Nov 26th

Tritax Big Box REIT

by Killik & Co

A new real estate investment trust (REIT) is due to launch on the London market early next month. The Tritax Big Box REIT will target a minimum dividend yield of 6% and a net total shareholder return of 9% over the medium term by investing in well-located ‘Big Box’ warehouse assets in the UK, let to high quality institutional-grade tenants on long-term leases. Regular upward-only inflation-protected long-term lease agreements will give the potential for the dividend to grow over time.

A ‘Big Box’ asset is typically defined as having the following characteristics:

  1. Over 500,000 square feet of floor area;
  2. A modern construction exceeding 12 metres in height, often with sophisticated automation systems;
  3. Primarily used for holding and distributing finished goods;
  4. Let to institutional-grade tenants on long leases with pre-agreed, often inflation-linked, rental reviews;
  5. Located in a prime geographical location.

The fund offers a play on the continued growth of domestic e-commerce

This sector of the UK real estate market has some strong demand drivers behind it. The successful large-scale retailers are increasingly relying on Big Box assets in order to efficiently up-scale logistic facilities. Mark & Spencer Group (MKS-LON, 499p) is just one recent example of a retailer transitioning to a simpler model using much larger, strategically located warehouse facilities1. Between now and 2020, the company plans to move from a complex network of 110 logistics sites to just four large Big Box locations, including a distribution centre in Castle Donington dedicated to e-commerce. Online retail is an area of particular growth for the sector. Online retail sales in the UK have grown substantially in recent years, a trend forecast to continue. Office of National Statistics data2 shows that the proportion of retail sales made over the internet has increased year-on-year in every month since 2007 and now accounts for nearly 11% of all sales (excluding automotive fuel) in the UK. E-commerce is expected to account for over £140bn of sales by 2016, up from £68bn in 2011. Despite this demand, development of these specialist assets has been constrained by challenges with planning consents and the financing of construction.

Company background

The new fund will be managed by Tritax, a real estate management house founded in 1996. Colin Godfrey and James Dunlop, two of the founding partners of Tritax, will take fund manager and property sourcing responsibilities. The company has advised and invested on a number of deals in the logistics sector and in May 2012 launched Tritax Amazon, a limited partnership fund, set up to invest in a newly constructed 1m square foot purpose built Big Box distribution warehouse prominently located next to the M90 motorway, north of Edinburgh and leased on a 20-year term to the European arm of the world’s top e-retailer, Amazon.co.uk, and offering a 7.25% income distribution to investors.

The fund is seeking to raise up to £200m

The Tritax REIT will look to raise up to £200m and list on both the specialist fund market (SFM) of the London Stock Exchange (LSE) and the official list of the Channel Island Stock Exchange (CISX), thus making it eligible for ISA accounts. The logistics assets to be acquired will typically be either fully let or pre-let and therefore the company will bear no construction risk. Contracts will typically be structured under ‘triple net leases’, whereby the tenant agrees to pay all taxes and building insurance and is responsible for covering all costs associated with the repair and maintenance of the building. This type of lease contract removes many of the additional potential costs associated with the asset.

Issue costs will equate to 2% of gross proceeds, meaning the initial NAV is expected to be 98p (on a 100p issue price). The fund will be structured as an externally managed Alternative Investment Fund (AIF) with a property management agreement for an initial term of five years. A management fee of 1% per annum will be charged on NAV excluding cash up to £500m (and on a sliding scale on assets thereafter). 25% of this fee will be paid in shares and no performance, acquisition or exit fees will be charged. The management team will look to maintain a level of gearing, which is expected to reside around the 40% level over the medium term, although may at periods reach up to 45% during the initial investment phase.

The key risks as we see them are:

  • Potential default of the underlying tenant. The initial capital raise, once fully invested, is likely to have exposure to a concentrated number of tenants. Whilst the likely occupiers of such large premises are expected to be large established institutions, a default from one tenant will have a detrimental impact on the REIT.
  • Execution risk. The team have indicated that three assets have been identified and are in solicitors’ hands, which will take commitments for the bulk of the target capital raise. Management anticipate that they will be substantially invested within a six-month period following admission, however any delay to this aim may negatively impact targeted returns.

We think this is an interesting new offering to the London market. We believe there are strong long term demand drivers behind the types of assets targeted by the team. Whilst accepting the potential execution risk of the strategy, Tritax could benefit from early mover advantage in the sector. The inflation-linked revenue stream from what is expected to be large established corporate names could be attractive to income-seeking investors. Interested investors are encouraged to read the prospectus available on the company’s website for further important risk factors and to contact your Broker for further details. The order book is expected to close at noon on Thursday 28 November, with listing due to commence on 9 December.

References

1 Marks & Spencer – E-commerce Distribution Centre (8 May 2013)

2 Office for National Statistics – Statistical Bulletin: Retail Sales, October 2013