Morning Note: Market news and updates from Tritax Big Box REIT and Spirax Group.

Market News

JPMorgan now sees a 35% chance the US will tip into recession by year-end, up from 25%. It also expects a 30% chance of the Fed and its peers keeping rates “high-for-long,” compared with a 50-50 assessment as recently as two months back.

Equity markets remain volatile, with the US indices losing early gains to finish last night’s session in negative territory – S&P 500 (-0.8%); Nasdaq (-1.1%) – amid tech weakness and weak demand in a 10-year Treasury auction which drew a yield that was well above the pre-sale indicative level. Traders are now gearing up for today’s $25bn sale of 30-year bonds. The 10-yield is currently 3.92%. Gold has nudged back up towards $2,400 an ounce, while Brent Crude trades at $78 a barrel.

In Asia this morning, markets were mixed: Nikkei 225 (-0.7%); Hang Seng (+0.2%); Shanghai Composite (+0.1%). The Bank of Japan debated further rate hikes in July. Officials believed monetary policy would remain accommodative even as they conducted a small rate increase, a summary of opinions from the 31 July board meeting showed.

After rallying 1.8% yesterday, the FTSE 100 is currently trading 0.8% lower at 8,094. Stocks trading ex-dividend this morning include AstraZeneca (0.63%), BP (1.46%), BT (4.24%), Melrose (0.42%), NatWest (1.86%), and Standard Chartered (1.03%), and Unilever (0.77%).

The UK RICS house price balance was -19% in July, well below the -11% expected and -17% the previous month. However, looking forward, surveyors expect a jump in UK home sales after the Bank of England cut rates. Sterling trades at $1.2712 and €1.1616.

Source: Bloomberg

Property News

Tritax Big Box REIT yesterday released its H1 2024 results and hosted an investor meeting. The company highlighted the ongoing stabilisation of the market and the large opportunity to grow rental income via rent reviews, asset management initiatives, and new developments. The shares currently trade on a 10% discount to NAV, which rose by 1.2% in the first half, and offer a dividend yield of 4.7%.

Tritax is a real estate investment trust dedicated to investing in very large logistics warehouse assets, or Big Boxes, in the UK. Over time, the group has evolved from an income-led asset aggregator into an integrated investment and development company. The £6.4bn portfolio is spread across 99 logistics assets and around 128 tenants, with a weighted average unexpired lease term of 10.4 years. The largest tenant is Amazon, representing 12% of rental income.

Through Tritax Symmetry, the group owns a strategic land portfolio for the development of Big Box assets of 42m sq ft (including land options) which provides the opportunity to more than double the company’s existing rent roll over the next decade. The group aims to minimise risk by primarily undertaking developments which are pre-let to a tenant – speculative development is less than 1% of asset value. The company believes these opportunities can be delivered at a yield on cost significantly higher than is currently available from the acquisition of built and let or pre-let forward-funded assets, with a 6%-8% yield target.

The recent merger with UK Commercial Property REIT adds high-quality urban logistics assets (i.e. smaller boxes). The deal enhances Tritax’s customer offer and drives accelerated rental growth through early capture of significant (41%) rental reversion. Around 40% of the £1.2bn UKCM portfolio is made up of office, retail, and other space (18 assets in total). The liquid nature of these non-strategic assets is reflected in the number of offers Tritax has received – the first disposals are expected in Q4 2024, and full liquidation is expected within two years. This will facilitate the accretive rotation of capital into the development of brand new best-in-class logistics assets.

At present, Tritax is 92% exposed to logistics property. We believe the long-term outlook for the sector remains favourable, supported by the continued growth in e-commerce, the consolidation of logistics networks into fewer, larger, more modern and efficient buildings, and the need to build resilience into supply chains. At a time when occupiers need a robust and flexible supply chain, the assets are essential to their business and cannot be easily replicated. We note that property costs are a small percentage of total operational costs for a retailer – more important is having the right location.

After a difficult period, the group highlights asset pricing is seemingly at a turning point, with both the occupational and capital markets exhibiting signs of improvement. CBRE prime market yields remained flat across the first half at 5.25%, but Savills have in recent weeks moved their prime yield in by 25bps to 5.0%. UK market vacancy is 5.6%, with speculative space under construction continuing to decline and now stands at 9.2m sq ft. Tritax’s portfolio vacancy is around 3.8% across its logistics portfolio.

Tritax continues to crystalise value through asset sales and recycle capital into higher-returning development and investment opportunities. In the first half, the group did not dispose of any assets as it focused on the acquisition of UKCM. However, for the full-year, the group expects to make disposals at the top end of its target range of £100m-£200m.

In addition, the group continues to take advantage of market conditions to selectively acquire what it considers to be mispriced assets. This includes the £46m acquisition of a 479,000 sq ft cold store in the East Midlands let to Co-op at a 5.75% NIY and 7.3% reversionary yield.

The group’s portfolio offers a secure and growing income – around a quarter of rent is generated by leases having an unexpired term of more than 15 years and 28% from leases expiring within five years which provide near-term asset management opportunities. In the first half, rental income increased by 16.4% to £127.2m.

Through rent reviews, lettings and re-gears, the group is making good progress capturing significant reversion within its investment portfolio. In H1, the contracted annual rent roll increased by 34.7% to £303.4m, driven by the UKCM deal, as well as rent reviews and asset management initiatives.

