Tritax Eurobox smashes total return target

Few property investors would find a 3.5 per cent net initial yield particularly enticing. But for Tritax Eurobox (EBOX) manager Nick Preston, it’ll do just nicely: his team just forward funded a €118m (£100m) pre-let logistics asset with an annual rent of €4.1m.

Several market dynamics underpin this conviction. First, low rental yields need to be set against negative eurozone interest rates; compared with the UK, the spread over the risk-free rate is actually higher. Second, vacancies for prime warehouse assets in Belgium and Germany are now 0.5 and 2.2 per cent, respectively, suggesting demand is starting to outstrip supply.

Third, rents make up as little as 1 per cent of occupier’s overheads, meaning there is considerable capacity for future hikes. And rise they will: full-year numbers show 95 per cent of Eurobox’s rents are now index-linked, meaning rents automatically climb with inflation. Marry all of this to active buying and fundraising, and you get a 14.3 per cent total return in the year to September.

The trust also has access to extremely cheap financing. In June, it issued a €500m green bond yielding 0.95 per cent, and last week sold a further €200m-worth of notes with an average maturity of nine years and an average coupon of 1.37 per cent.

All things being equal, this is as close as debt markets get to a free lunch. Furthermore, if inflation proves more than transitory, the real value of Eurobox’s fixed interest borrowings will take a knock. That’s a positive for shareholders, assuming property values and index-linked rents keep on rising.

The shares trade a smidge above current net tangible assets, and at a 7.5 per cent discount to Peel Hunt’s adjusted net asset value forecast for September 2022. That looks like decent value. Buy.

Last IC View: Buy, 81p, 28 May 2020