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Investment trust research

Tritax Big Box REIT – UKCM acquisition complete, Q1 trading update

Tritax Big Box completes the acquisition of UKCM, and first-quarter trading sees encouraging signs from the development market.
Tritax Big Box – record development lettings, asset values fall

Important information - 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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Tritax Big Box REIT has completed its acquisition of UKCM. Several enquiries have already been received for elements of the UKCM portfolio that do not necessarily fit with the long-term strategy. The plan is to recycle any capital from asset sales into new developments.

First-quarter trading saw an ‘encouraging’ uptick in development activity. Freehold development sales are expected to deliver £15mn of income over the year. There was also £2.4mn added to annual rent from rent reviews and other initiatives.

Including the new UKCM assets, the loan to value at the end of the period was 29.3%.

The shares were broadly flat in early trading.

Our view

At its core, Tritax Big Box generates income through renting out large warehouses, or 'Big Boxes', which are central to modern logistics and e-commerce. But the strategy is slowly shifting toward smaller, urban, logistics centres that offer better yields.

The acquisition of UK Commercial Property REIT offers some complementary assets, at both the large and small end of the size scale. It’s good to hear there’s already been interest in the UKCM assets that don’t quite fit with the long-term strategy; this was a question mark initially. We expect to see some asset sales with the capital reinvested into development projects.

First-quarter trading offered no major surprises. Despite an uncertain market backdrop, rents got a helpful boost from new developments coming online. These were snapped up by Tritax’s customers as building a strong logistics network is non-negotiable in this day and age.

Once Tritax rents out a site, 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 mean attractive deal terms, such as upwards-only rent reviews, which are helping boost income. A wide range of high-quality tenants should hopefully add some 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 a key focus capturing the increased demand for e-commerce and the distribution needs that follow. A shortage of ready-to-occupy premises means customers have been snapping up units before they've been completed. But it's expensive to get a logistics hub up and running, and if it doesn't get filled, it could become a financial headache.

Paying out rental income makes expansion complicated, too. Tritax is having to recycle its portfolio - selling lower-yielding mature assets in order to invest in higher-yielding development opportunities. Against an improving market backdrop, asset sales are now well underway.

Despite some uncertainty about when rate cuts might come, markets have adjusted to the current climate. However, the group still trades at a discount to its longer-term average. We continue to believe this could present an attractive entry point for those willing to ride short-term uncertainty. As with any investment, there are no guarantees.

Tritax Big Box REIT key facts

All ratios are sourced from Refinitiv, based on previous day’s closing values. 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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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 17th May 2024