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Tritax – higher rents drive profits up

Half year operating profit rose 5.6% to £88.8m, driven by a 16.1% increase in net rental income that offset a reduction in Development Management Agreements (DMA).

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.

Half year operating profit rose 5.6% to £88.8m, driven by a 16.1% increase in net rental income that offset a reduction 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.

The total portfolio value at 30 June 2022 was £6.0bn, up from £5.5bn at the start of the period.

The group said: “While noting the increasingly uncertain economic outlook, we continue to see strong occupier demand from a more diverse range of customers which is driving rents and supporting our ability to mitigate the effects of higher inflation.”

The group announced a dividend of 3.35p, up 4.7%.

The shares were broadly flat 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's helped the group add to its rent collections - 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, with a focus on capturing the increasing demand for e-commerce and the distribution needs that follow. 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. Having been on hold for a period, with the group asking for cash from investors last year instead, asset sales should start up again this year and into the next.

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, for all the strength, the valuation’s still come under heavy pressure this year. Serious questions around the health of the UK economy and the knock-on effect that could have on Tritax’s customers has weighed on sentiment. This could present an attractive entry point, for those willing to ride short-term uncertainty.

Tritax key facts

  • Forward price/book ratio: 0.74
  • Average forward price/book ratio since listing (2016): 0.98
  • Prospective dividend yield (next 12 months): 3.7%

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

A fair value gain on the portfolio of £390.5m, reflecting market conditions, pushed net tangible asset value per share up 9.1% to 242.88p.

Net rental income rose 16.1% to £101.5m, primarily the result of development completions in the second half of 2021 and uplifts from rent reviews, as well as a full period of the Avonmouth asset acquired in April 2021.

The portfolio maintained its 0% vacancy rate during the period.

The contracted annual rent roll was £216.1m across 70 assets (31 December 2021: £195.6m across 62 assets). This includes £17.8m from new development lettings in the period. The weighted average unexpired lease term was 12.8 years, down from 13.0 last year.

35% of the portfolio is due a rent review in 2022, with over half the total rent roll linked to inflation.

Net debt rose to £1.4bn, up from £1.3bn. Debt drawn over the period to fund development offset higher asset valuations, pushing loan to value up slightly from 23.5% at the period start to 23.7%.

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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