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Get a low-risk high yield from Tritax's big boxes

Tritax Big Box REIT offers investors exposure to property assets that are in short supply but are in high demand, promising the prospect of both price and income growth.
April 9, 2015

'Big box' distribution centres and industrial warehouses are in short supply and the boon in internet shopping is spurring strong demand from retailers and logistics companies. For landlords, that means rising rents and rising prices in a part of the property market that has traditionally been considered dull and remains - for now - lowly valued compared with more sought-after types of real estate. Tritax Big Box REIT (BBOX) provides income-seeking investors with a way to tap into these themes while enjoying a low-risk, bumper yield from the shares.

IC TIP: Buy at 116.75p
Tip style
Income
Risk rating
Low
Timescale
Long Term
Bull points
  • Good acquisition record
  • Discount to forecast NAV
  • Excellent yield
  • Low-risk property sector
Bear points
  • Reliance on retail
  • Regular share issues

Tritax's strategy is straightforward: acquire the pre-leased distribution centres of quality high-street and online retailers and watch the rent roll in. The portfolio that has been assembled has several factors working in its favour. As people do more and more of their shopping online, distribution centres are becoming increasingly important to the supply chains of major retailers. Investment in big warehouses is also increasingly viewed as presenting an opportunity to create economies of scale and improve customer experiences. At the same time, planning rules mean 'big-boxes' are in scarce supply. All this makes it easier for leaseholders to raise rents and find new tenants in the event of a vacancy. Not that high tenant turnover is a feature of this asset class. The average large retailer spends more fitting out a warehouse than it does on rent, meaning it makes more sense to remain a long-term occupant. The average length of Tritax's tenants' leases is almost 14 years.

As well as the big-box asset class, the appeal of Tritax - the only REIT exclusively focused on this niche sector - also lies in its deal-making abilities. Between listing in December 2013 and the end of 2014, the company deployed £480m of equity and about £200m of bank loans to buy 14 sites - many 'off-market' - in the supply chains of retailers including J Sainsbury (SBRY), Tesco (TSCO) and Morrisons (MRW). Big boxes are unlikely to be affect by supermarkets' attempts to curb capital expenditure due to their crucial role in retailers' operations.

 

 

Overall, last year's acquisitions were made at a 6.4 per cent yield on combined purchase prices, excluding acquisition costs. The portfolio value rose 9.3 per cent when it was reviewed by CBRE at the end of 2014. The increase in value was helped by a narrowing in the difference between the prices fetched by big-box properties and the prices fetched by properties that have traditionally been regarded as more desirable, such as retail space.

Since the beginning of the year, management has acquired an Ocado (OCDO) distribution centre for £98.8m, and is in exclusive discussions to buy three more assets for a combined £175m. Further share issues may be required to fund the purchases. Two fund-raisings have taken place already since float. But with shares trading at a small premium to current net asset value (NAV), investors do not need to fear dilution as long as fees are kept in check. Meanwhile, prospects for rents look good, with three rent reviews due this summer.

TRITAX BIG BOX REIT (BBOX)
ORD PRICE:117pMARKET VALUE:£735.3m
TOUCH:116.75-117p12-MONTH HIGH:117pLOW: 104p
FORWARD DIVIDEND YIELD:5.3%TRADING PROPERTIESnil
FORWARD DISCOUNT TO NAV:5%NET DEBT:20%
INVESTMENT PROPERTIES:£586m  

Year to 31 DecNet Asset Value (p)Pre-tax profit (£m)*Earnings per share (p)*Dividend per share (p)
2013*98---
2014*10712.84.64.15
2015**11629.56.36.00
2016**12332.06.86.25
% change+6+8+8+4

Normal market size: 3,000

Matched bargain trading

Beta: na

*For the periods 1 Mar - 31 Oct 2013 and 1 Nov 2013 - 31 Dec 2014

**Jefferies forecasts, adjusted PTP and EPS figures