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Tritax - Valuations rise and Big Boxes deliver

Nicholas Hyett | 17 January 2019 | A A A
Tritax - Valuations rise and Big Boxes deliver

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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: 151.60 | Buy: 151.80 | Change -1.80 (-1.17%)
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Tritax's portfolio has been independently valued at £3.42bn as at 31 December, representing a 4.7% uplift in valuation of like-for-like sites.

The group continues to target a full year dividend of 6.7p - of which 5.025p has already been paid. The group intends to maintain its progressive dividend policy into 2019 and beyond.

The shares were broadly flat in early trading.

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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 2.6%, using borrowings to part fund purchases that have typically offered starting yields of over 5% makes perfect sense. A target loan-to-value ratio of 40% means the group isn't laden up with too much debt and has plenty of firepower for more acquisitions.

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 5.1% next year, that's fine by us.

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Full Year Trading Update

Tritax's portfolio now stands at 54 Big Box assets and 114 acres of development land at Littlebrook. The portfolio is 100% let, or pre-let with contractual rental income of £161.1m.

All leases provide for upward only rent reviews, of which 45% are inflation-linked, 37% are open market, 11% are fixed and 7% are hybrid. The Weighted Average Unexpired Lease Term (WAULT) across the portfolio stands at 14.4 years.

The group has 39 tenants, of which Amazon is the single largest, accounting for 13.6% of total rental income.

During 2018 the group has acquired eight new Big Boxes - including seven pre-let forward developments - for £641.5m. Tritax has also secured planning consent for the first stage of its Littlebrook development.

The group finished the year with £834m of debt, representing a loan-to-value (LTV) of 27%. The average cost of debt stands at 2.63%.

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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 disclosure for more information.