Tritax Big Box has announced key details on a potential offer to buy UK Commercial Property REIT (UKCM) in an all-share offer worth around £924mn.
The proposal would see UKCM shareholders have a 23.3% stake in the combined group, and values UKCM at an 11% premium to the latest closing price.
The boards of both businesses believe there are “compelling” strategic and financial benefits to a combined business.
Tritax has until 5pm on 8 March to make a firm offer.
The shares were broadly flat in early trading.
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Our view
At its core, Tritax Big Box generates income through renting out large warehouses, or 'Big Boxes', which are central to modern logistics and e-commerce. But the strategy is slowly shifting toward smaller, urban, logistics centers that offer better yields. There’s no firm deal on the table but a potential acquisition of UK Commercial Property REIT would offer some complementary assets, at both the large and small end of the size scale.
The deal would make sense, but if a firm offer is put on the table we’d like to know a little more about Tritax’s plans for the c. 40% of UKCP’s portolfio that isn’t in the industrial logistics space (retail parks, offices etc).
Looking back to recent performance. Despite an uncertain market backdrop in 2023, rents got a helpful boost from new developments coming online. These were snapped up by Tritax’s customers as building a strong logistics network is non-negotiable in this day and age.
Once Tritax rents out a site, it's a long-term source of income. Tenants build up distribution networks around the site, making changing location costly, risky and time-consuming. Some have even sought to extend leases many years before their scheduled expiration, so determined are they to retain the use of the facility.
Highly desirable assets mean attractive deal terms, such as upwards-only rent reviews, which are helping boost income. A wide range of high-quality tenants should hopefully add more security to the dividend, while further expansion could lead to increasing payouts. Real estate investment trusts (REIT), like Tritax, must pay out the majority of profits to investors.
Development is also key, with a focus on capturing the increased demand for e-commerce and the distribution needs that follow. But it's expensive to get a logistics hub up and running, and if it doesn't get filled, it could become a financial headache. Luckily, this hasn't proven to be a problem so far. A shortage of ready-to-occupy premises means customers are snapping up units before they've been completed.
Paying out rental income makes expansion complicated, too. Tritax is having to recycle its portfolio - selling lower-yielding mature assets in order to invest in higher-yielding development opportunities. Against an improving market backdrop, asset sales are now well underway.
As inflation cools and markets look to interest rate cuts over 2024 we’ve seen a rebound in valuation. But the group still trades at a discount to its longer-term average. We continue to believe this could present an attractive entry point, for those willing to ride short-term uncertainty. As with any investment, there are no guarantees.
Tritax key facts
- Forward price/book ratio (next 12 months): 0.84
- Ten year average forward price/book ratio: 0.94
- Prospective dividend yield (next 12 months): 4.8%
- Ten year average prospective dividend yield: 4.7%
All figures are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.
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