Should investors be worried about Tritax’s shift in strategy?
The £332m acquisition by super-sized warehouse investor Tritax Big Box REIT (BBOX) of industrial land developer Db Symmetry represents a shift in the company’s strategy which could alienate some investors.
Gigantic warehouses are becoming expensive to buy as a result of heightened competition for such assets. This is pushing yields on acquisitions of operational warehouses down to levels which would struggle to support the same level of dividends Tritax has paid historically.
Tritax has responded by striking a deal to capitalise on Db Symmetry’s land bank to build new warehouses from scratch. This could result in bigger returns in the longer-term but also comes with higher risks such as potential construction cost overruns or development delays.
Investment bank Liberum says: ‘This transaction marks a change in Tritax’s strategy; significantly increasing its non-income producing land holdings, increasing development risk and diversifying asset exposure to last mile and urban logistic assets, albeit this latter factor will remain small.’
Stifel, another investment bank, sees the move as a ‘logical evolution in the business given the fall in “big box” yields’. It does not expect the dilution of the income-producing element of Tritax to threaten the existing dividend.
Tritax launched in December 2013, raising £200m and promising a 6% yield and total returns of 9% a year. Its market value is now £2bn and it trades on a forward yield of 5%. The £250m placing to fund the Db Symmetry deal will take the total raised since listing to circa £1.8bn.
The acquired portfolio provides the capacity to add 38.2m square feet of new ‘big box’ assets, which the company hopes will add £150m of rental income over the next decade and increase the portfolio’s valuation to around £6.5bn.
The company is targeting a yield on the cost of developing the new assets of between 7% and 8% compared with a valuation yield for the company’s portfolio of 4.4% as at 31 December 2018.
A bubble in big boxes:why warehouses became exciting
The shift in consumer habits from buying in-store to ordering online and expecting fast delivery and the capacity to return items easily created a challenge for retailers. Suddenly they needed lots of warehouse space to sort and distribute products.
The growing complexity of online retail and the demand for ever-faster deliveries led to the establishment of huge central facilities and so-called ‘last mile’ hubs which serve the last line of the supply chain. Typically, these facilities have been leased from the landlords, often investment funds, which own the assets.