There was a 10.7% (or 5.5% annualised) increase in passing rent across 7.7% of the portfolio subject to lease events. Around 17.4% of the portfolio is subject to rent reviews (including lease expiries) during the remainder of 2024. Looking forward, there are good prospects for rental growth to exceed inflation over the medium term. At the end of June 2024, rents were made up of a blend of inflation-linked (43%), open market (32%), fixed (11%), and hybrid (13%) review types

A record 25.5% logistics portfolio reversion provides the potential to capture £68.2m of additional rent, of which £43.4m (64%) is subject to lease events by the end of 2026, supporting future earnings growth.  

The growing rental stream means the group can adopt a progressive dividend policy, with the intention to pay out more than 90% of adjusted earnings. The group has declared a first-half dividend up 4.3% to 3.65p. With adjusted EPS up 4.1% to 4.1p, the payout ratio was 89%.

On the development front, the group is seeing an encouraging uptick in levels of activity in its pipeline. Many occupiers that deferred decision making in 2023 have moved forward in 2024.

The group continues to explore additional ways of leveraging its expertise into near adjacencies, including power and datacentres, where it is actively progressing potential opportunities. In the first half, £7.4m was added to passing rent from 1.8m sq ft of practical completions, while £1.3m of annual contracted rent was added from 0.1m sq ft of development lettings. There is £18.1m of potential new lettings in solicitors’ hands covering 1.8m sq ft. For 2024, the group is guiding to the lower end of its long-term development of 2-3m sq ft per annum, targetting an average yield on cost of 7.0%.

Overall, the combination of record rental reversion and a significant development pipeline gives the group the capability to more than double its rental income over the long-term (to £750m), and in the near term the potential to secure approximately £121m (+41%) of incremental rental income. 

The group remains financially robust – in the first half, LTV fell from 31.6% to 29.9%, just below the 30%-35% target range – with substantial covenant headroom. The current weighted average cost of debt is only 3.0%, with 95% of drawn debt either fixed or hedged, with an average maturity of five years. The group has no debt maturing prior to mid-2026. The increased scale of the company following the UKCM deal offers the potential for lower cost of capital and an enhanced credit rating – Moody’s has already upgraded the group’s credit rating outlook to Baa1 (positive) from Baa1 (stable).

The portfolio equivalent yield remained pretty stable at 5.7%. The EPRA cost ratio was 12.5% and is expected to reduce over near term as the UKCM synergies are realised. The EPRA Net Tangible Assets (NTA) per share rose by 1.2% to 179.33p. The shares currently trade on a 10% discount.

Source: Bloomberg

Company News

Spirax Group has this morning released muted results for the first half of 2024 and lowered its guidance for the full year. In response, the shares are down 9% in early trading.

Spirax (formerly Spirax-Sarco Engineering) is a UK-listed industrial company, with annual sales of £1.7bn. The group is a world leader in each of its three businesses. In Steam Thermal Solutions (54% of revenue), Spirax Sarco and Gestra are leaders in the control and management of steam. In Electric Thermal Solutions (ETS, 22%), Chromalox and Thermocoax provide electrical process heating and temperature management solutions. Finally, Watson-Marlow (23%) provides niche peristaltic pumps and associated fluid path technologies.

The group’s products are used in almost every industry worldwide: from the food sector where steam products are used in blanching, baking, packaging, and cleaning; to the pharmaceutical industry where pumps and associated fluid path equipment are critical to the production of life-saving medicines; through to the aviation industry where electrical heating elements are used in the de-icing of aeroplanes.

85% of revenue is generated from maintenance and operational (opex) budgets rather than capital (capex) budgets. Of that 85%, 50% comes from essential repair and maintenance activities, while 35% comes from small projects that improve existing systems. As a result, the group has a long history of stable, sustainable growth and strong profitability.

However, in 2023 the group experienced a materially weaker macroeconomic environment and in response took early action across all three businesses to appropriately right-size capacity and overhead support costs as well as implementing temporary cost containment actions and reducing variable compensation.

In the first half of 2024, the company continued to be impacted by the weak macroeconomic environment in key markets and its results were slightly below management expectations. Global industrial production (IP) was weak, with growth of 0.8% excluding China. The group generated revenue of £827m, only up 1% in organic terms.

Within the Steam Thermal Solutions (STS) business, sales fell 1% organically, against a strong comparator in the first half of 2023. Sales in the Electric Thermal Solutions (ETS) business were up 5% organically, supported by operational progress. Watson-Marlow organic sales grew by 3%, with early signs of improving demand in Biopharm.

The group’s adjusted operating profit margin fell by 30bps in organic terms to 19.4%. The decline reflects progress in ETS more than offset by a lower STS margin. As a result, adjusted operating profit fell by 1% in organic terms to £160.3m, while adjusted EPS declined by 12% to 137.2p.

The group is financially robust, although cash conversion was only 53%, reflecting usual seasonality. Net debt fell by 4% to £718m, with gearing of 1.9x net debt to EBITDA. The group has a strong track record of dividend growth, with 56 years of progress. The 2024 interim payment has been increased by 3% to 47.5p. A similar increase at the full-year stage will generate a yield of 2%.

Looking to the full year, the group now expects to generate mid-single digit organic revenue growth, a reduction from the previous guidance of mid to high-single-digit growth. Despite early signs of improvement in Biopharm demand, management does not expect a material recovery in sales from this or the Semicon sector in the second half of the year. The adjusted operating profit margin is now expected to be broadly in line with the 2023 margin, versus previous guidance for modest progress.

Source: Bloomberg