Edmond Jackson's Stockwatch: "Steady income" opportunities at Tritax

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualifiedinvestment adviser.

Should you be concerned by serial fundraisings? Mostly yes as companies should aim to be cash-positive from their operations, ensure acquisitions are well-integrated and strive to move at a sustainable pace.

However, exceptions include early-stage technology firms, that require continued investment until they can break even, and Tritax Big Box, a real estate investment trust that listed last December with a £200 million capital raising at 100p a share. Commercial property investment does not bring the same managerial risks as a trading operation and currently there looks to be a good case to push ahead with deals amid the better-than-expected UK economic recovery.

Tritax shares edged up to 109p this year as acquisitions were made (see table) but have dropped to 105p after news the company is undertaking a second equity fundraise within three weeks. On 30 May it announced a placing of nearly 20 million new ordinary shares with institutional investors at 104p along a rationale that "the board believes there is a healthy pipeline of new investment opportunities and the company is currently in advanced negotiations in relation to the acquisition of two additional assets... capital raised will be used to assist in financing".

Encouraging signs

Then on 20 June a much bigger fundraise of £150 million was announced by way of a wider offer with the price not mentioned as yet.

"The company has successfully invested the proceeds of its initial £200 million fundraise and its subsequent £20.8 million placing in a portfolio of six "big box" assets let to institutional-grade tenants, with appropriate levels of debt drawn down against the assets in line with the company's investment policy.

"The board and the manager believe that there is a strong pipeline of suitable new investment opportunities and the company is in detailed discussions in relation to the potential acquisition of a number of additional assets."

I interpret this as an encouraging sign about the current environment for warehouses and the like, with Tritax management seeking to close deals while prices and yields are attractive.

Mind also that some property professionals are exiting - for example last December's Sainsbury's deal was with Ekistics Property Advisors LLP, who are not developers but investors for income.

However, the other deals appear to have been struck with retailers as owners as they seek to liberate capital for use elsewhere. So there is logic for retailers to divest and such assets should be a quality investment.

Management history

I drew attention to this investment trust flotation last December because, while Tritax Big Box was a new company, its management has a track record since 1995 and controls assets worth some £1.2 billion across 30-plus funds.

The objectives concur with what a significant proportion of investors want: a worthwhile yield backed by a sound risk/reward profile, i.e. scope for capital appreciation too.

Mostly among equities, a yield over 5% implies underlying risks with the business that could see (further) losses in shareholder value; or an exceptional time in markets such as end-2011 when investors have turned fearful in the face of macro risks. As the economy has improved, the stockmarket rates fewer firms with attractive yields unless the business is especially risky.

A 19 May update cited the company "on course to deliver on shareholders' expectations for steady income with the potential for growth through upward-only rent reviews in a sector experiencing strong rental growth".

All main sectors of the UK commercial property market have seen increased investor demand during 2014 and availability of logistics investment stock such as warehousing remains tight.

Fund market transfer

While development is now starting to respond, take-up is exceeding new stock which is expected to strengthen - this effect is now being factored into recent transaction prices. So the context looks like Tritax should indeed press ahead with deals so as not to compromise potential returns; hence another fundraising which broadens the opportunity beyond institutions.

The company also intends to transfer from the specialist fund market to the premium-listing segment of the official list; which if accepted by the UK Financial Conduct Authority would imply they are satisfied with Tritax's expansion. You may recall how AIM-listed Quindell was recently thwarted in its goal to move up to a premium listing, apparently because it had expanded so fast, though this involved radical change in its operations too.

While a series of published financial statements is needed to cast a firm verdict, the economics of this industry look attractive and the management team capable - so the open offer is well worth considering.

This share may not be one to salivate over but it stands a good chance of useful medium-term returns and with a competitive income. Management has said it is on track to deliver an initial yield of 6% benchmarked to the 100p issue price and given the economic context I would expect the dividend policy to be progressive.

For more information see tritax.co.uk.