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Tritax Big Box is the only Real Estate Investment Trust dedicated to investing in and funding the pre-let development of very large logistics facilities in the UK. We believe these properties, known as Big Boxes, are one of the most exciting and highest-performing asset classes in the UK real estate market.

We own and manage some of the UK’s most sought-after Big Boxes, let to some of the biggest names in retail, logistics, consumer products and automotive. We aim to provide an attractive, secure and growing income for our Shareholders, together with capital appreciation.

6.40p

We have carefully constructed our portfolio to provide a high-quality, sustainable and growing income stream for our Shareholders. This enabled us to meet our target of declaring dividends totalling 6.20 pence per share for 2016, which was 105% covered by Adjusted earnings per share of 6.51 pence.

In line with the Group’s progressive dividend policy for 2017, our target dividend for the year is 6.40 pence per share.

* This is a target only not a profit forecast. There can be no assurances that the target will be met and it should not be taken as an indicator of the Company’s expected or actual future results.

9% pa

Total return measures the ultimate outcome of our strategy, which is to deliver value to our Shareholders through our portfolio and to deliver a secure and growing income stream.

For the year ending December 2016, Tritax Big Box achieved a total return of 9.6% compared to our medium-target of 9% pa.

Such strong financial results reflected the successful implementation of our investment policy and the growth in our portfolio, as well as robust cost management and positive market conditions.

129.00p

The EPRA NAV reflects our ability to grow the portfolio and to add value to it throughout the life cycle of our assets.

During 2016 the EPRA net asset value per share grew by 3.5% to 129.00 pence, or 4.7% when viewed on a like-for-like basis taking into account the timings of distributions made, against those made in the period to 31 December 2015 (31 December 2015: 124.68 pence).

£1.89bn

Since our IPO in December 2013, we have built an outstanding portfolio of 35 selectively acquired Big Boxes. Our portfolio is well diversified by size, geography and tenant. The assets are typically modern, in prime locations and fully let on long leases to institutional-grade tenants with upward only rent reviews.

We believe these factors give us one of the highest-quality portfolios in the UK quoted real estate sector and underpin our objective of delivering low-risk and growing income.

A total £524.6 million was invested during 2016 across 10 assets with a further £101.8 million committed to two assets, conditional on receiving planning consent. As at 31 December 2016 our portfolio consisting of 35 assets was independently valued at £1.89 billion, reflecting a like-for-like valuation uplift of 3.5% (2015: £1.31 million across 25 assets).

£99.7m pa

All our assets are either let or pre-let and income producing. During 2016 the portfolio’s contracted rental income increased to £99.7 million per annum across 35 assets (2015: £68.37 million across 25 assets).

The timing of rent review events over the next few years supports the Group’s ambition to deliver income growth, thereby underpinning our progressive dividend policy. In 2016, 23% of our rental income was subject to review, while in 2017, a further 23% is subject to review. Through careful selection we have ensured a balance in the timing of our rent reviews which provides the opportunity to grow our rental income each year.

Our diversified, long and growing rental income stream is underpinned by high calibre tenants – 81% of which are major quoted indices and include some of the UK’s strongest omni-channel retailers.

30% LTV

As at 31 December 2016 the Loan to Value was 30.0%. The Group continues to target a LTV in the medium term of up to 40%, which we believe is conservative given the quality of the tenants, real estate, portfolio WAULT and its low risk nature. As has historically been the case, whilst we have future commitments towards pre-let forward funded developments, we are likely to be running below our medium term gearing target, as demonstrated by our 30% LTV ratio at the year end.

The Best of Logistics

We believe these properties, known as Big Boxes, are one of the most exciting and highest-performing asset classes in the UK real estate market. Strong tenant demand, coupled with limited supply and significant inward investment from tenants, make Big Boxes attractive assets.

Big Boxes are larger format industrial logistics facilities that often have characteristics not found in the rest of the sector and should be differentiated from smaller older buildings.

