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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.

£2.90bn
6.70p
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, while prudently applying leverage to increase returns.

 

 

 

The inputs to our business model

We use the following resources to create value for Shareholders and other stakeholders:

Financial capital
We are funded by Shareholders’ equity, third-party debt and recycled funds

Physical assets
We have an outstanding portfolio of UK Big Box logistics assets, as well as strategically located land for pre-let development

Relationships
We build mutually beneficial relationships with our Customers and draw on the Manager’s extensive contacts with key players across the subsector

Human capital
We have an experienced Board of Directors and a Manager with a high-calibre, consistent, knowledgeable and forward-thinking team The Manager provides expertise in assembling a high-quality, diversified and low-risk portfolio, as well as relationship building, buying for value and speed and certainty of execution

The value we add

Sourcing investments

The starting point for value creation is sourcing our investments. This relies on the Manager’s extensive agency, developer and tenant contacts, built up over many years. The Manager also develops relationships with asset owners, learning of their triggers to sell. These relationships and knowledge allow us to source most investments off market, so we can buy at attractive prices. In a market where personnel changes are common, the consistency of the Manager’s team helps us to maintain our relationships and work on longer-term deals.

The Manager’s expertise enables us to move fast, rapidly assessing opportunities, making decisions, performing thorough due diligence and completing transactions. We have never withdrawn a contract after agreeing terms and believe that our reputation is unrivalled in our market. This speed and certainty of execution makes us the obvious choice for asset owners looking to sell Big Boxes and can help us achieve better prices.

Buying and selling for value

We have a clear Investment Policy but we are also pragmatic. We may buy smaller assets in locations where larger ones are not available, helping us to diversify by geography and building size and spreading lot-size risk. We may also buy assets with shorter leases, where we see an opportunity to add value such as by regearing the lease or reletting. Creating value requires capital discipline and patience, and we discount numerous opportunities that do not offer value for money or meet our stringent criteria.

Our intention is to hold most assets for the long term but we may sell if we have unlocked value and delivered the asset’s business plan, and we have the potential to reinvest the proceeds in a more attractive opportunity.

Funding developments

The Manager’s relationships with developers enables us to invest in forward funded developments, through which we fund the construction of a Big Box which has been pre-let to a specific Customer. This results in lower transaction costs and enables us to source brand new buildings for institutional tenants on long leases.

We can also acquire land which is suitable for pre-let forward funded developments. We do not invest in any speculative developments (ie those which are not pre-let).

Asset management

The assets we buy are usually strategically important to our Customers. We work with them to maximise their operational effectiveness, for example by extending buildings or adding mezzanine floors. This encourages them to sign longer leases, increasing our revenue security and capital values. Whilst recognising that only a limited part of our portfolio is categorised as Value Add assets within our investment pillars, where we buy properties with the potential to add value, we look to turn them into Foundation assets through asset management.

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 a progressive target dividend. Our asset selection and management add value to our investments, allowing Shareholders to benefit from attractive total returns.

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

Buying assets directly incurs total costs of approximately 6.78%, of which SDLT is approximately 5.00%. Standard sale costs are c.1.75%. This means that frictional costs – the total standard costs of selling an asset and reinvesting the proceeds – are c.8.53%. Our actual transaction costs are typically lower, as where possible we reduce SDLT by buying the special purpose vehicle which owns the asset. Even so, frictional costs influence investment returns, particularly in times of lower capital growth. Our portfolio is weighted towards Foundation assets because they do not need to be regularly traded. This reduces our frictional costs, which supports our returns.

In addition, our REIT status protects the value we create for Shareholders, as we are not subject to corporation tax on profits and gains in respect of our qualifying property rental business. We also pay dividends that qualify as a property income distribution (PID) where possible, which offers tax advantages for certain UK investors.

The outputs from our business model
Our business model primarily creates value for our Shareholders and Customers.

For Shareholders
We aim to deliver an attractive total return to Shareholders, underpinned by progressive annual dividends and net asset value growth.

