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Tritax research update: September 2021

Tritax share sales raise £300m.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Tritax raised £300m selling new shares for £2.04, representing a 5.3% discount to the closing price on 29 September.

Together with borrowing and asset sales, Tritax expects to have roughly £530m to spend on development and asset management initiatives including:

  • 2.2m square feet of pre-let development opportunities
  • 2.5m square feet of construction activities
  • Land and infrastructure investments
  • 0.5m square feet of investment and asset management space

The group continues to target £34m of additional contracted annual rent from its development initiatives, which is expected to translate to 12% growth in earnings per share and dividends per share and 7% growth in property values.

The shares fell 3.3% following the placing to £2.08.

View the latest Tritax share price and how to deal

Our View

Ask and you shall receive, at least if you’re Tritax.

Typically a flood of new shares is bad news for existing investors, who see their positions diluted. While shareholders will see profits spread thinner going forward, they also benefitted from the placing, a rarity.

That’s because Tritax was able to price the new shares at a significant premium compared to underlying assets. The effect was an uptick in Tritax’s underlying value and ultimately an increase in shareholders’ book value per share. Shareholders may hold a smaller slice of the pie, but the pie has become considerably bigger.

The ability to raise money at a premium is a reflection of both the quality of Tritax’s assets and the skill with which they have been managed.

Tritax's giant warehouses are at the heart of modern logistics and e-commerce - housing the equipment that keeps stock flowing as efficiently as possible. Playing a crucial role in the supply chain of mostly blue-chip tenants means the rent roll has proved remarkably secure despite the coronavirus disruption.

But Tritax has moved away from simply collecting rents, increasingly getting involved in development too. That creates some additional risks – particularly when sites are developed without tenants lined up. So far the group's speculative developments have come good, and all are now pre-let – supported by the ecommerce surge of the last 18 months.

There is still some uncertainty. A worse than expected economic outlook could see fewer businesses looking to expand in the future. Given the potential challenges the board has decided to take a more cautious approach to the dividend, with the payout a little lower than 2019. That could climb back to pre-pandemic levels if the buoyancy persists, but remember no divided is guaranteed.

Investors also may have read that Abrdn recently bought a 60% stake in Tritax Management, which manages Tritax Big Box. However, as the current management team will remain in place, this shouldn’t have any bearing on performance.

Long term we think Tritax is in a good position.

Suitable sites, ideally situated next to a major motorway and covering 500,000 square feet or more, are reasonably rare. Tritax's experienced team has proven adept at securing attractive assets in off-market transactions, meaning sites are snapped up before others even know they're for sale.

Once Tritax rents out a big box it's a long-term source of income. Tenants build up distribution networks around the site, making changing location costly, risky and time-consuming. Some have even sought to extend leases many years before their scheduled expiration, so determined are they to retain the use of the facility.

Highly desirable assets also mean Tritax can impose attractive terms, such as upwards only rent reviews. A wide range of high-quality tenants should hopefully add more security to the dividend, while further expansion could lead to increasing payouts. Real estate investment trusts (REIT), like Tritax, must pay out the majority of profits.

However, paying out rental income makes expansion complicated. To cope, Tritax has been recycling its portfolio - selling mature assets in order to invest in development opportunities. But the placing will also go a long way toward supporting the group’s investment goals.

We think Tritax is in a good position, thanks to its crucial role in the supply chain of major blue chip companies. While the group’s success is linked to the economy, the risk of a major downturn has tempered. The group’s strong performance through the worst of the pandemic puts it in a solid position as the global economy fully reopens.

Tritax key facts

  • Price/Earnings ratio: 1.27
  • Average Price/Earnings ratio since listing (2019): 0.98
  • Prospective dividend yield (next 12 months): 3.2%

All figures are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half Year Results (August 2021)

Operating profit more than doubled to £395.2m as the fair value of its investment properties was revised up by £314.3m. Underlying profits were also higher, driven by a 10.9% increase in net rental income, development completions, and growing development management income.

All of the rent from 2020 has now been collected and 99.5% of rent from the first six months of FY 2021 has been collected. The remaining 0.5% is expected to be received by year end.

The group declared dividends in the first half of 3.20p, up 2.4% year-on-year.

Net rental income rose 10.9% to £87.4m, reflecting assets acquired and completed over the last 12 months as well as rent reviews. The contracted annual rent roll rose from £180.6m at the start of the year to £189m. The portfolio’s weighted average unexpired lease term was 13.4 years, down from 14.1 years in 2020.

Tritax added a 0.9 million square foot facility in Avonmouth to its portfolio, bringing the total number of assets to 60. The group’s portfolio value rose 10.9% from the start of the year to £4.9bn, driven by rental growth and asset management and development. Net asset value per share increased by 25% to 194.2p.

Net debt increased from £1.3bn at the start of the year to £1.5bn, this caused a slight uptick in the loan-to-value ratio to 30.3%, which is still below the group’s medium-term target of 35%.

87.2% of the group’s 10.4m square foot development pipeline had been granted planning consent at 30 June. The group aims to deliver 2-3 million square feet of new space per year yielding between 6% and 8%.

Find out more about Tritax shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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