Big Boxes are modern, strategically located, highly efficient distribution centres and logistics hubs that hold finished goods for distribution to other parts of the supply chain or directly to consumers. It is their scale, location and sophisticated automation that enable Big Boxes to offer previously unavailable flexibility, economies of scale and low cost of use.

This large-scale format did not exist in the UK before the early 1990s. Most high quality Big Boxes are modern facilities constructed within the past 15 years. This makes Big Boxes an emerging market and we have been at the forefront of its recent development.

Big means "BIG”

Perhaps the most distinguishing feature of this asset type is their sheer scale – everything about Big Boxes is vast.  Situated on sites of up to 50 acres, Big Boxes typically boast floorplates of between 300k sq ft and 1 million sq ft.

In terms of height, their eaves are usually between 12 and 25 metres. More specifically, low-bay buildings are typically used for food distribution, but general merchandise distribution (non-food) use taller buildings of up to 25 metres which allows for the installation of racking or mezzanine floors to increase the useable space. This additional volume which is highly attractive to tenants as rents are generally only paid on the ground floor area, as opposed to the building’s total volume

Occupiers are up-scaling, centralising dispersed distribution facilities into fewer, larger Big Box facilities to capitalise from the previously unavailable flexibility, economies of scale and low cost of use that these assets provide.

Strategically located

The location of Big Boxes is critical for efficient market coverage. Traditionally, the ‘Golden Triangle’ in the Midlands has been regarded as a prime logistics location as it offers tenants access to 85% of the UK market in 4.5hrs driving time.

Big Boxes are strategically located in areas with strong transport connections, Access to major roads or motorway junctions is a must, but alternative transportation routes via airports, sea ports or rail are increasingly important for efficient goods inwards stocking and downstream distribution.

Increasingly, of equal importance to occupiers are locations that are close to large employment pools, ensuring their ability source suitably qualified employees in sufficient numbers from an area immediately surrounding a site.

Modern specifications

Big Boxes are a relatively new phenomenon. This large-scale format did not exist in the UK before the early 1990s, therefore most high-quality Big Boxes are modern facilities constructed within the past 15 years.

Big Boxes have evolved into technologically advanced buildings. The specification will usually include ground floor loading upwards of 50kN/m², with laser level floated floors and loading doors which are designed to accommodate the latest truck specifications.

Increasingly these facilities will have high power supplies, sometimes dual power supplies or on-site standby generators. High speed internet access is a must for e-commerce. Non-food buildings are getting taller, now up to 25 metres, which provides for the possibility of high level racking and multiple mezzanine floors to double or even triple the floor space available inside the building.

Furthermore, such modern designs ensure the building is energy efficient and include impressive environmental credentials with solar panels, wind turbines and rain water harvesting etc.

Technologically sophisticated

These assets have evolved significantly from the simple ‘sheds’ we knew of old; today’s modern Big Boxes are smart and becoming smarter. Such sophisticated, innovative and technologically advanced warehousing can provide distribution solutions that help our tenants reduce costs and maintain their competitive edge.

Occupiers want to automatically stock and retrieve products, use state of the art robotics to efficiently pack complex deliveries, and meet customer demand for quicker deliveries. Big Boxes are the perfect setting for this automation, with the scale necessary to accommodate the high-level racking and mezzanine floors that maximise use of the space.

Technologically, no part of the property market is evolving faster than logistics. Whether it is ground-breaking drone deliveries or the rapid advancement of robotics applications, the technology that is being tried and tested today will shape the future – the positive influence of Big Boxes is still at an early stage of development.

Sought after by investment grade tenants

Boxes are sought after by institutional-grade high-calibre tenants including conventional and online retailers, third-party logistics companies (“3PLs”), and other companies such as manufacturers. These organisations are responding to structural changes in their markets, such as the relentless rise of e-commerce, weaker economic growth and increased competition, which means that improving operational efficiency can be a key factor in determining profits.

