Hear Colin Godfrey and Frankie Whitehead present our Interim Results for 6 months ended 30 June 2017

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Tritax Big Box is the only Real Estate Investment Trust dedicated to investing in very large logistics facilities in the UK. We own, manage and develop some of the UK’s most sought-after Big Boxes.

Our Big Boxes are strategically important to our tenants as they offer efficiency savings and are increasingly fulfilling e-commerce retail sales. Our tenants include some of the biggest names in retail, logistics, consumer products and automotive.

We aim to provide a secure and growing income for our Shareholders, together with capital appreciation. Our ambition is to be the UK’s pre-eminent owner of Big Boxes.

£2.10bn
6.40p
9% pa

Our Business Model

We own and manage high-quality Big Box logistics assets across the UK, using the Manager’s experience and expertise to assemble and grow a well-diversified asset portfolio and prudently applying leverage to increase returns.

 

 

 

The value we add

The value we add
The starting point for value creation is our ability to source investments. This depends on the Manager’s extensive network of investment agency, developer and tenant contacts, built up over many years. The Manager also spends considerable time researching and developing relationships with asset owners, while learning of any triggers that might lead them to sell. These relationships allow us to source most investments off-market, enabling us to buy at attractive prices. Creating value can also be as much about the investments we do not buy. Patience is vital and we discount numerous opportunities that do not offer value for money.

The Manager’s expertise and market knowledge enable us to assess an investment opportunity rapidly and give vendors a decision promptly. We can also complete transactions quickly, but always following thorough due diligence. This speed and certainty of execution is highly attractive to vendors; the highest offer is not always deliverable, so price is not the only consideration.

We have a clear investment policy but we are also pragmatic. We will buy smaller assets or assets with shorter leases, where we see an opportunity to add value for Shareholders, for example due to a near-term lease expiry where we believe we can re-gear the lease or re-let within a short period. Buying smaller properties reduces the risk inherent in the investment and provides building size diversity. We buy assets directly, but where possible we acquire the special purpose vehicle that owns the asset, thus reducing our acquisition costs.

The assets we buy are usually strategically important to our tenants. We work with them to maximise their operational effectiveness, for example by extending buildings or adding mezzanine floors. This encourages tenants to sign longer leases, increasing the security of our revenues and increasing capital values. Where we buy properties with the potential to add value, we look to turn them into foundation assets for our portfolio through asset management. Our intention is to hold most assets for the long term but we would consider selling if we have unlocked value and delivered the asset’s business plan, and we can reinvest the proceeds in a more attractive opportunity.

The Manager’s relationships with developers are increasingly enabling us to invest in pre-let forward funded developments, through which we fund the construction of a Big Box that has been pre-let to a specific tenant. For more information on this see The Opportunity in Forward Funded Development.

Sustaining our advantage

Sustaining our advantage
As a specialist Big Box investor, we have a reputation as one of the sub-sector’s most knowledgeable, forward-thinking and pragmatic owners and managers. This makes us the obvious choice for asset owners looking to sell Big Boxes. The consistency of the Manager’s team helps us to maintain our relationships in a market where personnel changes are common, enabling us to work on longer-term deals with continuity.

As our portfolio grows, we benefit from economies of scale, increased diversification by geography, tenant and building type, and a larger list of contacts, helping us to source further attractive investments off-market. A larger portfolio also gives us greater insight into market developments and more control over the evidence for rent reviews and lease renewals, as well as the potential to work up multi-asset initiatives with the same tenant.

Delivering returns

Delivering returns
By acquiring high-quality properties with excellent tenants and carefully managing our assets, we aim to deliver a robust, low-risk and growing rental stream, which supports our target of paying a progressive dividend. Our asset selection and management approach also adds value to our investments, allowing our Shareholders to benefit from attractive total returns.

In addition, our status as a REIT helps to ensure that the value we create is not eroded for Shareholders. For example, we are not subject to corporation tax on profits and gains in respect of our qualifying property rental business. We can also pay dividends that qualify as a property income distribution, which offers tax advantages for certain UK Shareholders.

Our strategy

Central to delivering the Group’s objective of driving Shareholder returns is capitalising on the Manager’s deep understanding of the Big Box sub-sector. It is this knowledge and experience that will allow the Company to exploit value from the favourable dynamics that this sector presents.

The Company’s primary focus is creating growing and sustainable income through buying well – quality assets that are attractively priced that will protect and grow capital value over the medium term. Where appropriate, performance will be further underpinned by proactive asset management and exploiting market anomalies.

More specifically, the Company seeks to deliver its objective by positioning business behind three key themes and investing accordingly:

78%

The quality and sustainability of our rental income underpins our business. Foundation assets provide our core, low-risk income. They are usually let on long leases to tenants with excellent covenant strength. The buildings are typically new or modern and in prime locations, and the leases have regular upward-only rent reviews, often either fixed or linked to inflation indices.

