Tell me a bit about the fund
The Centuria Sandgate Road Fund is a closed-ended, unlisted, single-asset fund with an initial term of 6 years to 1 July 2023. The fund holds an A-Grade Office asset with rental income underpinned by government leases. The fund is seeking to raise $68.9M through the issue of 68.9m units at $1.00 per unit. Bank debt will also be used buy 1231 Sandgate Road Nundah Qld for $106.25M. The office building is situated in Nundah Queensland not far west of Brisbane Airport and 10kms north of Brisbane CBD. It been dubbed as an up and coming business district that is close to a railway station and shops (Woolworths). It’s a new property and its tenants are safe government agents – Energex and Powerlink. That makes up 81% of rental income. The remainder is shops, gym and other retail businesses. The Weighted Average Lease Expiry (WALE) of 9.4 years (as at 1 July 2017). The current leases have fixed rent increase of 3.5% – 4.0% p.a which provide upside support to valuations. The Fund will have an initial LVR of 44.3%,against a 57.5% bank covenant. It has a forecast a distribution in FY18 of 6.5 cents per units (6.50% pa) increasing in FY19 to 7.0 cents per units (7.00% pa).
The Investment Process
Centuria has a proven track record and invests only in high quality assets. The company says it is an asset-driven investor and so it looks for quality properties that can provide its investors with stable yields and strong returns over time in any market. Centuria’s business has two key areas of focus – Centuria Investment Bonds which delivers innovative solutions to help clients meet their investment goals and Centuria Property Funds which specialises in listed and unlisted property investments. Centuria Unlisted Property Funds presently own and manage a portfolio of 17 individual properties with a combined value of approximately $1.3 billion in 18 unlisted funds. This division was established in 1999 with the specific objective of purchasing high-quality, growth-oriented commercial property investments. The company has managed 33 funds to completion totalling approximately $1.3bn and with an average total return to investors of 13.2% per annum.
Why Invest in Centuria Sandgate Road Fund? Here are few of the benefits from the fund:
- Secure yield focused investment opportunity
- Fund is purchasing a $106m institutional-grade Brisbane office asset
- Long 9.4 year weighted average lease expiry (WALE)
- 100% occupied with 81% of income underpinned by state government tenants
- Minimum 3.5% p.a. rental uplifts in leases
- Modern office building (2012 build) with low capex requirements
- Conservatively geared with an initial 44% LVR (debt is 100% hedged for 5 years)
- 7.34% p.a. average distribution yield (paid monthly)
- Strong forecast tax deferred benefits (85% year 1; 70% year 2)
- Brisbane property market has bottomed – market forecast is for prime office vacancy rates to fall followed by moderate rental growth
- Initial 6 year fund term (no redemption facility) – Centuria employs a “best endeavours” approach to put buyers and sellers together if an investor seeks to exit the fund early
- Centuria is an experienced property fund manager with a successful 19-year track record
- Fees – 2.0% acquisition fee.
- Performance fee of 20% over 10% IRR.
- Disposal fee 1%.
- Base management fee of 0.8% pa (of GAV).
- Leasing fee of 6.5% (renewal). 20% (new lease).
- The fees are quite high for this fund.
- Rising interest rates is a headwind.
We think the fund is pretty straight forward, simple office fund that gives investors quality exposure to an office building that has a secured government tenant. It has a secure yield and would make a great addition to diversify any portfolio and income investor. The fund isn’t correlated to the share market and the unlisted property space can provide investors with both capital growth and income. But as with everything a property investment means you move up the risk curve in the expectation of higher return. Unlisted property is risky, you only have to flick back to the GFC to remember what happened to property. Unlisted property trusts also have a lot more fees than your normal managed fund – as you can see above. An illiquid asset can make it hard for investors to get out early. So as with everything we advise investors to take note of the risks.