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Tritax Big Box - ticking over nicely

George Salmon | 9 August 2018 | A A A
Tritax Big Box - ticking over nicely

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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: 185.10 | Buy: 185.30 | Change 0.40 (0.22%)
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Tritax Big Box's half year results show a 5.3% increase in earnings per share, to 3.38p. That's a function of continued expansion in the portfolio, rent increases and good control of administrative expenses.

The shares were little moved on the news.

Year-to-date, total dividends have increased to a total of 3.35p per share, up 4.7% on last year. Tritax remains on track to pay out 6.7p this year.

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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, ideally situated next to a major motorway and covering 500,000 square feet or more, are reasonably rare. However, Tritax's experienced team have proven adept at securing attractive assets in off-market transactions, meaning sites are snapped up before others even know they're for sale.

With interest costs around 2.5%, using borrowings to part fund purchases that have typically offered starting yields of over 5% makes perfect sense. However, a target loan-to-value ratio of 40% means the group isn't laden up with too much debt.

After kitting out their Big Box, lessors 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.

That means Tritax can impose attractive terms, such as upwards only rent reviews. A wide range of high quality tenants should add security to the dividend, while further expansion could lead to increasing payouts.

For all its attractions, there are of course no guarantees. For example, a rapid rise in interest rates could hit the capital value of the portfolio, and the shares.

Investors should also bear in mind that, 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. This limits its ability to fund purchases organically, so the company frequently turns to shareholders for extra cash. That will remain a major feature in the future.

All told, we view Tritax as an attractive proposition. It's not trying to shoot the lights out, simply deliver a steadily increasing dividend. With the shares offering a prospective yield of 4.6% next year, that's fine by us.

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First half details

The portfolio was independently valued at £2.9bn, up from £2.6bn last year. Growth was driven by the addition of a total of 12 new assets in the last year, including 4 so far in 2018, and a like-for-like valuation uplift of 1.9%.

Those 4 assets were acquired off market with an aggregate purchase price of £222m. These properties were acquired with an average net initial yield of 5.1%. Since 30 June, the group has secured an agreement with Amazon for it to lease a new, £121m site in Darlington. Tritax is close to completing on a further £160m of assets.

Using debt to part-finance these acquisitions would likely see its loan to value ratio (LTV) of 25% rise towards the longer term target of 40%.

The portfolio was fully let, or pre-let and income producing, during the period, with a weighted average unexpired lease term of 14.1 years. An independent assessment put the portfolio's Estimated Rental Value (ERV) 5.6% above contracted annual rent, at £147.2m pa.

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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. 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.