12%

These assets are typically let to tenants with strong financial covenants and offer the chance to grow the assets’ capital value or rental income, through lease engineering or improvements to the property. We do this using our asset management capabilities and understanding of tenant requirements. These assets are usually highly re-lettable.

10%

These are fundamentally sound assets in good locations, but let to tenants we perceive to be undervalued at the time of purchase and which have the potential to improve their financial strength, such as early stage e-retailers or other companies with growth prospects. These assets offer value enhancement through yield compression.

Leverage is used prudently to further drive Shareholder returns. The Company’s medium-term target aggregate borrowing is 40% of portfolio value. The Company retains full gearing strategy and takes into account factors such as lender diversity, cost of debt, debt type and maturity profiles.

Our Management

Board of Directors

The Board is responsible for leading and controlling the Company and has overall authority for the management and conduct of the Company’s business, strategy and development.

The Board is also responsible for ensuring the maintenance of a sound system of internal control and risk management (including financial, operational and compliance controls) and for reviewing the overall effectiveness of systems in place as well as for the approval of any changes to the capital, corporate and/or management structure of the Company.

Richard Jewson

Jim Prower ACA

Susanne Given

Mark Shaw FCA

The Manager

The Company’s Manager is Tritax Management LLP and is part of the Tritax Group. Since 1995, the Tritax Group has acquired and developed commercial property assets with an acquisition value of more than £4.0 billion on behalf of property unit trusts, limited partnerships and syndicates, involving more than 122 separate investment vehicles and including Big Box assets, industrial properties, office, retail and hotels.

As at January 2017, the Tritax Group had total assets under management with an acquisition value of approximately £2.4 billion, across more than 122 investment vehicles (including the Company), consisting of over 22 m sq ft of real estate assets.

Since 2000, the Tritax Group has delivered an average exit IRR across its non-tax products of approximately 16.00% pa, with a number of its tax products achieving performance in excess of this average. Its tenant list has currently and historically included Amazon, Next, Intercontinental Hotels Group, Sainsbury’s, RBS, Royal Mail, Tesco, IBM, HMRC, Halfords, GDF Suez, Accor and Asda.

Colin Godfrey

James Dunlop

Henry Franklin

Petrina Austin

Bjorn Hobart

Ed Plumley

Frankie Whitehead

Olivia Cox

Portrait of Olivia Cox

Corporate Governance

Since its inception in December 2013, the Company has undergone substantial growth and in June 2015 was included in the FTSE 250 Index.

As the Company has grown it has embedded a culture of good governance because the Board of the Company believes that strong corporate governance is integral to the Company’s success and its continued growth and development. Good governance provides the structure for an open, informed and transparent environment to allow good decisions to be made.

The Role and Duties of the Board

The Board is responsible for determining the Company’s Investment Objectives and Investment Policy with the Manager and has overall responsibility for the Company’s activities including reviewing investment activity, performance, business conduct and strategy as well as developing and complying with the principles of good corporate governance. The operational aspects of running the Company are delegated to the Manager, however the Board has reserved the following matters for its consideration:

  • Reviewing and approving Board membership and powers including the appointment of directors;
  • Approving the budget, financial plans and annual and interim financial reports;
  • Discussing, approving and implementing the Company’s strategy;
  • Reviewing property valuations and valuations of its interest rate derivatives;
  • Overseeing treasury functions;
  • Managing the Company’s capital structure;
  • Overseeing the services provided by the Manager and, in conjunction with the Manager, the Company’s principal service providers;
  • Approving the dividend policy;
  • Approving all investment decisions; and
  • Reviewing and approving all compliance and governance matters.

Board Committees

Audit Committee
The Audit Committee consists of Jim Prower who Chairs the committee, Susanne Given and Stephen Smith. Richard Jewson is invited to attend Audit Committee meetings to further his understanding of the Company. The Audit Committee’s role is to oversee the Company’s financial reporting process including the risk management and internal financial controls in place within the Manager, the valuation of the property portfolio, the Group’s compliance with accepted accounting standards and other regulatory requirements as well as the activities of the auditors.

Management Engagement Committee
The Management Engagement Committee’s role is to review the performance of the Manager and the Company’s other main service providers over the year and to recommend to the Board a schedule of re-tender for each of the appointments. The committee is also responsible for overseeing any amendments to the Investment Management Agreement between the Company and the Manager.

Nomination Committee
The Committee’s role is to review the size, structure and composition of the Board; to ensure that the Board has the right mix of skills, experience and knowledge to enable the Company to fulfil its strategic objectives. The Committee is also responsible for making recommendations for new appointments to the Board and for reviewing the performance and terms of engagement for the existing Directors.

