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Tritax - Compelling fundamentals remain undisturbed

Nicholas Hyett | 31 January 2018 | A A A
Tritax - Compelling fundamentals remain undisturbed

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Tritax Big Box REIT plc Ordinary 1p

Sell: 190.80 | Buy: 191.00 | Change 0.20 (0.10%)
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In a brief trading update ahead of full year results, scheduled for 7 March, Tritax confirmed its target of a full year dividend payment of 6.4p per share - of which 4.8p has so far been paid.

For 2018 the group is targeting a dividend payment of 6.7p per share, a 4.7% year-on-year increase.

The shares were broadly unchanged following the announcement.

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Our View

Tritax buys and rents out Big Boxes, and the Big Box is in demand.

They may not be pretty, but these giant warehouses are at the heart of modern logistics and e-commerce. They house the automated handling equipment that keeps stock flowing as efficiently as possible.

Suitable sites are few and far between, ideally covering half a million square feet or more next to a major motorway. The combination of limited supply and a crucial role in company infrastructure means Tritax is unlikely to suffer unexpected vacancies.

The sites are let to blue-chip clients on long leases, with upward-only rental reviews providing the income growth to fund a policy of steadily increasing dividends. 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. An experienced executive team helps build a portfolio of in-demand assets where prospects for rental growth look encouraging. Debt is kept low to limit risks. With average interest rates on debt of below 2.4%, using borrowings to part fund purchases that have typically offered starting yields of 5.7% makes perfect sense.

The upwards only rent reviews and high quality tenants should mean the dividend is secure, although a rapid rise in interest rates could hit the capital value of the portfolio. That's one reason we view Tritax as a 'get rich, slowly' scheme. It's not trying to shoot the lights out, simply deliver a steadily increasing dividend. At present, the shares offer a prospective yield for 2018 of 4.1%.

As a real estate investment trust (REIT), Tritax is obliged to pay out the majority of profits after management costs, so it can't retain much cash. That limits its ability to fund acquisitions, so the company frequently raises the extra cash it needs through rights issues - where shareholders are invited to increase their holding. That will remain a major feature as the company grows.

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Full Year Trading Update

2018 saw Tritax acquire 11 new Big Box assets and 124 acres of London development land for a total consideration of £497.5m. The group also completed four pre-let forward funded developments, totalling 2m sq. ft.

This takes portfolio to £2.46bn invested in 46 Big Boxes, of which 100% is let or pre-let, generating annual rental income of £124.6m.

Since the year end a further three Big Boxes have been acquired, for a total of £139.8m.

The portfolio has a weighted average unexpired lease term (WAULT) of 13.9 years, and was purchased on an average initial yield of 5.7%. All leases provide for upward only rent renewals.

The weighted average term to maturity of the group's debt facilities has increased to 8.9 years - following the issue of £500m of senior unsecured loan notes (2016: 4.8 years). The average running cost of debt at year end was 2.38% per annum.

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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.

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.

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