden. Please go ahead.