The future looks bright, although much depends on management closing tasty deals.
After recently examining inflation risks, I want to re-visit the ‘big box’ warehouse assets investment theme, linked to e-commerce. It is a specialist field with few investment options, but stocks can be well asset-backed and their dividends supported by strength in the digital economy.
Tritax Big Box established the concept
Tritax Big Box (LSE:BBOX) real estate investment trust floated at the end of 2013, and when I drew attention to it one could buy in the market at the same 100p flotation price. Indeed, the directors were doing so materially.
The concept took time to sink in, but the shares have enjoyed a steadily rising chart, currently testing 200p. There has also been a good single-digit yield and asset backing. For conservative investors, that is a very attractive risk/reward profile versus yields nearer 10% where you cannot be sure if capital value may deteriorate. Versus inflation, the management team instils upward-only rent reviews.
A dilemma of success, however, is big box equity now trading at a 20% premium to net tangible asset value or 13% based on European Public Real Estate Association (EPRA) methodology.
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It is not unusual for property stocks in vogue to trade at a premium to net asset value (NAV), but on a five to 10-year view it means the segment can attract more investment, which raises supply and can mean the premium erodes.
There is a ‘younger brethren’ situation
Tritax EuroBox Euro Ord (LSE:BOXE) floated in July 2019 at 100p, or €113 a share.
The investment formula was similar: logistics warehousing facilities on long leases, with 90% of income secured for five years or more and 95% of the company’s rent having an element of annual indexation linked to inflation. Assets fulfil key roles in the most established markets across major population centres.
Estimated NAV per share at flotation was 98p, and the company raised a net £294 million. A slight premium to NAV was possible given keen interest on the back of the UK big box operation proving successful.
The stock traded sideways, however, and fell below 70p with the March 2020 Covid sell-off. But it joined last November’s vaccines-led rally, advancing to 105p last March and hit 115p in early May.
EuroBox has currently eased to 106p, capitalising it around £650 million versus £3.4 billion for Big Box. A 5x greater size for the elder sibling’s begs the question if the younger stands an arithmetically easier chance of delivering capital growth.
Circa 7% discount to net tangible asset value
EuroBox also trades around its International Financial Reporting Standards (IFRS) net asset value of 105p a share based on the 31 March balance sheet, and a 5% discount to the 112p a share, EPRA value as of end-2020.
The interim results did not include an EPRA valuation but noted a portfolio independent valuation at €343 million (£295 million), a 3% increase over 12 months to 31 March. Given this and a 2.5% increase in the IFRS value it would not be unreasonable to view the stock trading at a circa 7% discount to its EPRA value, which is key.
By comparison at Big Box, end-2020 EPRA net tangible assets per share were 176p hence at 197p the stock trades at a 12% premium. I would not go so far as suggesting Big Box holders consider a switch but with fresh money the value differential favours EuroBox for exposure to this concept.
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Why should European economies justify this differential in stock pricing? Given the investment criteria are similar it would chiefly appear Big Box is just better known as a stock.
Prospective yield of 4.2%
Consensus forecast is for a 5c dividend for the current financial year to 30 September – representing 16% growth – and 5.2 cents in 2022. At current exchange rates that implies 4.3p rising to 4.5p i.e. a prospective yield around 4.2%.
Meanwhile, Big Box yields around 3.4% if forecasts are fair, which justifies continuing to hold but suggests EuroBox as better value.
See from the tables for both companies, they have no real capital expenditure needs hence cash generated is substantially available for investment, debt repayment and dividends.
The 31 March balance sheet showed debt as all long-term, having reduced from €341 million to €257 million, with a €3 million interest charge relative to €19 million net property income and a total €47 million operating profit.
Potentially at an inflection point?
EuroBox’s stock rise since November looks to have more substance than tracking a wider rally.
Last December’s annual results included a revised strategy: “to tilt towards a more value-added approach, acquiring assets earlier in their development cycle”. The dividend policy was updated, aiming to pay out 90% to 100% of adjusted earnings per share (EPS).
The chairman’s interim statement described the period as “reflecting the growing maturity of the business…successfully implementing all elements of our evolved strategy…”
Covid-19 has accelerated growth of e-commerce, boosting already significant demand for high-quality, large-scale and sustainable logistics space. A substantial pipeline of attractive opportunities has been identified.”
Tritax Big Box REIT - financial summary
Year ended 31 Dec
|Net rental income (£million)||18.6||43.8||74.6||108||133||144||162|
|Operating profit (£m)||46.7||143||110||265||277||181||492|
|Net profit (£m)||41.8||134||91.9||248||253||141||449|
|EPS reported (p)||14.7||21.0||10.4||19.4||17.4||8.4||26.3|
|EPS normalised (p)||14.7||21.0||10.4||19.7||17.5||8.2||26.3|
|PE ratio (x)||7.5|
|Operating cashflow/share (p)||8.0||4.2||7.9||6.8||6.5||5.5||8.1|
|Capital expenditure/share (p)||0.0||0.0||0.0||0.0||0.0||0.0||0.0|
|Free cash flow/share (p)||8.0||4.2||7.9||6.8||6.5||5.5||8.1|
|Covered by earnings (x)||3.6||3.6||2.0||3.8||3.2||1.4||4.8|
|Net debt (£m)||102||318||368||637||773||1,127||1,286|
|Net asset value/share (p)||104||121||126||140||151||150||170|
|EPRA net asset value/share (p)||108||125||129||142||153||152||176|
Source: historic company REFS & company accounts
Tritax EuroBox - financial summary
Year ended 30 Sep
|Operating margin (%)||120||150|
|EPS - reported (cents)||6.2||10.6|
|EPS - normalised (cents)||6.2||10.6|
|Price/earnings ratio (x)||11.9|
|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 (cents)||112||119|
Source: historic company REFS and company accounts
Financial facilities have expanded to take advantage
Last March, EuroBox raised nearly £200 million at 103p a share with investor demand significantly exceeding the £173 million targeted. The rationale was to expand investment properties from 13 assets in six European countries, while the transformation of retail to online shopping still has considerable scope to grow.
Land intended for logistics development will also be sought, which raises the risk profile but seems an appropriate pursuit of margin for the longer term.
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Mind this incurred equity dilution around 46% which is likely to temper per share numbers for the September 2021 year and possibly 2022 as well, but it added a foundation on which to layer debt.
The capital was swiftly deployed by way of buying two assets in Germany for a total €291 million with a combined net initial yield close to 4% - serving a major German sportswear manufacturer, secondly the US Wayfair Inc, online furniture group.
On 27 May, €500 million was raised via five-year bonds with a 1% annual coupon, again over-subscribed. This led to credit ratings agency Fitch awarding a BBB- investment grade rating, which reduces debt costs and opens up new sources of debt.
A broad-based call on logistics space and managerial talent
You are taking a view on the Tritax management team’s proven record, transferring to continental Europe and being able to close deals on sufficiently attractive terms.
Interim pre-tax profit up 48%, EPS by 38% and the dividend by 14% - all looked very dynamic but this was just a snapshot amid acquisitions.
I think this specialist area of the property market bodes well for ability to raise rents with inflation – should it become ingrained – and EuroBox’s strong asset-backing mitigates downside risk should equities sell off on inflation (or any other fears).
Acquisition prices will have risen overall compared with Big Box's earlier years in the UK, but management should continue to exercise discipline and is confident well beyond its second-half year. Indeed, I suggest taking a multi-year view as a tuck-away. Buy.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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