Analysts cold on Centuria’s Telstra data centre play

Centuria’s play for Telstra’s data centres hasn’t impressed analysts. Picture: Simon Bloomberg

Centuria Industrial’s left-field bid for Telstra’s Melbourne Data Centres has been met with little excitement from analysts, who have refrained from upgrading neutral recommendations on the listed real estate investor that outlaid $416.7m for the assets.

The UBS-advised process included such names as AMP Capital, Unisuper, John Laing, APN Property Group and Charter Hall and was concluded with a surprising result of a sale of the assets to Centuria Industrial by Telstra on Wednesday – although Centuria was in the mix, the industry did not expect it to be a strong contender.

The sale of the 3.2ha Clayton complex includes a leaseback of 30 years to Telstra, alongside two options to Telstra to extend the lease for 10 years and comes as buyers chase low risk investment opportunities amid the challenging economic conditions linked to the COVID-19 pandemic.

In UBS research note, analysts said that the assets purchased at a 4.2 per cent yield would be dilutive to earnings to the tune of negative 7 per cent, and would shave 20 basis points off net property income growth.

The key factor behind the modelling was the “data centre components” of the rent, which at $105 per mega watt hours per month, against a broader stated market range of $115-145.

However, the analysts did say that the site provided 9000 square metres of developable land on which a further 7MW of data centre capacity can be built, a sizeable addition to the 12.7MW already leased to Telstra.

Analysts from Credit Suisse also noted the dilutive nature of the acquisition and the tight rate of return, but said that it extended the fund’s weighted average lease expiry to 10.2 years from 7.2 years, providing “long term earnings viability” that could offset risks related to lease expiries of other assets.

Credit Suisse increased its per share price target for Centuria to $3.17 from $2.66 while UBS decreased its target from $3.36 to $3.23.

Centuria Industrial raised $340.8m of equity for the acquisition at $3.15 per share through an entitlement offer handled by JPMorgan and UBS.

The shares were sold at a 4.8 per cent discount to their last traded share price.