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Tritax Big Box REIT - Values tick up and dividend on track

Nicholas Hyett, Equity Analyst | 3 February 2020 | A A A
Tritax Big Box REIT - Values tick up and dividend on track

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Tritax Big Box REIT plc Ordinary 1p

Sell: 137.60 | Buy: 137.80 | Change 0.00 (0.00%)
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Tritax finished the year with a portfolio valued at £3.94bn, up from £3.85bn in June. That was driven by a 0.9% increase in like-for-like valuations.

The group continues to target a final dividend of around 1.7p and a growing dividend going forward - although as ever there are no guarantees this will be delivered.

The shares were broadly unmoved following the announcement.

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Our view

They may not be pretty, but Tritax's 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.

Once Tritax rents out a big box it's to be a long term source of income. Tenants 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.

Highly desirable assets also mean 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. That's because 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.

More recently Tritax has focused on developing its own assets. The acquisition of db Symmetry brought in a handful of assets but also development expertise and a shedload of land to build on. The £370m deal was largely funded by issuing £250m of new shares, and with the group keen to keep debt under control, new issuances will likely remain a feature.

Going forwards the group plans to fund developments through the sale of portfolio assets. This is a bit of a change of tack, but if well executed could improve overall returns - as the profits from development activity supplement rental yields.

However, development is a riskier activity than simply collecting rents. Even then capital growth is likely to be steady rather than spectacular, and a rapid rise in interest rates could hit the capital value of the portfolio, and by extension the shares.

Still, we view Tritax as an attractive proposition, particularly for income-seeking portfolios. The prospective yield is 5.1% next year and we'd expect further growth, although there are no guarantees.

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Full Year Trading Update

Tritax now owns 58 warehouses, let to 40 tenants generating a total rental income of £166.6m a year. The group's single largest tenant, Amazon, accounts for 13.1% of the total rent role.

The group completed five pre-let developments during the year, totalling 4.3m sq. ft. along with three developments by the group's in-house development arm, Tritax Symmetry. The current development pipeline includes two further pre-let developments and three Tritax Symmetry developments.

The company completed seven rent reviews during the year, representing 15.4% of the rent role, achieving an average rental increase of 2%. The group also extended the leases on two properties during the year to 25 years and 6 years. The portfolio's weighted average unexpired lease term now stands at 14.1 years.

Tritax finished the year with a loan-to-value (LTV) of 30%.

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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.