Interactive Investor

Stockwatch: An Alternative to this prized institutional stock?

10th March 2017 10:00

Edmond Jackson from interactive investor

Is it "onwards and upwards" for this logistics facilities group, or are its mid-cap shares at risk of investor enthusiasm cooling?

Tritax Big Box REIT is a £1.6 billion real estate investment trust specialising in quality "big box" buildings as distribution hubs and the like, e.g. for online retailers and stores expanding e-retail sales.

It's an attractive seam of opportunity and the management team is highly capable. That's why I drew attention to Tritax at around 100p promptly after it floated in December 2014 and its directors were buying stock.

The idea has rewarded buying any dips and my updating positively, the price having advanced to twice test 148p in the last six months. After robust 2016 prelims, the price has dipped to 146p where the prospective yield may still be about 4.4% and you could have locked in 5%-plus earlier on.

With a policy of upwards-only rent-reviews and an average unexpired lease of 15.3 years, institutions have come to regard Tritax as a sound investment offering a secure yield and capital growth through acquisitions and development.

Last February, £200 million was raised via a placing at 124p, double what was targeted, and another £350 million last September at 132p after an initial £150 million was targeted.

Stock trades at premium to NAV

Mind how net asset value (NAV) figures vary slightly according to balance sheet or EPRA (European public real estate association) estimates, but, with the EPRA basis closer to intrinsic value, that means a 13% premium in market value relative to an end-2016 EPRA value of 129p per share.

Bulls might say a premium is justified for management's proven track record and future growth prospects. There's also a relatively secure dividend stream, such that a cash flow-based "net present value" should respect this - it's what trade buyers would pay than a balance sheet measure (and with EPRA NAV only 0.7% higher).

Long-term investors in commercial property should be aware, however, that stockmarket values are prone to swing with the business cycle, and also consider how youthful or mature is a company's business plan.

For years, shares in Helical used to trade at a significant premium to NAV due to perceived entrepreneurial skills exploiting the central London offices boom in particular.

But, in 2016, EU referendum year, their price plunged and, despite a near-40% rebound from a July low, Helical currently trades at a 23% discount to net tangible assets.

The market view, therefore, changed from deserving a premium for specialist growth, to the discount which is more generally the norm, e.g. Land Securities trades at a 33% discount to NAV as a large diversified REIT listed in the FTSE 100 index.

This premium is relatively recent. When I advocated Tritax as a relatively safe haven in stormy markets at 116p in August 2015, the stock compared with an EPRA NAV up from 102p to 117p in the interim results year-on-year. That, together with a 5% yield, presented attractive risk/reward.

Holders need to be comfortable that the current premium is warranted by "big box" logistics assets offering defensive growth versus Brexit/cyclical risks, and thereby a safer dividend stream. The bull case is online sales growth - even if retail sales stagnate generally - requiring increased supply of big box assets.

Chart volatility has soared since Brexit vote

A technical analyst would say the stock has got inherently riskier due to a fourfold increase in volatility, while a market psychologist might reckon investors have become torn as to what premium (or conceivably discount) might be appropriate as the UK's consumer-driven economy enters Brexit years.

Investors will also understand that Tritax is industry leader in an attractive niche, which will ultimately mature; and what if the UK ends up poorer?

So these are not just manic-depressive swings. The EU referendum prompted a slump to 115p from which the stock rebounded to strike a 148p all-time high last September. The shares then fell to 128p last November before a resurge to the apparent resistance point of 148p from which it has shied off.

Pre-referendum, Tritax had exhibited around 5p volatility in its uptrend, which became roughly 20p since 24 June 2016, although the uptrend looks broadly intact.

Mind, that if recent behaviour becomes established, then the market may exact a higher yield by way of pricing lower, to compensate for added risk in terms of volatility. Also contributing to volatility perhaps is a seeming lack of broker forecasts.

Management maintains 9% total return target

The 2016 figures vary due to the effects of acquisitions-for-shares, e.g. a 75% lift in operating profit to £92.9 million with contracted annual rent roll up 46% to £99.7 million, versus adjusted earnings per share (EPS) up 6.4% to 6.5p and the total dividend up 3.3% to 6.2p.

Overall, intrinsic growth was 9.6%, respecting capital and income, above a medium-term target of 9% annually and in context of a 15.1% total shareholder return for the period.

Management retains a 9% growth target, though it has turned somewhat cautious about capital growth in the current environment (unless by further acquisitions). It does, however, cite "strong drivers to rental growth due to an imbalance between supply and demand, and the increase in build costs in 2016, which we expect will feed through to rents."

The board's saying management has delivered "outstanding" performance since the IPO also quite begs a question about longevity. So the message is quite mixed, but you sense that if another portfolio of assets is identified then institutions will be only too happy to finance another placing, hence ultimately another boost to value. At end-2016 there was £170.7 million cash, giving some flexibility, albeit £533.5 million debt also.

Comparison with Hansteen Holdings is appropriate

Last January, I drew attention to the Mid 250 shares of Hansteen Holdings, a real estate investment trust engaged in light industrial property mainly in Germany (58% of revenue/profit), the Netherlands (about 20%) and the UK (about 15%) with France and Belgium the remainder.

It's not a pure Big Box specialist like Tritax but does dial into demand for warehouse space as more goods are sold and distributed online. The end-June 2016 EPRA-based NAV was over 120p per share, with a projected 5.2% yield.

Moreover, the euro exposure, especially through Germany, is a useful hedge against Brexit uncertainties. The stock has risen from 109p to 118p currently, but note by way of comparison, still not at a premium to NAV like Tritax.

It will be interesting to see what the full-year results bring on 21 March as regards extent of NAV upgrade, although the rise may significantly relate to the euro rising through a perceived chart break-out level versus sterling. That's in part driven by encouraging eurozone data such as German employment and Italian inflation, and the approach of triggering Article 50.

So, if you are cautious about "the Brexit UK economy" then a switch from Tritax to Hansteen is worth considering. Tritax looks like its specialty concept does have further mileage, but care is needed towards the premium to NAV that's developed.

Sentiment ultimately turns, and if the UK economy weakens then one scenario is Tritax shares consolidating in a sideways-volatile trend, even as management does further shrewd deals. Meanwhile, currency and the German economy may favour Hansteen.

Tritax BigBox REIT - financial summary     
year ended 31 Dec  201420152016
      
Turnover (£ million)  16.445.274.7
IFRS3 pre-tax profit (£m)  35.9134.091.9
Normalised pre-tax profit (£m)  35.9134.0
Operating margin (%)  243313
IFRS3 earnings/share (p)  21.621.510.5
Normalised earnings/share (p)  4.921.56.5
Price/earnings multiple (x)  6.511.6
Cash flow/share (p)  6.73.4
Dividends per share (p)  4.26.06.3
Yield (%)  2.74.5
Covered by earnings (x)  4.46.31.9
Net tangible assets per share (p)  107.0124.1128.0
EPRA NAV per share (p)  107.6124.7129.0
      
Source: Company REFS     

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