 

Principal Risks and Uncertainties

We aim to operate in a low-risk environment, focusing on a single sub-sector of the UK real estate market with the aim of delivering an attractive, growing and secure income for Shareholders, together with the opportunity for capital appreciation. The Board therefore recognises that effective risk management is key to the Group’s success. Risk management ensures a defined approach to decision-making that seeks to decrease the uncertainty surrounding anticipated outcomes, balanced against the objective of creating value for Shareholders.

Our principal risks and uncertainties are set out below. They have the potential to affect materially our business, either favourably or unfavourably. Some risks may currently be unknown, while others that we currently regard as immaterial and have therefore not been included here, may turn out to be material in the future.

Property Risks

Default of one or more of our tenants
Probability: Low (no change) 
Impact: Low to Moderate
The default of one or more of our tenants would immediately reduce revenue from the relevant asset(s). If the tenant cannot remedy the default and we have to evict the tenant, there may be a continuing reduction in revenues until we are able to find a suitable replacement tenant, which may affect our ability to pay dividends to Shareholders.

Mitigation
Our investment policy limits our exposure to any one tenant to 20% of gross assets or, where tenants are members of the FTSE, up to 30% each for two such tenants. This prevents significant exposure to a single retailer. To mitigate geographical shifts in tenants’ focus, we invest in assets in a range of locations, with easy access to large ports and key motorway junctions. Before investing, we undertake thorough due diligence, particularly over the strength of the underlying covenant. We select assets with strong property fundamentals (good location, modern design, sound fabric), which should be attractive to other tenants if the current tenant fails. In addition, we focus on assets let to tenants with strong financial covenant strength in assets that are strategically important to the tenant’s business.

The performance and valuation of our property portfolio
Probability: Low 
(no change)
Impact: Moderate
to High
An adverse change in our property valuations may lead to a breach of our banking covenants. Market conditions may also reduce the revenues we earn from our property assets, which may affect our ability to pay dividends to Shareholders. A severe fall in values may result in us selling assets to repay our loan commitments, resulting in a fall in our NAV.

Mitigation
Our property portfolio is 100% let, with long unexpired weighted average lease terms and an institutional-grade tenant base. All the leases contain upward-only rent reviews, which are either fixed, RPI/CPI linked or at open market value. These factors help maintain our asset values. We have agreed banking covenants with appropriate headroom and manage our activities to operate well within these covenants. We constantly monitor our covenant headroom on LTV and interest cover. This headroom is currently substantial.

Our ability to grow the portfolio may be affected by competition for investment properties in the Big Box sector
Probability: Moderate 
(up)
Impact: Low
Competitors in the sector may be better placed to secure property acquisitions, as they may have greater financial resources, thereby restricting our ability to grow our NAV. 

Mitigation
We have extensive contacts in the sector and often benefit from off-market transactions. We also maintain close relationships with a number of investors and developers in the sector, giving us the best possible opportunity to secure future acquisitions. We are not exclusively reliant on acquisitions to grow the portfolio. Our leases contain upward-only rent review clauses and we have a number of asset management initiatives within the portfolio, which means we can generate additional income and value from the existing portfolio.

Our property performance will depend on the performance of the UK retail sector and the continued growth of online retail
Probability: Low (no change)
Impact: Moderate
Our focus on the Big Box sector means we directly rely on the distribution requirements of UK retailers. Insolvencies among the larger retailers and online retailers could affect our revenues and property valuations.

Mitigation
The diversity of our institutional-grade tenant base means the impact of default of any oneof our tenants is low. In addition to our due diligence on tenants before an acquisition or, in thecase of forward funded developments, before agreeing the lease terms, we regularly review the performance of the retail sector, the position of our tenants against their competitors and, in particular, the financial performance of our tenants.

Development activities are likely to involve a higher degree of risk than that associated with standing investments
Probability: Low (no change)
Impact: Low
Our forward funded developments are likely to involve a higher degree of risk than is associated with standing investments. This could include general construction risks, delays in the development or the development not being completed, cost overruns or developer/contractor default. If any of the risks associated with our forward funded developments materialised, this could reduce the value of these assets and our portfolio.

Mitigation
Only three of the Company’s current portfolio of 35 assets as at 31 December 2016 are forward funded assets, representing 6.6% of the value of our portfolio (on a completed basis). All of these assets are pre-let to institutional-grade tenants. Any risk of investment into forward funded projects is minimal, as the developer takes on a significant amount of construction risk and the risk of cost over-runs. Funds for these developments remain with us and are only released to the developer on a controlled basis subject to milestones as assessed by our independent project monitoring surveyors.

