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Tritax Big Box – still seeing strong demand

Tritax is seeing good levels of demand, with take-up of space more than doubling to 10.4m sq ft, compared to the first quarter last year.

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 is seeing good levels of demand, with take-up of space more than doubling to 10.4m sq ft, compared to the first quarter last year. The group also said it’s started construction on 1.8m sq ft in its development business, and 56% of this new space is pre-let. Total square-footage now under construction is 3.1m.

Tritax confirmed: “We remain on-track to deliver an accelerated level of 3-4 million sq ft of development starts in FY 2022, within our 6-8% yield on cost target range.”

The group’s loan-to-value was 24.2% in the quarter.

The shares were unmoved following the announcement.

View the latest Tritax share price and how to deal

Our View

Tritax generates income renting out giant warehouses. These so-called Big Boxes are at the heart of modern logistics and e-commerce because they house the equipment that keeps stock flowing as efficiently as possible.

Despite inflation-linked doom and gloom hanging over many of Tritax's retail customers, building out a strong logistics network is non-negotiable these days. That helped the group add £23m to its rent collections last year - firepower that will allow it to continue investing in new growth opportunities.

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 to investors.

Development is where Tritax’s ambitions lie, though. That creates some additional risks. It's expensive to get a logistics hub up and running, if it doesn't get filled it could become a financial ball and chain. Luckily this hasn't proven to be a problem for Tritax, a shortage of ready-to-occupy premises means customers are snapping up units before they've been completed. The group’s increasingly managing the development and delivery of assets it doesn’t own for a fee as well, something that should help boost profits without much investment.

Paying out rental income makes expansion complicated, too. In the past, Tritax has recycled its portfolio - selling mature assets in order to invest in development opportunities. But last year’s market conditions put this strategy on hold.

That led Tritax to raise £300m selling new shares last September. The group said it will return to selling assets in 2022, but we can’t rule out the possibility of another share sale. This doesn't have to be a bad thing, last time they went for a significant premium. But if the market is still skittish, it would be much harder to justify.

We think Tritax is in a good position, thanks to its crucial role in the supply chain of major blue chip companies. This insulates it somewhat from growing uncertainty about the impact of inflation. However, if the crisis in Ukraine continues to escalate, ballooning commodity prices could put Tritax’s consumer goods customers in a precarious position. Given the valuation is at a premium, some near-term volatility is possible.

Tritax key facts

  • Forward price/earnings ratio: 28.6
  • Ten year average forward price/earnings ratio: 21.1
  • 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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Full Year Results (3 March 2022)

Full year operating profit rose 20.7% to £178.0m. This was driven by a 14.3% increase in net rental income and a rise in Development Management Agreements (DMA), in which Tritax oversees the development and delivery of an asset it does not own in exchange for a fee.

Taking into account the rising value of the group’s investment properties and other variable charges, operating profits rose from £489.4m to £1.0bn.

100% of 2020 and 2021 rent has now been collected.

The group will pay a 1.9p dividend for the final quarter, bringing the total to 6.7p for the year, a 4.7% increase.

Rental growth, rising property values, and Tritax’s strong market position are expected to mitigate rising build costs.

Tritax’s portfolio value was £5.5bn, reflecting strong market conditions and the development of existing assets. This translated to a 26.8% increase in the tangible net asset value per share to 222.60p.

Net rental income rose to £184.6m, driven by new lettings, five new warehouses coming online and upward rent reviews.

Tritax saw 8.3% growth in the contracted annual rent roll to £1.95m. Amazon is the largest customer, accounting for 16.4% of this figure, with Morrison’s, Tesco and Howdens making up 5.9%, 5.1% and 4.5% respectively. The weighted average unexpired lease term was 13.0 years, down from 13.8 last year.

35% of the group’s portfolio is due for a rent review in 2022 and the group has 8.8m square feet worth of near-term development opportunities representing £60-70m of rent potential. Just under half of that is tied to projects due to start development within the next 12 months.

Net debt fell slightly to £1.3bn as the group’s cash on hand increased. Together with rising property values, this helped the group’s loan-to-value ratio (LTV) fall from 30.0% to 23.5%.

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.

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    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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