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Tritax Big Box REIT - 200m pounds share placing

Nicholas Hyett | 24 April 2017 | A A A
Tritax Big Box REIT - 200m pounds share placing

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Tritax Big Box REIT plc Ordinary 1p

Sell: 185.70 | Buy: 186.00 | Change -0.60 (-0.32%)
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On 24 April Tritax announced a £200m share placing and open offer, with each share priced at 136p per share (a 5.4% premium to the group's most recently announced Net Asset Value per share).

Tritax is reportedly in negotiations regarding three standing assets, two of which are under offer, for a total of approximately £155m. When combined with the two forward funded Howdens developments the company will have invested the proceeds from the October 2016 equity issue.

The net proceeds of the issue announced today will be used to make additional investments in line with the company's existing investment criteria.

The shares fell 4.9% in early trading, although at 140p a share this remains 3% ahead of the issue price.

Our View

The Big Box is in demand. They may not be pretty, looming alongside major roads and motorways, but they are at the heart of modern logistics and e-commerce. Companies need these huge buildings to house automated goods handling equipment, keeping stock flowing through to the end point of demand as efficiently as possible.

The portfolio is let to blue chip clients on long leases, with upward-only rental reviews providing the income growth to fund a progressive dividend policy. Because the nature of what the companies use these buildings for is so fundamental to their very existence, Tritax is unlikely to suffer from unexpected vacancies. Indeed, the company has found tenants seeking to extend leases many years before their current term expires, so determined are they to retain the use of the facility.

The business is very simple; they use the experience of the executive team to build a portfolio of in-demand assets where rental growth prospects look encouraging. The debt is kept low, to limit risks. With average interest rates on debt of below 2%, using borrowings to part fund the purchase of assets that have typically offered starting yields of 5.7% makes perfect sense.

As a REIT, Tritax is obliged to pay out the majority of profits after management costs, so can't retain much cash. That limits the group's ability to fund acquisitions organically and so repeated equity raises have been, and will continue to be, a major feature as the company grows. While debts remain below target, providing some dry powder for deals, it would be no great surprise to see more shares issued this year.

We view Tritax as a "get rich, slowly" scheme. It is not trying to shoot the lights out, simply to deliver a steadily increasing dividend. At present, the shares offer a prospective yield of 4.6%, according to Bloomberg.

Full Year Results

Over 2016, the group added a further 10 assets into the portfolio. Tritax now has 35 assets, covering 18.2m sq ft of logistics space. These assets have been independently valued at £1.9bn, giving a net asset value of 129p per share, up 3.5%, or 4.7% on a like-for-like basis.

Considering both the dividend and NAV growth, the total shareholder return was 9.6%, slightly ahead of the group's medium term target of 9% per annum. Looking ahead, the group is optimistic of further increases in rental rates, although acknowledges the potential for further capital growth is limited at present. Tritax is targeting a dividend of 6.4p in 2017.

As at 31 December 2016, the weighted average unexpired lease term has dipped slightly to 15.3 years. The group's loan to value (LTV) was 30%, below the longer term target of 40%.

Richard Jewson, Chairman of Tritax said: "The outlook for the Group remains positive. We are in a strong financial position and see further opportunities to acquire high-quality standing assets and to forward fund pre-let developments."

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

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 for more information.