Stockwatch: a rare premium for this ‘big box’ dividend payer

Has our companies analyst changed his mind on this high-flying provider of services for food and online retailers?

An all-time high of around 162p for shares in Tritax Big Box (LSE:BBOX) sees the market price creeping ahead of an underlying net asset value (NAV) of almost 155p per share at the end of June. 

Normally, you can expect property-related stocks to track net asset values, if not trade at a discount. But when an investment/development concept is in vogue then rare premiums can apply. A key question for investors is how much mileage there is for the concept, as in the longer run you can expect ‘mean reversion’ of the stock.

For example, take Helical (LSE:HLCL) – what used to be known as “Helical Bar” after the 1980’s revamping of a small listed steel company.

This enjoyed about two decades of premiums to NAV when its office developments in particular were lionised. But eventually – and before Covid-19 may have revolutionised working practices, away from big cities – the stock slid to a discount which is now around 40%. It capitalised around £370 million, and with an overall declining trend in profits it is now rated as a small cap company. 

Supply/demand imbalance for high-quality logistics 

Thirty to 40 years later, Tritax is in a quite similar glory phase. I drew attention to the company when shares traded at around 90p in December 2013, after a dip from its flotation price, then again at 105p in June 2014 due to encouraging interim results.

I liked that it specialised in ‘big box’ warehouses especially for food and online retailers, where strong growth was evident and upwards-only rent reviews expected.

It looked like a potential gilt-edged stock both for both income – offering a 5% yield at the time – and capital growth. 

Demand for logistics space correlates with growth in e-commerce, and online shopping has been boosted by Covid-19 – especially pure online retailers, food, and homeware/DIY shops.

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These sectors made up 53.6% of Tritax’s annual rental income in the first half of 2020. Before Covid-19, management thought there was demand for 65-155 million square feet of extra logistics space by 2030, but the pandemic is accelerating this. 

Tritax remains the only listed company focused on giant warehouses for logistics, and is also buying land suitable for such development. So it has scarcity value at a time when Covid-19 has compromised many dividends and institutional investors need to match their liabilities.

Interim pay-out trimmed, albeit a 2.2% annual rise targeted

Latest interim results show an 8.8% slip in the interim dividend to 3.125p a share, as adjusted earnings per share (EPS) eased 4.4% to 3.26p. 

I do not worry about this. Reported EPS jumped 49% to more than 6p, boosted by development activity, based on interim pre-tax profit being up 52% to £103.2 million. 

However, the UK’s sharpest reduction in gross domestic product since the 1970s means the company thinks “it is right to ensure the business has the financial headroom to ride out a potentially protracted period of economic weakness” – hence the current dividend trim.

Cash in the bank is also down, from £177.5 million to £35.3 million, but property company financials can be lumpy due to investment activities.

Management still declares a progressive dividend target of 7p a share for 2020, a 2.2% rise on 6.85p for 2019. 

It says:

“The board will continue to monitor the dividend position for the current 2020 year with the potential to progressively increase the dividend when it has better visibility.” 

That would imply a prospective yield of around 4.4%, or 3% in a worst-case scenario. 

(A note how databases – hence potentially published yields also – are generally based on the timing of dividend payments during a calendar year than payments announced in company reporting in respect of an annual period. I have kept this in the table partly to show how published yields can under-estimate returns: e.g. for 2019 the timing of payouts implied 5.8p a share, however in respect of that year it was 6.85p up from 6.7p.)

Hard to see this positive bias reversing

Perceived medium-term potential looks like the chief reason Tritax shares keep creeping up despite their interim dividend trim. 

Investors sense big box property is a space to be for medium-term shareholder returns. Another driver is central banks’ demolishing the risk-free return on capital and quantitative easing also encouraging more yield-chasing.

Bill Gates - who five years ago cannily predicted a global pandemic - reckons Covid-19 will ebb sometime later in 2021. If he is roughly right then perhaps all such yield-chasing will too, but that is at least a year away.

Helical Bar sustained a premium to NAV for some time after the office property market matured, hence I suspect investor psychology may be repeating itself with Tritax as a perceived choice play. 

Its properties have not met with rental payment delinquencies, unlike some areas of UK commercial property.

The interim statement says 97% of second quarter 2020 rent and 99% of third quarter rent has been paid.

Rent reviews, together with development, have driven a 7.4% increase in “institutional-grade tenants on long-term leases (typically at least 12 years) with upward only rent reviews”.

Although upward only reviews can seem unsustainable in the current environment, Tritax’s food retail and e-commerce clients are prospering and a supply/demand imbalance in big box assets is apparent. Were this to get amended eventually then yes, it would gnaw at the stock’s premium to NAV, but it may be a few years away.

Business model ticks over nicely 

“Several asset disposals in final documentation with an attractive pipeline of development and investment opportunities” hardly suggests a business at risk of disruption from Covid-19. 

I suspect autumn and winter will again reinforce eating at home rather than inside pubs or restaurants, hence underwriting demand for supermarket produce. Online retail will also continue to grow market share.

The only worst-case scenario I envisage would be a second-wave of Covid-19 creating fear once again – say if children back at school become asymptomatic spreaders to their parents, and heated dry air indoors also aids the virus.

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Presently this appears pessimistic, yet it is entirely prudent for boards to hold back a bit at interim results time, then judge at the full year.

Strategic progress made during the first-half year includes Europe’s largest logistics facility: a “mega box” at Dartford where planning consent for a 2.3 million square feet facility was obtained in June and pre-let to Amazon. 

This will be built on land previously acquired by Tritax, justifying its ‘vertically integrated’ model combining different activities. The lease is 20 years and its annual yield on estimated cost is an attractive 6%.

Net asset value resumes rising

The EPRA (European Public Real Estate Association) valuation for net tangible assets per share has risen 2% from 151.79p to 154.85p during the six months to the end of June.

That is based on portfolio value rising 7.4%, from £3.94 billion to £4.18 billion. This is the more likely yardstick investors are attuned to, rather than sheet values. It is a welcome development, given EPRA NAV eased 1.3% last year, as if the business might be consolidating.

NAV has historically influenced perception, given the way Tritax’s bull trend ran to 154p in June 2018 before a period of volatile-sideways consolidation – as if sensing near-term NAV growth was mature.

This was borne out by the slight drop in 2019 NAV. However, the anchor chain to NAV might well stay a bit stretched – on the upside – if Tritax proves it can sustain dividend growth, come the board’s decision on the full-year pay-out.

I would be cautious of chasing the price currently, at just over 161p, given the possibility some extent of stock market correction could happen by autumn. Barring a worst-case scenario however, a yield over 4% looks an underlying prop and this is a business able to capitalise on further demand for logistics assets. 

Rather than take profits on the rally, for the medium term I suggest: ‘hold’.  

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.