Big Boxes offer previously unavailable flexibility, economies of scale and low cost of use. They are often the nucleus for distribution at a national level and increasingly at a regional level and can be the most important component of an occupier’s supply chain. Many companies use Big Boxes to centralise previously dispersed distribution into fewer, larger facilities, helping to optimise staff and stock management and expand product ranges. This allows retailers to match store or online offerings in a single warehouse, which is not possible with smaller buildings. 3PLs are also focusing on Big Box assets to centralise multiple contracts, providing flexibility and allowing them to tender more competitively.

Long institutional standard leases

Big Boxes are in demand from institutional-grade high-calibre tenants who recognise the strategic and operational importance of these assets to their business. Big Boxes offer previously unavailable flexibility, economies of scale and low cost of use. They are often the nucleus for distribution and can be the most important component of an occupier’s supply chain. This increasing occupational demand however is against a backdrop of very limited supply.

Secondly, to further drive efficiency occupiers often make a significant capital investment in racking, mechanisation and automated systems within Big Boxes, the cost of which often eclipsing the construction cost of the building or value of the investment.

For the above reasons, occupiers are often willing to sign long leases of 20 years or more, with regular upward-only rent reviews, which is rarely seen elsewhere in the UK commercial property market. This is to ensure that they initially secure and then retain use of the asset over the long term, thus benefiting from the increasing efficiency the assets provide, as well as their own substantial investment within the building.

Our Market has Compelling Fundamentals

We believe these properties, known as Big Boxes, are one of the most exciting and highest-performing asset classes in the UK real estate market. Strong tenant demand, coupled with limited supply and significant inward investment from tenants, make Big Boxes attractive assets.

Growing demand

Growing demand
Demand for Big Box assets comes from three main sources:

  • conventional and online retailers,
  • third-party logistics companies (“3PLs”), and
  • other companies.

Big Boxes have become the nucleus for distribution at a national and, increasingly, a regional level. Many companies use Big Boxes to centralise dispersed distribution facilities into fewer, larger facilities, helping optimise staff and stock management and expand product ranges. This allows retailers to match store or online offerings with a full product line in a single warehouse; such an arrangement is not possible with a collection of smaller buildings each of which would carry part of the product line. 3PLs are also focusing on Big Box assets to centralise multiple contracts, provide flexibility, and allow them to tender more competitively.

To drive efficiency, tenants increasingly invest in advanced systems that allow them to stock automatically and rapidly retrieve products. The tenant will typically own the fit-out. This capital investment in racking and automated systems within Big Boxes can be substantial, sometimes eclipsing the construction cost of the building or value of the investment. Such levels of commitment to a location often go hand-in-hand with either an initial long-term lease commitment or lease extension. This can be value enhancing and so such tenant investment is highly attractive to owners.

The retail revolution – Big Boxes are the new shops
Big Boxes are integral to the rapid growth of e-commerce distribution. Online retail growth has substantially outstripped the UK’s total retail market growth for a number of years and is likely to be a key driver of future demand for Big Boxes. This growth is expected to continue over the next few years, with online sales forecast to make up around one fifth of total retail sales by 2019, a market share that suggests that online sales have capacity for significant long-term growth.
To respond to this online growth and to remain competitive and relevant, retailers need to have large, highly efficient distribution facilities that can fulfil orders quickly and accurately because customers expect ever-faster delivery, with next day and even same day delivery increasingly the norm. Big Boxes dedicated to e-commerce increasingly also house the retailer’s data centre function. These fulfilment centres are therefore effectively acting as a quasi-retail outlet.

Pure online retailers, such as Amazon, ASOS and Ocado, have led the way in developing advanced facilities. However, traditional retailers own most of the UK’s largest online operations and many are co-locating their online and offline operations to achieve economies of scale and ensure that they can deliver efficiently and reliably to both store networks and consumers’ doorsteps from the same facility. The growth in online sales means that the UK is estimated to have an e-commerce warehouse space requirement of more than 17 million sq ft per year to 2020, even before potential growth in demand, which is nearly double that estimated for the rest of Western Europe combined.

