Tritax Big Box REIT: A 4.9% Yield With Amazon As Core Tenant (OTCMKTS:TTBXF)

Introduction

About a year ago, I published an article on Tritax Big Box REIT plc (OTCPK:TTBXF) claiming “the worst is behind us.” I had been warning about this even before real estate assets appeared to be overvalued based on a rapidly increasing interest rate on the financial markets, which traditionally means REITs need to take higher capitalization rates into account.

Tritax Big Box focuses on warehouses and distribution centers in the UK (its largest tenant is Amazon (AMZN) which accounts for almost 15% of the annual rent income). And although the REIT definitely isn’t out of the woods just yet, its share price is currently trading about 5% higher than last year.

Tritax has approximately 1.9B shares outstanding, resulting in a market cap of approximately 2.85B GBP based on the current share price of 150 pence (the price at the closing bell on Wednesday). The REIT is part of the FTSE 250 index, and as the average daily volume in London (almost 9M shares per day) is far superior to any of the secondary listings, I’d strongly recommend using the London listing to trade Tritax shares. The ticker symbol in London is BBOX.

The 2023 results are now in

When looking at a REIT, I mainly need to be convinced of a few things. Firstly, the current share price needs to make sense from an earnings point of view. Secondly, the LTV ratio should be relatively conservative to avoid any balance sheet worries when economic shocks (like a rapid increase in the capitalization rates) occur. And finally, the stock shouldn’t be trading at too high of a premium to the underlying book value.

Just like in North America (and pretty much anywhere else), the net income result of a REIT is pretty irrelevant to judge how attractively it is valued. In Europe, EPRA earnings are relatively comparable to an FFO calculation. As you can see below, the starting point is the net income, and in a first series of adjustments, the EPRA earnings came in at 113M GBP, representing approximately 6.01 pence per share based on the weighted average share count of just over 1.88 billion shares (as mentioned in the introduction, the share count has now increased to just over 1.9 billion shares).

In a second step, the REIT needs to adjust some items. On an underlying basis, its income was approximately 146M GBP, which worked out to 7.75 pence per share. That’s a 0.5% decrease compared to FY 2022, but during 2023, the REIT extinguished the liabilities related to the B & C shares.

The relatively flat earnings in 2023 should be seen as a “success.” After all, Tritax had to deal with the start of the increasing interest rates on the financial markets. As you can see below, the net finance expenses increased from less than 37M GBP to almost 45M GBP.

In fact, Tritax Big Box REIT’s CFO played the interest rate game well. At the end of 2023, the REIT had just over 1.6B GBP in borrowings, but only 475M GBP consisted of bank borrowings, with the majority (1.14B GBP) consisting of fixed rate debt.

This helped to keep the increase in the cost of debt manageable. At the end of 2023, the average cost of debt was just 2.93% and although that is a sizeable step-up from the 2.57% at the end of 2022, Tritax can be very lucky with its historical decision to issue bonds.

That being said, at 150 pence per share, the stock is trading at just under 20 times the earnings. That’s still a bit too rich for my blood.

Looking at the fair value, the European REITs always provide three different types of Net Asset Value calculations. As you can see below, the Net Tangible Assets have been estimated at 177 pence per share, while the Net Disposable Value came in at just under 184 pence per share.

While the current share price of 150 pence represents a 15% discount to the official NTA, it’s also important to understand what capitalization rate was used.

As you can see below, the REIT’s independent appraisers used a weighted average net initial yield in the high 4% range.

The Net Rental Income in FY 2023 was approximately 222M GBP of which 113M GBP was generated in the second half of the year (the H1 NRI was 109M GBP). Applying a required net rental yield of 5.5% based on the 226M GBP annualized yield would result in a fair value of the assets of approximately 4.1B GBP. Adding the 260M GBP in assets under development would result in a fair value of close to 4.4B GBP or approximately 450M GBP lower than the ‘official’ estimates. Divided over 1.9 billion shares, the NTA/share would be negatively impacted by approximately 23 pence per share. In that case, the underlying NTA/share would be 154 pence, excluding rent hikes in 2024.

Based on the current discount of 15% to the NTA and seeing how there still would be a small discount using a higher capitalization rate, Tritax Big Box REIT is appealing based on the NTA/share.

At the end of 2023 the LTV ratio was just 31.6% and even if you’d apply a 5.5% net rental yield to the income-producing properties, the LTV ratio would only increase towards the mid-30% range, which is still pretty low.

And two bonus elements: the long weighted average lease terms and the breakdown of its main tenants also tilt my opinion on Tritax Big Box REIT towards “positive.”

Additionally, the Tritax pipeline of development projects looks appealing as well. Between now and the summer of 2025, Tritax’ developments will cost approximately 128M GBP to complete but will add in excess of 18M GBP to the rental income if they are fully let.

I’m happy to see the REIT has become more conservative before tackling new and major expansion projects. It is targeting a 6-8% yield on cost for all new developments, which definitely is higher than its cost of capital.

Investment thesis

While I’m still not keen to pay about 20 times the underlying earnings for a REIT, Tritax Big Box REIT checks the boxes on all other key elements I look at (NTA, LTV ratio, investment pipeline, sensitivity to higher capitalization rates), which means I am getting increasingly interested in Tritax Big Box. Unfortunately, the dividend (7.3 pence for 2023 for a 4.9% yield based on the current share price) is subject to the 20% dividend tax withholding rate in the UK for dividends.

Tritax Big Box REIT is also working towards the acquisition of UK Commercial Property. This will create additional economies of scale, as this deal will create the fourth largest REIT in the UK.

I currently have no position in Tritax Big Box REIT, but I remain convinced the worst is behind us. ;

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.