Interactive Investor

Stockwatch: Yield security for conservative investors

4th October 2016 12:17

Edmond Jackson from interactive investor

Is this "prime logistics" property investor, a refuge for dependable yield and capital protection? Tritax Big Box REIT has progressed well since I drew attention to its December 2013 flotation at 100p when directors and senior managers were buying in the market.

The price did not jump on flotation but traded around 100p for a while, advancing on solid results and acquisitions funded by debt and further equity. It rose steadily to test 140p by early June, then succumbed to worries around the European Union referendum and plunged briefly to 115p on the outcome, amid panic that commercial property values would pop.

Yet a prompt rebound and recent high of 148p shows that investors reckon the strategy to buy Big Box logistics properties has firm legs. Warehouses that are close to motorways and serve major supermarkets and online retailers are a revolution rather than mere cycle, hence the UK's principal investor in this segment - and only means of listed equity exposure - has become a prime institutional stock, capitalised near £1.2 billion with its price about 139p.

Previous Tritax share offers have been a buying opportunity. Is this another?It has dropped from 145p after news of a £150 million share issue at 132p - to finance further acquisitions - and comes after £100 million was raised last January at 124p per share.

Management has drawn £583.4 million from a £641.5 million debt facility (capped at a 2.82% annual cost), so is resorting to additional equity. When I've updated on Tritax around previous share offers, they have proved a buying opportunity both for existing holders and fresh money. So is this another?

Buying property

The aim is to acquire three specific properties for a total of £175 million, relative to end-June net assets of £1.1 billion - 128.9p per share calculated on a European Public Real Estate Association (EPRA) basis (the European listed property sector association) - and balance sheet net assets of £1.072 billion.

The table implies the share price has developed some premium to net tangible assets per share, currently nearly 8%. Based on the properties' purchase prices the asset base is being expanded just over 16% relative to equity dilution of about 13.5% - i.e. modest debt involved also.

Tritax's preferred approach, through contacts and sector knowledge, avoids bidding competitionsThe pro-forma net asset value looks to be about 132p per share, presumably how the issue price was struck.

It would be a concern if the stock was running a significant premium to net assets while the yield was becoming riskier; but that doesn't appear the case when large logistics properties are fundamental to the growth of e-commerce.

The assets targeted include: one in the Midlands with 800,000 square feet and 20-year unexpired lease, costing £80 million; a second in the Midlands with 500,000 square feet and five-year unexpired lease, for £35 million; and a third in the South East with 350,000 square feet and nine-year unexpired lease, for £60 million.

Tritax's preferred approach is directly through established contacts and knowledge of the sector, thereby avoiding competitive bid situations. Over three quarters of its portfolio value has been acquired this way.

Robust dividends

A chief dilemma for income investors is that high yields often reflect the increasing risks of maturing industry cycles - e.g. housebuilders and outsourcers. The concern is that companies get caught up in profit warnings and capital value then gets slashed.

So a company that is able to demonstrate relatively good levels of security in its dividends, with growth prospects also in capital value, becomes sought-after.

The move to quarterly dividend payments from January 2017 may appeal to someTritax's dividends are underpinned by a supply/demand imbalance for prime logistics properties, its rental streams having inflation protection, a low cost base and upward-only rent reviews.

The chief risk is the impact of a "hard Brexit", as EU challenges weigh on consumer spending and commercial property values.

Presently the portfolio has 31 assets let or pre-let to quality clients such as Amazon, B&Q, Marks & Spencer, Sainsbury's and Tesco: 43% of tenants being FTSE 100 companies, 23% Mid-250, and 16% other listed public companies. The average lease is 16.3 years and 56% of the rent roll does not expire for more than 15 years.

Forecasts in the table represent only independent broker finnCap, which last May targeted an annual dividend of 6.3p per share, rising to 6.5p in 2017. Given recent acquisitions and the potential for more, it's possible this could get upgraded.

But it's already meaningful in offering 4.9% upside at the share issue price and 4.7% at current market price. There is also a move to quarterly dividend payments from January 2017, which may appeal to some.

Supportive financials

The 11 August interims to end-June showed a 62% advance in operating profit to £25.7 million, with adjusted earnings per share up 15.8% to 3.2p - hence the interim dividend edging up only 3.3% to 3.1p.

Net assets per share rose 3.4% over the period to 128.9p, on an EPRA basis, according to property assets valued just over £1.5 billion and subtracting liabilities.

The balance sheet shows long-term bank debt rising from £268.8 million in June 2015 to £377.6 million that December, and £476.2 million by last June.

A sceptic might say Tritax is refuelling financially while it can, before Brexit fears return So, given the latest announcement cites £583.4 million of a £641.5 million debt facility drawn and the balance sheet shows no short-term debt, Tritax has expanded debt to its limits to make sizeable acquisitions. End-June cash had, however, also risen from £93.9 million to £98.5 million.

Since the 28 September announcement declared an intention to deploy proceeds of the share issue within three months, this begs a funding question as regards medium-term development: why note two on page 48 of the prospectus cites potentially increasing funds raised to £250 million.

A £1.5 billion asset base appears substantive and, at some future point, the availability of attractive deals will wane. A sceptic might also say Tritax is refuelling financially while it can, before Brexit fears return to the sector.

Yet, all things considered, Big Box property offers relatively secure dividend prospects that are asset-backed, hence attractive risk/reward for conservative investors.

For more information see the website and share issue prospectus.

Tritax Big Box REIT - financial summaryBroker estimates
year ended 31 Dec2014201520162017
Turnover (£ million)16.445.2  
IFRS3 pre-tax profit (£m)35.9134  
Normalised pre-tax profit (£m)35.9134101110
Operating margin (%)243313  
IFRS3 earnings/share (p)12.921.5  
Normalised earnings/share (p)12.921.512.013.1
Earnings per share growth (%) 66.5-44.39.2
Price/earnings multiple (x) 6.511.610.6
Cash flow/share (p)6.73.4  
Dividends per share (p)2.93.86.36.5
Yield (%) 2.74.54.7
Covered by earnings (x)4.46.31.92.0
Net tangible assets per share (p)107124  
Source: Company REFS

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