The retail market is also developing in other ways that favour Big Boxes. Retailers want to make the most of their expensive high street store space, so they are carrying less stock and using computerised sales tracking to respond rapidly to customer demand and spend trends. At the same time, consumers are increasingly favouring smaller convenience stores for food shopping. These stores generally have very limited storage capacity. Along with the rise of click-and-collect, these factors mean retailers need much greater control of stock and the timing and efficiency of deliveries to stores. Speed and reliability are crucial, which is where Big Boxes come into their own.

 

Constrained supply

Constrained supply
Building a new Big Box is relatively quick. Once a site has detailed planning consent and is serviced with suitable infrastructure, a Big Box can typically take 6-12 months to construct. Tenant fit-out can then take a further three to 18 months to implement, subject to the extent and complexity.

Suitable land which can accommodate these Big Boxes is scarce in key locations that suit the business objectives of logistics operators – usually near motorways/major roads and within reach of their target market. This land is often situated in areas which are not zoned for employment use. The scale of Big Boxes and the extent of traffic movements they generate can present further planning challenges. Consequently securing such a designation can take many years of lobbying for change of planning use. As such, there is a significant supply lag of new Big Box stock and developers with suitable land are currently reluctant to speculatively develop buildings of more than 400,000 sq ft, preferring the pre-let, built-to-suit, route since this carries lower risk. Consequently, the supply of Big Boxes is likely to remain constrained in the medium term.

Limited supply and strong demand mean there is now a shortage of Big Boxes to let and some key areas of the country currently have no new-build supply. While there is some speculative development of smaller buildings, we are not aware of any properties of more than 400,000 sq ft that are being speculatively built, due to the difficulties described above and developers preferring the method with lower associated risk. We have seen more tenants actively looking for built-to-suit opportunities on a pre-let basis and this is an area of increasing opportunity for us to acquire investments.

While we expect the supply of Big Boxes to respond to current trends over time, the supply lag is considerable and these dynamics mean that demand is likely to outstrip supply for some time to come. This creates opportunities for rising rents and increasing capital values for owners.

Continuing strong growth forecasted in
UK internet sales
uk-internet-sales-h1-16

The UK has the greatest e-commerce warehouse
space requirement in Europe (sq ft)
e-commerce-warehouse-space-h2-15

Compelling market fundamentals

Compelling market fundamentals
The combination of strong occupier demand, current scarcity of suitable vacant buildings and limited new supply has produced an imbalance which is resulting in strong rental growth in most regions of England and around the M25 (see CBRE chart below), following similarly attractive rental growth reported by CBRE in 2014.

Pre-let deals for Big Boxes are often completed at a premium to the prevailing market rent, as tenants are keen to secure the opportunity and developers seek the benefit of growth in the period between transaction and delivery of the completed building, often around a year or so after agreeing terms.

The estimated rental value of our portfolio (based on an independent valuation by CBRE as at 31 December 2015) has shown a like-for-like increase of c.7.0% against the same assets held at 31 December 2014.

The increased importance of Big Boxes to tenants has served to heighten investment demand, resulting in compressed yields in recent years, as shown in the chart below.

 

Historically, prime retail yields of around 4% were the norm. This low yield reflected limited property fabric obsolescence and reliable rental growth from strong occupational demand. Industrial property attracted yields of 6.5% or more, due to higher perceived obsolescence and abundant land supply, which suppressed rental growth.

The relationship between retail and industrial yields has been reversing, however, with high street retail under pressure from shopping centres and online sales, while prime logistics are benefiting from e-commerce sales growth, lower obsolescence (due to increase in size and technology), tight land supply and the cost savings delivered by scale. As a result, prime yields in the two sectors are converging (see graph below). We believe that this change in relationship reflects a structural long-term yield repositioning.

Prime logistics yields have reduced from around 6.5% in January 2013 to 5.00% as at December 2015, compared to prime shops which have improved very little over the same period, from 4.85% to 4.25%.

Contacts

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

Gary Gould Stuart Klein Jefferies International Limited Joint Financial Adviser and Corporate Broker Tel: +44 (0)20 7029 8000

Anthony Richardson Tom Frost Akur Limited Joint Financial Adviser Tel: +44 (0)20 7493 3631

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