Financial Risks

Our use of floating rate debt will expose the business to underlying interest rate movements
Probability: Moderate (no change)
Impact: Moderate
Interest on our debt facilities is payable based on a margin over Libor. Any adverse movements in Libor could significantly impair our profitability and ability to pay dividends to Shareholders.

Mitigation
The Company has entered into interest rate derivatives to hedge our direct exposure to movements in Libor. These derivatives cap our exposure to the level at which Libor can rise and have terms coterminous with the loans. We aim, where reasonable, to minimise the level of unhedged debt with Libor exposure, by taking out hedging instruments with a view to keeping variable rate debt approximately 90%+ hedged.

A lack of debt funding at appropriate rates may restrict our ability to grow
Probability: Moderate
(no change)
Impact: Moderate
Without sufficient debt funding, we may be unable to pursue suitable investment opportunities in line with our investment objectives. If we cannot source debt funding at appropriate rates, either to increase the level of debt or re-finance existing debt, this will impair our ability to maintain our targeted level of dividend.

Mitigation
Before we contractually commit to buying an asset, we enter into discussions with our lenders to get an outline heads of terms on debt financing. This allows us to ensure that we can borrow against the asset and maintain our borrowing policy. The Board keeps our liquidity and gearing levels under review. We only enter into forward funding commitments if they are supported by available funds. In October 2015, we arranged a £500 million five year secured debt facility with a syndicate of four lenders. We had headroom of £150 million within the facility at the year end. This has created new banking relationships for us, which helps keep lending terms competitive.

We must be able to operate within our banking covenants
Probability: Low
 (down)
Impact: Low
If we were unable to operate within our banking covenants, this could lead to default and our bank funding being recalled. This may result in us selling assets to repay loan commitments, resulting in a fall in NAV.

Mitigation
We continually monitor our banking covenant compliance, to ensure we have sufficient headroom and to give us early warning of any issues that may arise. Our LTV is low and we enter into interest rate caps to mitigate the risk of interest rate rises and also invest in assets let to institutional-grade tenants. We also seek to maintain a long WAULT.

Corporate Risk

We rely on the continuance of the Manager
Probability: Low
 (down)
Impact: High
We continue to rely on the Manager’s services and its reputation in the property market. As a result, the Company’s performance will, to a large extent, depend on the Manager’s abilities in the property market. Termination of the Investment Management Agreement would severely affect our ability to effectively manage our operations and may have a negative impact on the share price of the Company.

Mitigation
Unless there is a default, either party may terminate the Investment Management Agreement by giving not less than 24 months’ written notice, which may not be served before 31 December 2019. The Management Engagement Committee regularly reviews and monitors the Manager’s performance. In addition, the Board meets regularly with the Manager, to ensure we maintain a positive working relationship. The Investment Management Agreement was amended during the period, see the Management Engagement Committee Report.

Taxation Risk

We are a UK REIT and have a tax-efficient corporate structure, with advantageous consequences for UK Shareholders. Any change to our tax status or in UK tax legislation could affect our ability to achieve our investment objectives and provide favourable returns to Shareholders
Probability: Low 
(up)
Impact: Low to Moderate
If the Company fails to remain a REIT for UK tax purposes, our profits and gains will be subject to UK corporation tax.

Mitigation
The Board is ultimately responsible for ensuring we adhere to the UK REIT regime. It monitors the REIT compliance reports provided by:

• the Manager on potential transactions;
• the Administrator on asset levels; and
• our Registrar and broker on shareholdings.

The Board has also engaged third-party tax advisers to help monitor REIT compliance requirements.

Political Risk

The vote to leave the EU in June 2016 could result in political and/or economic uncertainty that could have a negative effect on the performance of the Company
Probability: Low
 (up)
Impact: Low to Moderate
At present, the UK Government has communicated very little detail on its strategy to negotiate the exit from the EU. The eventual outcome and the way that policies over an exit will be negotiated is impossible to predict at this time.

Mitigation
The Group operates with a sole focus in the UK Big Box market which has a significant supply shortage against current levels of demand, this will assist in supporting property capital values. It is currently well positioned with long and secure leases and a diverse blue-chip tenant line up, with a focus on tenants with financial strength, which are well positioned to withstand any downturn in the UK economy.

Our Principal Risks and Uncertainties

Company Contacts

Colin Godfrey Partner, Fund Manager Tritax Group Email: bigbox@tritax.co.uk Tel: +44 (0)20 7290 1616

Kirstin L Walmsley Head of Marketing Tritax Group Email: bigbox@tritax.co.uk Tel: +44 (0)20 7290 1616

James Benjamin Alex Shilov Lydia Thompson Newgate Communications Financial PR Email: tritax@newgatecomms.com Tel: +44 (0)20 7680 6550