Tritax Big Box – rent hikes support double digit income growth

Tritax posted full year net rental income of ￡206.0m, up 11.6%. Growth was driven by uplifts from rent reviews and the benefit of acquisitions and developments.

Operating profit rose 2.9% to ￡183.1m. Higher inflation and interest rates have impacted both the investment market and asset valuations. The total portfolio value fell from ￡5.5bn to ￡5.1bn. This drove a 17.9% decline in reported net assets per share to 179.25p.

Net debt at the year-end was ￡1.6bn, up from ￡1.3bn. That’s pushed the loan to value ratio up to 31.2% - still within the target range of 30-35%. Net operating cash flow, plus licence fees received, was ￡18.7m lower at ￡177.4m.

Since the year-end, Tritax has disposed of three non-core assets for ￡125m.

A final dividend of 1.975p was announced, bringing the full year dividend to 7.0p, a 4.5% increase.

The shares were broadly flat in early trading.

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Tritax Big Box generates income renting out giant warehouses. These so-called ‘Big Boxes’ are at the heart of modern logistics and e-commerce, from highly automated large-scale fulfilment centres to small urban or last journey warehouses.

Despite inflation-linked doom and gloom hanging over many of Tritax's retail customers, building out a strong logistics network is non-negotiable these days. That's helped the group add to its rent collections - firepower that will allow it to continue investing in new growth opportunities.

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 mean attractive deal terms, such as upwards only rent reviews. A wide range of high-quality tenants should hopefully add more 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 to investors but remember nothing is guaranteed.

Development is where Tritax’s ambitions lie, though, with a focus on capturing the increasing demand for e-commerce and the distribution needs that follow. That creates some additional risks. It's expensive to get a logistics hub up and running, if it doesn't get filled it could become a financial ball and chain. Luckily this hasn't proven to be a problem, a shortage of ready-to-occupy premises means customers are snapping up units before they've been completed.

The group’s increasingly managing the development and delivery of assets it doesn’t own for a fee as well, something that should help boost profits without much investment.

Paying out rental income makes expansion complicated, too. In the past, Tritax has recycled its portfolio - selling mature assets in order to invest in development opportunities. Having been on hold for a period, asset sales are back on the menu with a three-asset portfolio sold already in 2023. There’s no immediate urgency to sell into a weak market, so there’s scope to be selective about what and when to sell.

We think Tritax is in a good position, thanks to its crucial role in the supply chain of major blue chip companies. This insulates it somewhat from growing uncertainty about the impact of inflation.

Nevertheless, questions around the health of the UK economy and the knock-on effect that could have on Tritax’s customers has weighed on sentiment. We’ve seen a rebound over the past few months, but the group still trades at a discount to its longer-term valuation. We continue to believe this could present an attractive entry point, for those willing to ride short-term uncertainty. As with any investment, there are no guarantees.

All figures 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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