Tritax Big Box REIT 05 May 2020

Tritax Big Box REIT (LON:BBOX) invests primarily in the large-scale sites at the centre of modern distribution and logistics networks – so-called ‘big boxes’ or ‘mega boxes’. These are crucial to online-only retailers and to the distribution networks of those multichannel retailers operating nationally or internationally. The largest single tenant is Amazon, responsible for 13% of the company’s rental income, and the second largest is Ocado. Manufacturers, wholesalers and courier services are major tenants.

‘Big boxes’ serve as centralised hubs for more complicated networks, offering efficiencies of scale and location, and frequently being newer, more automated and energy-efficient structures. The sector has performed strongly in recent years as online sales and click-and-collect services have stolen market share from bricks-and-mortar sales. As we discuss in the Portfolio section, the yield compression that has resulted means BBOX is now focussing on augmenting its core portfolio with land and early-stage developments, largely pre-let, which offer the prospect of greater returns and are smaller nodes in the same distribution networks.

BBOX has fallen onto a 20% discount following the emergence of the pandemic, close to the average of the generalist-dominated AIC Property – UK Commercial sector. The 7p dividend guidance for 2020 has been withdrawn, and the first quarterly payment was reduced slightly from what had been expected (to 1.5625p). This would amount to a yield of 5.2% annualized, although given the ongoing situation no commitment regarding the dividend has been made. However, the manager Tritax Group notes that around 50% of the portfolio is let to tenants with defensive characteristics in the current environment, such as online retailers, supermarkets and delivery services.

In our view, the current crisis is accelerating the trend towards online retailing, and therefore any valuation falls seen by BBOX this year could create a greater long-term opportunity. High demand and low supply have compressed yields on big boxes in recent years. While there may be a hit to one or two quarters’ rental income, we think that the same trends could reassert themselves more strongly once the crisis has passed.

Thanks to the company only issuing semi-annual NAVs, it is hard to get a true handle on the discount, but we note in the Discount section that adjustments to generalists’ portfolios have been modest so far. We would expect the industrials sector – and logistics, in particular – to be less affected by the current crisis than bricks-and-mortar retail and offices because restrictions on shops and office working are likely to be eased slowly. BBOX’s strategy has been slightly diluted by the focus on land and pre-let developments, but as far as we can see the new, smaller sites are benefitting from the same themes.

We acknowledge the high level of gearing is a risk, but again distinguish the short- from the long-term issues. In the Gearing section we show that there is little need for refinancing for many years, and covenants allow for much higher falls in NAV than we think are likely.