Stockwatch: A safe haven with a 5% yield

It isn't going up in a straight line but the chart for Mid 250 investor in logistics warehouses, Tritax Big Box, reflects a sound strategy and capable management. The stock began trading at its 100p offer price in December 2013 and has steadily risen to a recent high of 120p, currently 116.25p, also the prospective dividend yield has been about 6% based on the offer price or just over 5% currently. Tritax might not thrill but is a relatively dependable stock with attractive risk/reward. Knocking the business off course would need a downturn enough to force change with Tritax's policy of upward-only rent reviews; rents being a significant factor to commercial property values.

Exploiting a niche in warehouses serving online retailers

Tritax is benefiting from the economics of warehousing and distribution scaling up as online retailers gather pace; also as retailers find it efficient to divest property assets to a specialist owner, thereby enhancing return on capital employed. Regarding food retailers this could also be seen as generating cash in support of "investment programmes" (sustaining price wars) and possibly dividends. Not surprisingly therefore, 45% of Tritax's portfolio comprises food retailers, although Morrisons (at 11%) perhaps shows this strategy being appropriate - as its strong asset base has not provided much downside protection while investors focus on earnings.

Such trends explain how Tritax has accumulated assets valued at £1.1 billion at end-June, representing an 11.7% increase over acquisition price (before costs) and providing an average net initial yield of 5.8% , with average unexpired lease terms of 15.8 years. That's respectable for commercial property; why investment institutions will be content to back Tritax than try to achieve this in-house. Good management is also evident in the portfolio being fully or pre-let, and income-producing, during the period. Indeed the company's underlying total return for the first six months of 2015 was 10.7% versus its target of 9% annually for the medium term.

The latest interim results also have a positive outlook statement: management continues to identify "good opportunities" and "we will continue to build an increasingly diversified and high quality profile, as we deploy the equity and debt financing raised during the period." In the six months to end-June, £229 million equity was raised at prices of 110p and 113p, the end-June balance sheet showing £93.9 million cash - i.e. ongoing scope for development. Tritax is financially geared to the tune of 22% and has a medium-term target of 40%, utilising derivatives currently to cap the interest rate on various debt at 3.81% - although the actual average annual interest rate was 2.35% at end-June. Total bank borrowings have risen from £164.8 million to £268.8 million, June-to-June, albeit in a context of net assets multiplying 3.5 times to £790.6 million. The net interest charge was covered 26 times by operating profit.

Net asset value should remain an anchor for the share price, which has increased from 102.1p to 117.1p on an EPRA basis. For so long as management are able to grow NAV usefully then the stock ought to trade at an NAV premium. Sceptics could cite the NAV discounts applying to equity investment trusts, and indeed in a worst case scenario such a sentiment-change cannot be ruled out. Yet Tritax has positioned itself intelligently, where the trend to logistics' warehouses ought to mitigate any deflationary impact from China etc.

CBI raises its UK economic growth target

Despite being a broad measure this ultimately affects demand for commercial property; why it tends to be a lagging feature in economic cycles. The Confederation of British Industry has upgraded its GDP forecasts to 2.6% this year and 2.8% next year from 2.4% to 2.6% respectively, amid strong household spending and now investment growth. While cynics tend to regard the CBI as a contra-cyclical indicator, the Bank of England's seemingly hawkish stance to raise interest rates in due course also affirms the economy firming. The chief UK risk would appear, wider economic fears conspiring to hit consumer confidence at a time when personal borrowings have once again risen. As yet this remains a worst-case scenario and the UK a relative bright spot in the global economy.

5.2% prospective yield ought to create a support level

Presently the stock is trading down below EPRA net asset value - i.e. not as yet a special situation, insulated from wider market moves. Yet with the board saying it is on track to pay 6.0p a share by way of 2015 dividend, the prospective yield is now over 5% - versus the likelihood, the risk-free rate of interest isn't rising anywhere near this in a good while yet. So it's hardly surprising, Tritax has attracted a good range of institutional shareholders (despite the dilemma this means for private investors, of recent share issues being placings).

While Tritax has less than two years' listing record, it has delivered well on its objectives - another good sign. I drew attention at the December 2013 flotation when the market price had not jumped above the 100p listing price, also at 105p in June 2014 given the stock's scope for useful medium-term returns. Certainly the robust UK recovery has helped, although the logistical issues Tritax addresses look firm versus cyclical issues - and management sees these trends as offering further mileage. So while patience may herald the best opportunities from more volatile stocks, amid this sell-off, Tritax is already in a valuation range of interest to serious investors: its share price fully backed by underlying assets and offering a yield that ought to be at least 5% at the current buying price, as management continues to grow the portfolio.

For more information see: tritaxbigbox.co.uk.