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Tritax - underlying profits up but monitoring coronavirus

Sophie Lund-Yates, Equity Analyst | 17 March 2020 | A A A
Tritax - underlying profits up but monitoring coronavirus

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Tritax Big Box REIT plc Ordinary 1p

Sell: 138.90 | Buy: 139.00 | Change -1.70 (-1.21%)
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Tritax reported a 7.7% increase in underlying operating profit to £122.5m, helped by increases in net rental income and the annual rent roll.

The group said the occupational market remained healthy last year, but this could be "tempered" by the coronavirus outbreak. It said it's impossible to know the extent of the virus, and is monitoring the situation.

There was a 2% rise in dividend per share to 6.85p.

The shares fell 19.1% in early trading following the announcement.

View the latest Tritax share price and how to deal

Our view

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. Assuming the ongoing disruption from coronavirus doesn't put tenants out of business, Tritax's rental revenues should be secure.

But Tritax has moved away from simply collecting rents. More recently it's focused on developing its own assets, meaning a prolonged period of economic uncertainty wouldn't be ideal.

If global growth stalls, fewer companies will be looking to expand, and therefore there'll be less demand for Tritax's new mega-warehouses. In the medium term that's likely to hit the valuation of existing warehouses too.

However, long term we still think Tritax is in a good position.

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.

That obligation offers some protection for the dividend compared to other businesses. The dividend target for next year implies a forward dividend yield of around 7%. However, we're in turbulent times and the old warning that "no dividend is guaranteed" has never been more true.

Overall we still think Tritax is in a relatively defensive position, thanks to its crucial role in the supply chain of major blue chip companies. Remember though, a lot is resting on how the coronavirus outbreak progresses, and we can't rule out challenges down the line.

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Full year results

Four assets were added to the portfolio in the year, all of which came from the new Tritax Symmetry portfolio. The total number of assets now stands at 58. That helped the contracted annual rent roll reach £166.6m, compared to £161.1m last year. Net rental income increased 8.7% to £144.3m.

Underlying earnings per share was 6.64p, compared to 6.88p last year. That reflects investments in the Tritax Symmetry portfolio.

The value of the portfolio increased 15.2% to £3.94bn. Tritax said it made good progress with its Strategic Land platform, and the current development pipeline is progressing well. The group's targeting an average yield on cost of 6-8% across the Strategic Land assets, above the current portfolio valuation yield of 4.5%.

The net asset value per share was 151.06p, a reduction of 1.16%. The decrease reflects the costs involved in the Tritax Symmetry acquisition, without this NAV would have risen 1.3%.

Tritax now has 40 "institutional quality" tenants, of which Amazon is the single largest, accounting for 13.1% of rental income. The Weighted Average Unexpired Lease Term (WAULT) across the portfolio stands at 14.1 years.

Net debt increased by £356.3m to £1.1bn, meaning the loan to value ratio is now 30.4%.

Tritax announced a target of 7p per share for 2020.

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