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Tritax ticking all the big boxes

Demand for big distribution centres far outweighs current supply
August 17, 2017

Tritax Big Box (BBOX) lives up to its name, with a majority of its distribution centres covering over half a million square feet. Demand for distribution centres from retailers has been boosted by the steady rise in e-commerce trading, and this comes at a time when there is a chronic undersupply of new premises coming onto the market. In fact, at the moment there is not a single distribution centre of over 500,000 sq ft available in the UK.

IC TIP: Buy at 148.6p
Tip style
Growth
Risk rating
Medium
Timescale
Medium Term
Bull points
  • Strong demand for distribution centres
  • Lack of new supply
  • Modest loan-to-value ratio
  • Strong earnings visibility
Bear points

 

  • Heavy reliance on retail
  • Strong competition for space

This might signal the green light to build speculatively, working on the premise that there will always be a tenant sitting there waiting. That may well be the case, but Tritax adopts a belt and braces approach and only builds on a pre-let or forward funded basis.

Offering tenants such as Argos, B&Q, Ocado and Tesco the opportunity to move into a large space makes sense because with big premises tenants tend to install a lot of equipment, and that makes it more likely that they will remain as tenants. This helps to provide increased earnings visibility, and around half the rent roll doesn’t expire for another 15 years.

The property portfolio is currently valued at £2.1bn; that’s after a £21m valuation uplift in the six months to June. In that time net rental income jumped by 59 per cent to £49.4m, helped by the acquisition of three big boxes, adding two new customers. One forward funded pre-let developments also reached practical completion, and the portfolio comprised 38 assets covering more than 19.6m sq ft of logistics space at the end of June. Two further developments have reached practical completion since then. And contracted rental income of £108.7m is below the estimated rental value of £114.8m, implying that if all rents were marked to market, rental income would be 5.7 per cent higher.

Competition for space from other users remains strong, and management has walked away from a number of potential site acquisitions because the price has not offered an acceptable return. Fortunately, through experience and market contacts, Tritax has managed to acquire 80 per cent of its acquisitions off market.

TRITAX BIG BOX (BBOX)  
ORD PRICE:148.6pMARKET VALUE:£2.03bn
TOUCH:148.6-148.7p12-MONTH HIGH:151pLOW: 127p
FORWARD DIVIDEND YIELD:4.4%TRADING PROPERTIES:nil
PREMIUM TO FORWARD NAV:7%NET DEBT:12% 
INVESTMENT PROPERTIES:£2.05bn  
Year to 31 DecNet asset value (p)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201410710.24.94.2
201512527.26.16.0
201612944.46.56.2
2017*13483.76.66.4
2018*13999.97.36.6
% change+4+19+11+3
Normal market size:10,000   
Matched bargain trading    
Beta:0.27   
*Liberum forecasts Adjusted NAV, PTP and EPS figures

The latest of these is likely to be transformational, as it will increase the size of the portfolio by nearly 9 per cent. In late July Tritax bought the freehold for the former Littlebrook power station in Dartford for £65m. This is an amazing coup for a number of reasons. It was a clear example of the management skills and experience because to win the deal Tritax had to beat 24 other interested parties. Then there’s the all-in cost of around £625,000 per acre against an average £1.2m for commercial space in the surrounding area.

But the biggest attraction is the location. The 124-acre site is right next to the M25 Dartford river crossing, which means it’s minutes away from the A2/M2 and the M20 with its direct link to the Channel Tunnel. It even has its own docking facilities on the River Thames. Around a third of the site already has planning consent for storage and distribution, and subject to planning consent on the remainder, construction will begin in Autumn 2018 on a pre-let basis with site preparation expected to cost around £25m. And a number of potential tenants have already expressed an interest.

Among its tenants Tritax has a big exposure to the retail sector, which could leave it vulnerable in an economic downturn. But with very long leases and greater online shopping, the effects would be materially offset. Online sales now make up 16.2 per cent of all retail sales, and forecasts suggest that e-commerce is expected to grow to 23 per cent of all retail sales by 2020.

Finances are in pretty good shape, too. A £200m placing in May at 136p was so oversubscribed that Tritax increased the offering to £350m. This gives it plenty of firepower for further acquisitions. And including a new £90m long-term fixed-rate facility, the loan-to-value ratio was a modest 27 per cent.