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Tritax - Dividends rise, with more asset purchases to come

George Salmon | 10 August 2017 | A A A
Tritax - Dividends rise, with more asset purchases to come

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Tritax Big Box REIT plc Ordinary 1p

Sell: 242.40 | Buy: 242.60 | Change 1.60 (0.67%)
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Pre-tax profit rose 50% to £80.5m, however following the £350m share issuance in May, adjusted earnings per share rose 1.6% to 3.21p. The group declared two 1.6p interim dividends in the period, and says it remains on course to deliver the 6.4p full year target.

The share were little moved on the news.

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 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.

Tritax itself is very simple business; the experience of the executive team helps build a portfolio of in-demand assets where rental growth prospects look encouraging. 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.

This doesn't mean Tritax will go around spending shareholder's cash on new assets willy-nilly. Even though competition for assets is rising, numerous opportunities have been rejected in recent months. It is good to see the group remains committed to buying only what it sees as high quality, long-term assets at attractive prices.

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 for 2018 of 4.4%.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. 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.

Half year results:

Tritax added 3 new assets in the period, bringing the total to at the half year stage to 38. The portfolio was independently valued at £2.1bn, helping NAV per share rise 3.3% to 133.3p and the ratio of administrative and operating costs to rental income fall from 15.8% to 13.7%.

The weighted average unexpired lease term was 15.1 years, against its target of at least 12 years. The portfolio is 100% let and income producing, and just 5% of the rent roll is set to expire within the next 5 years.

The group had total long-term bank borrowing commitments of £781.5m, of which £681.5m had been drawn, meaning loan-to-value at the half year stage was 27%. On a fully invested basis, the group expects to be operating with a LTV of approximately 35% for the time being, well within the long-term target of 'up to 40%'.

Management intends to have invested the £350m proceeds from the recent rights issue, and expects the level of dividend cover to increase as it deploys more equity through the second half of the year.

The group believes the development of the Big Box logistics market remains in its infancy, and continues to view the remainder of 2017 and 2018 with optimism.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. 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 for more information.