We are targeting:

6.7 pence annual dividend for 2018 up 4.7% on 2017

9%+ per annum a total return over the medium term

For Customers
Our Customers benefit from occupying Big Box logistics assets which are strategically important to their businesses, helping them to achieve cost savings and economies of scale, and to fulfil their rapidly growing e-commerce businesses.

Our investment 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:

76%

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.

 

14%

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.

 

7%

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.

 

3%

These are opportunities in strategic land which we will invest in with a view to securing pre-let forward funded developments. The land we acquire will usually have the benefit of outline B8 planning consent over at least part of the site in order to minimise risk. This approach allows us to own the ultimate investments in locations which might otherwise attract yields lower than we want to pay. It can also deliver enhanced returns whilst controlling risk by avoiding speculative development. Aggregate land purchases, including costs associated with site preparation, are limited to 10% of net asset value calculated at the point of purchase

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

Susanne Given

Mark Shaw

Aubrey Adams

Richard Laing

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

Charlie Withers

Sally Bruer

Responsible Business

Being responsible and sustainable is important for our long-term financial success. Our approach helps ensure our properties are suited to current and future tenants’ needs and continue to meet evolving legislative requirements. This provides our properties with defensive qualities, makes them attractive to the market and therefore underpins the potential for longer-term income.

As a responsible owner, we want our properties to minimise their impact on the local and wider environment. We therefore consider the environmental performance of assets before we acquire them and encourage a sustainable approach to new developments and to maintaining and upgrading existing buildings.

EPC’s on all properties

An Energy Performance Certificate (EPC) is a key measure of an asset’s energy efficiency. An EPC is required by law whenever a building is bought, sold or rented, and grades the property from A (most efficient) to G (least efficient). Under the Minimum Energy Efficiency Standards, it will be unlawful from 1 April 2018 for landlords to grant a new lease on an asset with an EPC rating below E.

The EPC rating is a key part of our review of potential asset purchases. We also look at material environmental risks, such as flood and storm risk, connectivity and circulation, and planning requirements. In addition, we commission an environmental survey that includes the sites’ previous uses, so we can assess the risk of possible site contamination and any past remediation, with a view to implementing clean-up plans.

As at 31 December 2017, our portfolio (by gross internal area) is rated as follows:

pie chart of EPC ratings for all assets at 31 December 2017

Very Good

The Building Research Establishment Environmental Assessment Methodology (BREEAM) is a voluntary sustainability measure. It has six ratings, ranging from Unclassified to Outstanding. We expect a minimum of a Very Good rating for our pre-let forward-funded developments, which represents advanced good practice and puts the buildings in the top quartile of new builds.

Case study

“The Range”, Doncaster

In 2014, we acquired the asset in Doncaster let to CDS (Superstores International) Limited, trading as The Range. Our Green Review identified opportunities to financially benefit the tenant and enhance the asset’s EPC rating of B. These included adding renewable power generation.

We reviewed the potential for installing roof-mounted photovoltaic panelling. This would generate income from selling energy to the tenant and supplying any unused energy to the national grid. The review showed that we could increase annual income by £40,000 at a cost of £380,000, representing an internal rate of return of 8.17% per annum and a payback of 9.5 years.

The tenant agreed to purchase the energy, resulting in savings to them of between £250,000 and £1 million over the life of the lease, with the higher savings depending on a lease re-gear. The original roofing contractor installed the panels and we negotiated a 20-year warranty extension for the roof at the same time. At the asset’s following independent valuation, £575,000 of the uplift was attributed to income from the scheme. The scheme should also increase the EPC rating to B+, further improving the property’s credentials.

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 Aubrey Adams. 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 subsector of the UK real estate market to deliver an attractive, growing and secure income for Shareholders, together with the opportunity for capital appreciation. The Board recognises that effective risk management is key to the Group’s success. Risk management ensures a defined approach to decision making that decreases 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 (up) 
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 Customer. 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, while continuing to monitor the covenant strength once forming part of the portfolio. 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 that are strategically important to the tenant’s business. Our maximum exposure to any one tenant (calculated by contracted rental income) is less than 9% as at 31 December 2017.

