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Tritax Big Box - rental income and profits up

Sophie Lund-Yates, Equity Analyst | 10 March 2021 | A A A
Tritax Big Box - rental income and profits up

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Tritax Big Box REIT plc Ordinary 1p

Sell: 239.40 | Buy: 239.80 | Change 0.60 (0.25%)
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Tritax reported underlying operating profit of £147.5m, up 20.4% on last year. That reflects an 11.9% increase in net rental income to £161.5m.

99.4% of rents were collected last year, and all outstanding arrears are expected to be recouped in the current financial year.

A fourth quarter dividend of 1.7125p takes the full year payment to 6.4p per share, compared to 6.85p in 2019. Excluding development management income, this represents a pay-out ratio of 93%.

The shares rose 2.2% following the announcement.

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Our view

Tritax's giant warehouses are at the heart of modern logistics and e-commerce - housing the equipment that keeps stock flowing as efficiently as possible. Playing a crucial role in the supply chain of mostly blue-chip tenants means the rent roll has proved remarkably secure despite the coronavirus disruption.

But Tritax has moved away from simply collecting rents, increasingly getting involved in development too. And the group's speculative developments have come good. All such developments are now pre-let - boosted by demand from tenants like Ocado who're seeing business swell as demand for online shopping balloons.

There is still some uncertainty. A worse than expected economic outlook could see fewer businesses trying to expand in the future. Given the potential challenges the board has decided to take a more cautious approach to the dividend, with the pay out a little lower than last year. Tritax will consider increasing the payout as conditions become clearer, but it could be a while before the dividend is back to where it once was.

Longer term though, 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 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. Real estate investment trusts (REIT), like Tritax, must pay out the majority of profits, so it can't retain much cash.

However, paying out rental income makes expansion complicated. Historically Tritax has funded growth by selling new shares to shareholders. More recently the group has been recycling its portfolio - selling mature assets in order to invest in development opportunities. However, we can't rule out the group tapping-up shareholders for extra cash in the future.

We think Tritax is in a good position, thanks to its crucial role in the supply chain of major blue chip companies. A lot is resting on how the coronavirus outbreak progresses though, and if its retail customers start to go under Tritax will not be immune.

Tritax key facts

  • 12m forward price/earnings ratio: 25.2
  • Average price/earnings ratio since listing (2013): 19.8
  • Prospective yield: 3.8%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Full year results

Net rental income increases were almost fully driven by gross rental income, while the much smaller service charge income division also saw improvements. Net rental income was boosted by rent generated from pre-let development completions, upwards rent reviews, and the letting of speculatively developed Tritax Symmetry assets.

The contracted annual rent roll rose from £166.6m to £180.6m. The portfolio's weighted average unexpired lease term was 13.8 years, down slightly from 2019. Amazon remains the largest contributor to the contracted rent roll, accounting for 17.8%. The next largest, Morrisons and Tesco, make up 6.3% and 5.3% respectively.

The group acquired one asset in the year and disposed of four. The net asset value of the group's portfolio rose 15.7% to 175.61p per share. That reflects an increase in value of existing properties.

Net debt of £1.3bn was slightly lower at the end of 2020 than the same time in 2019. As a result, the loan-to-value (LTV) ratio was broadly flat at 30.0%.

For the current financial year, 37% of the rent roll is up for review, which is expected to generate income growth. Tritax has a near-term development pipeline of 10.2m sq ft, across 12 sites. 74% of these had planning permission as at the end of 2020.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.