My trip to Tritax - Box Clever

Steve Clayton - Fund Manager

12 April 2017

Last week, I visited one of Tritax Big Box’s assets, a giant distribution centre near Peterborough, occupied by Amazon and met with Tritax management. The HL Select UK Income Shares fund has a 3.8% weighting in Tritax.

Tritax Big Box owns a portfolio of Big Boxes, those vast distribution sheds alongside trunk roads and motorway junctions. Modern retailing requires these for low cost logistics and e-commerce operations. Time is money and the faster goods move from source to destination, the less capital tied up in stock and the better the business can service its customers.

The facility I visited was vast, over 500,000 ft² with multiple storeys of racking to allow millions of items to be stored at any one time. About 1800 staff work there, perhaps twice that ahead of Black Friday and Christmas. As many as 300 articulated lorries arrive each day to deliver or collect. Onsite, customer orders from Amazon.co.uk are being picked, then packed for bulk shipping to Amazon’s local delivery hubs.

This is just one of fourteen such Amazon facilities in the UK with a similar number across the rest of the EU. Volumes through the site are rising fast, in part due to investments made by Amazon but also because of the unstoppable rise of ecommerce.

Big box allows big business

Amazon’s comments about the industry they operate in reinforced the arguments behind our investment in Tritax. Amazon could not do what they do, without access to big boxes. Sites are not easy to find and becoming harder each year, not least because of the numbers of employees that are required.

Brexit poses a challenge. Amazon reckoned that around 80% of their staff were non-UK citizens, primarily from Poland and Lithuania . If the industry loses access to these staff in future, operators will struggle to staff new sites and may find it hard to fill vacancies. Access to workers is an increasing concern for many service businesses.

Amazon have spent a lot of money kitting the building out with automated conveyor systems and vast racking systems. Full automation would require a complete rebuild of the goods storage area. Robots are heavy, requiring reinforced floors and need more room to manoeuvre than a human picker.

Pickers walk swiftly around the racks of goods, using handheld devices that tell them what to pick next to complete each customer’s order. Amazon have invested vast amounts in creating technology to maximise efficiency. During a typical day, a picker will walk around fifteen miles and pick as many as 300 items each hour. That’s twelve seconds per item. Forget Weightwatchers; get a job with Amazon and be paid roughly £13 an hour, all in, to get thinner and fitter!

Location is vital. Being close to ports like Felixstowe is important from a Goods In perspective, whilst short road links to the A1(M), the A14 and the M1 make the onward distribution cost effective too. Amazon are not alone in rating the location, with major facilities for IKEA, Debenhams and DHL all close by.

The investment case

Tritax Big Box have built a portfolio of these best in class Big Boxes, focusing mainly on over 500,000 ft² buildings which are in the shortest supply. Tenants typically spend at least as much on kitting out their buildings as Tritax spend on buying them and they do not relinquish them lightly, so critical are they to operations.

Tritax have typically bought their investments on yields of circa 5.5%, financed by new shares and cheap debt. The difference between the cost of the debt, Tritax’s own running costs and the rents received creates the profit for shareholders. Leases are struck long and with upwards-only rent reviews, allowing Tritax to have a very stable financial profile. The ratio of debt to buildings value is low, leaving Tritax well placed to cope with the unexpected.

Over time, we would hope that the buildings and their sites will increase in value. Indeed, Amazon acknowledged they were already talking to Tritax about maybe adding a bit of extra space to their vehicle handling areas, which ought to lead to an increase in rent. In the near term, Tritax’s profits and cash flows are very predictable, to the point where they announce their dividend targets up to a year ahead. However, income is variable and not guaranteed.

Visiting an asset like this is always useful and is a chance to speak to the customer and find out how they see things. Tritax appear to have a strong position. These sites are in short supply and given the vast footprints they occupy, that seems unlikely to change. Tritax’s tenants are blue chip names, like Amazon and M&S, so income looks well underpinned and likely to grow in our view.

We have another investment which plays a similar theme, but in the healthcare space. Primary Healthcare Properties owns buildings like medical centres and pharmacies, where the lessor is typically a publicly backed body. They have a similar profile of steadily rising rents, and a similarly modest use of debt. These businesses offer prospective yields of over 4%, with steady dividend growth expected by analysts, although of course, this is not guaranteed. We think they have a valuable role to play in the portfolio, underpinning its aim of delivering a steady growth in income from an attractive starting point.

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