Our equities expert runs his eyes over a company with a big opportunity on the continent.
Since I drew attention to this real estate investment trust (REIT) at 106p last May, it is pertinent to review progress – in context also of a £170 million placing at 111.5p to expand its portfolio of prime “big box” logistics assets.
Relative to a near £700 million market value at 113p currently, this is a second such move for Tritax EuroBox Euro Ord (LSE:BOXE) following a £198 million placing and open offer at 103p last March, which was increased due to being over-subscribed. If this latest fundraise goes through as planned, I calculate it to be 25% dilutive.
The stock reached 124p a month ago then eased, possibly in the sense of another dilutive share issue – as its elder brethren, £4 billion Tritax Big Box Ord (LSE:BBOX), has stayed relatively firm at around 234p.
An asset class in vogue, albeit seemingly a durable one
A long-term revolution towards e-commerce is underway, accentuated in the short term by supply chain problems during Covid.
As global markets steadily recover from the pandemic’s shock, it has exposed support chains as fragile and exposed to unnecessary risk – hence companies are seeking to hold more stock closer to end-users, be they manufacturers or consumers.
This is driving up demand for logistics space close to major European conurbations.
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A second placing in fairly short order likely reflects how the race is on for such assets, which will become more expensive to acquire – unless for example, more out-of-town retail centres can be converted or other suitable sites become available for development.
Demand for these two specialist REITs seems likely also to be supported by investors regarding sound, quality property assets as a source of quality rents, hence dividends, also as a hedge against inflation.
Instead of shopping centre REITs trading at a discount to net asset value, those in logistics may therefore enjoy some extent of premium – so long as the stock does not trend so high as to compromise yield (relative to dividends per share).
This has already become the case at Big Box, which trades on 1.25x underlying net asset value (NAV) compared with Eurobox on 1.1x so far. If this trust meets expectations over time, its premium could similarly edge up.
|Tritax EuroBox - financial summary|
|year ended 30 Sep|
|Operating margin (%)||120||150|
|EPS - reported (cents)||6.3||10.6|
|EPS - normalised (cents)||3.3||4.2|
|Price/earnings ratio (x)||12.6|
|Return on equity (%)||8.7||9.1|
|Operating cash flow/share (cents)||-1.0||7.6|
|Capital expenditure/share (cents)||0.0||0.0|
|Free cash flow/share (cents)||-1.0||7.6|
|Covered by earnings (x)||1.9||2.5|
|Net assets||per share (euro cents)||112||119|
|Source: historic Company REFS and company accounts|
Big Box has been a solid performer since I drew attention at 100p in late 2013, also enabling early investors to lock in a near 6% yield, projected to rising to 7% in 2022. On current prices and forecasts, it yields 3% versus 4% for Eurobox.
These are quality yields because the Tritax management team is applying a similar formula: owning warehouses on long leases, with 90% of income secured for five years or more and 95% of the company’s rent being inflation-indexed.
Total shareholder return of 13% over six months
A total €520 million (£444 million) worth of assets have been identified: two in Germany for over €170 million and undergoing final due diligence, also six further including zoned development land and forward funding development, for a total €350 million.
As part of the placing pitch, Tritax proclaims “total shareholder return” of 13.1% over six months to early September. Mind, however, this relates to the stock price and a 2.5 euro cents dividend, and stocks can be influenced by factors wider than company specific performance.
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The stock may have benefited from deploying €391 million into five acquisitions during this period - including a first Nordic investment and developments in Barcelona and Antwerp. It extended Eurobox’s portfolio to 17 assets across seven countries, with a gross value of €1.3 billion.
Further placements look possible, say from 2022, given proceeds of this latest are expected to be deployed within three to four months. “The manager believes this transformation of the retail landscape to fully accommodate online shopping has some way to go before reaching equilibrium.”
Online sales appear to have plenty further scope to grow, where Europe lags the UK and also has a shortage of good quality potential logistics space.
Mind the dilutive effect of serial equity capital raisings
Together with acquisitions, these capital raisings make it tricky to project asset value per share, also yield, and compare historic earnings per share (EPS).
When I drew attention to Eurobox at 105p last May, it traded on a 5% discount to the 112p per share, European Public Real Estate Association (EPRA)-based net asset value as of end-2020. (This is a respected methodology by the EPRA, which tends to be a slight premium to balance sheet values.)
As of last 30 June, the EPRA valuation translates at 111p – i.e. around the current placing price.
Last 27 May, the company did issue a €500 million five-year bond with a 0.95% coupon, which was aimed to cut the cost of debt and would also help limit dilution in the medium term.
However, the pace of deals – which is justified, to position competitively in logistics provision – will need to be shown as translating into per share asset growth.
Strong interim results, however forecasts are a curiosity
The six months to end-March showed net property income up 9% to €18.7 million, boosted a further €33.8 million chiefly by fair gain in property values also a disposal gain.
Operating profit soared 46% and EPS by 38%, hence an all-round oddity how published consensus is for net profit to halve in the full year to 30 September, with EPS down 152% to 4.2 euro cents, rising only to 5.5 cents in 2023.
Possibly, such forecasts are based around rental income, although property companies do justifiably include asset sales especially as part of normal activity.
I would therefore beware database type assessments of this share, and instead focus on asset growth and yield. The pace of deals makes per share progress very hard to project, but following the long-term success of Big Box in the UK it seems fair to “trust in Tritax”.
Dividends are projected to rise from 4.3 cents to 5 cents this year and 5.2 cents in 2023, from a base of 3.4 cents in 2019 – hence a prospective yield near 4%.
It looks a lot more dependable however, than dividends from shares in cyclical businesses, liable to be compromised as prices and taxes rise on UK consumers and businesses alike.
I imagine this latest placing will also be over-subscribed, given how difficult it is becoming to locate secure asset-backed income.
Gearing around 25% as of last March
While there is not a latest update, Eurobox’s loan to net asset value ratio declined from 40% to 25% over the six months to last March – as debt was cut with the help of equity issuance.
A BBB- “investment grade” credit rating was awarded. I am surprised is not higher but may be justified by the €500 million, five-year “green bond” pushing gearing higher again.
The green element refers to acquisitions and new developments of net zero carbon buildings, a wise step given institutional investors’ need to meet modern environmental, social and governance (ESG) criteria.
Consequently, owning Eurobox equity requires quite an act of faith, that Tritax can balance debt, equity and acquisitions well.
I think a strong tailwind of logistics demand and track record with Big Box, tilt favourably. Buy.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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