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, gearing and interest cover. The level of headroom is currently significant. The EMTN has limited covenants.

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 current asset management initiatives within the portfolio, which means we can generate additional income and value from the existing portfolio. We are, however, disciplined in our investment of capital and will not pay a price which we believe is above market value, just to secure
a purchase.

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: Low
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 one of our tenants is low. In addition to our due diligence on tenants before an acquisition or, in the case 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. E-commerce is expected to grow to 23% of UK retail sales by 2020.

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
The Company had no forward funded development assets under construction as at 31 December 2017. However, it has completed on a further two and conditionally exchanged on one forward funded development post the period end. 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 overruns. Funds for these development activities).

The purchase of land may involve a higher degree of risk than that associated with existing and built investments or development activities
Probability: Low (up)
Impact: Moderate
The inability to obtain planning consent means that the land would have to be held or sold prior to any development. The value of the land may be reduced due to the refusal of planning consent and the costs incurred to that date could be significant and may be irrecoverable; this would reduce the Company NAV. If the Company fails to attract a suitable pre-let it cannot proceed with the development of a Big Box. This would impact on the future revenues the Company could make from the land and failure to secure a pre-let may have a negative effect on the valuation.

The land may be subject to an environmental risk which requires significant investment to remediate prior to commencing the development works.

The costs associated with developing land may fluctuate over the course of the development due to market conditions.

Mitigation
The Company cannot undertake any speculative development of buildings although it can undertake land preparation works and therefore a pre-let is a pre-requisite to commencing the construction of building. Prior to acquisition of land the Company will carry out an extensive due diligence exercise to limit exposure to environmental risk and other hazards. Once a pre-let is agreed with a suitable tenant, the Company will structure the development of the asset as it does its forward funded development projects, therefore minimising risk (see risk above on development activities). The purchase of land is also subject to a maximum level of 10% of NAV, at the time of purchase. The Company also undertakes a significant level of due diligence on the land, the surrounding power and highways infrastructure, the surrounding environment and the state of the market prior to embarking on a land purchase to mitigate any risk around the viability of the site for development as much as possible. The Company will usually also work in tandem with an experienced and respected development partner to manage any preparatory works and/or development.

Financial Risks

Our use of floating rate debt will expose the business to underlying interest rate movements
Probability: Moderate (down)
Impact: Low
Interest on our variable rate 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 to 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. During 2017, we refinanced a significant amount of floating rate debt in the year with fixed rate debt. Our exposure to Libor currently represents only 8.5% of our drawn debt.

A lack of debt funding at appropriate rates may restrict our ability to grow
Probability: Low
(down)
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 refinance existing debt, this will impair our ability to maintain our targeted level of dividend or impair our ability to grow.

Mitigation
During the year the Company refinanced a significant portion of its secured borrowings, by issuing long-term unsecured borrowings. This should enable the Company to raise future debt in a more efficient and effective manner on an unsecured basis. 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 committed funds. In December 2017, we issued a £500 million dual tranche bond with an average term of 11.5 years along with a £350 million unsecured revolving credit facility. We had headroom of £340 million within the credit 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 debt covenants, this could lead to default and our debt 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 debt 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. During 2017, we refinanced a significant part of our floating rate debt and moved predominantly to a fixed rate debt platform. This will mitigate the effect on the Company from interest rate rises. We invest in assets let to institutional-grade tenants and we also seek to maintain a long WAULT, which should reduce the volatility in our property values.

Corporate Risk

We rely on the continuance of the Manager
Probability: Low
 (no change)
Impact: Moderate
to 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 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 it maintains a positive working relationship. The Investment Management Agreement was amended during 2016; 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 
(no change)
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
 (no change)
Impact: Low to Moderate
The UK has now triggered Article 50, which sets the expected date of the UK’s departure from the EU in March 2019. Economic volatility is not a new risk for the Group; however, until the terms of Brexit become clearer the exact outcome on the business is difficult to predict at this stage.

Mitigation
The Group operates with a sole focus on 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