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Tritax Big Box REIT - dividends trimmed but continuing

Nicholas Hyett, Equity Analyst | 8 April 2020 | A A A
Tritax Big Box REIT - dividends trimmed but continuing

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Tritax Big Box REIT plc Ordinary 1p

Sell: 139.00 | Buy: 139.20 | Change -1.50 (-1.07%)
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All but three of Tritax's properties remain open and operating. The company expects to have collected 96% of the rent that was due by 1 April by the end of May, with discussions around the final 4% ongoing.

The group has access to £500m of undrawn borrowing facilities, with £130m committed to current development initiatives and no significant maturities until 2024. Tritax has significant headroom over borrowing covenants, the terms on which loans are made, with rental income and asset values having to fall 60% and 50% respectively before the group would be in breach.

However, given the uncertainty around the eventual impact of coronavirus the board has taken the decision to withdraw its previous guidance for a 7p dividend in 2020. Instead it has confirmed a first quarter dividend of 1.5625p per share, which would equate to a full year payment of 6.25p if repeated in each quarter for the year.

The shares were broadly unmoved in early trading.

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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. While the coronavirus disruption is putting some tenants under pressure, most of the blue-chip rent roll should still be pretty secure.

But Tritax has moved away from simply collecting rents. More recently it's focused on development too. 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.

Given the challenges facing tenants and potential challenges to asset values the board has decided to take a more cautious approach to the dividend. If the first quarter dividend were repeated across the remainder of the year it would represent an 8.8% cut compared to 2019. Management have said that they will consider increasing the payout as conditions become clearer - but there's certainly no guarantee things improve as the year progresses.

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. Tritax's experienced team has 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. However, we're in turbulent times and the old warning that "no dividend is guaranteed" has never been more true. Fellow REIT British Land has already said that it may not meet its pay-out obligation this year.

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 if more companies start to go under we can't rule out challenges down the line.

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Full year results

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.

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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