Morning Note: Market news and updates from Visa and Tritax Big Box REIT

Market News

US equities moved higher last night – S&P 500 (+0.5%); Nasdaq (+0.3%) – as the corporate earnings season proceeded. Visa (see below) and Apple both rose after hours on good results. Big Oil is the focus tonight with results from Chevron and Exxon Mobil.

The dollar rose as traders brace for President Donald trump’s tariff announcements on Saturday. Trump may hit Canada and Mexico with 25% tariffs, while warning of ‘100% tariffs’ if BRICS seek to replace dollar. Trump will also make a determination on oil tonight. The 10-year Treasury yields 4.54%, while gold climbed to a record to $2,800 an ounce as investors sought safe havens.

In Asia this morning, equities were mixed as concerns over the impact DeepSeek will have on the artificial intelligence market pressured South Korean chipmakers. The Nikkei 225 rose 0.2% as Tokyo inflation hit 2.5%, its fastest pace in a year.

Nationwide's latest report has revealed that the price of a typical home in the UK edged up by 0.1% in January to sit at £268,213. Annual house price growth eased to 4.1% in January - down from 4.7% in December, possibly revealing signs of price negotiations amid high demand from first-time buyers pushing to beat April’s stamp duty deadline.

The FTSE 100 is currently trading 0.2% higher at 8,666. 10-Gilts yield 4.57%, while Sterling trades at $1.2428 and €1.1957.

Source: Bloomberg

Company News

Yesterday evening, Visa released results for the three months to 31 December 2024, the first quarter of its FY2025 financial year. The figures were better than expected, driven strong spending in the holiday season and momentum across new flows and value-added services. The company nudged up its guidance for FY2025 and is now targetting earnings growth in the low teens. The shares were marked up 2% during market trading and a further 1% after-hours to a record high post the announcement.

Visa is the world’s largest electronic payments network. It connects 14,500 financial institutions, 130m merchant locations, and 4.7bn cards. Visa is not a bank; it doesn’t lend or take on credit risk. It doesn’t issue cards or place the terminals at the merchant locations. Instead, the company earns a small fee from more than 230bn transactions processed on its network to generate annual revenue of more than $36bn.

The company is benefiting from the ongoing shift from cash and cheques (which still amounts to c. $18tn, growing at 2% p.a.) to electronic means of payment, and the growth of online retail, contactless, and mobile payment systems. In emerging markets, a lack of physical communication infrastructure traditionally provided a barrier to payments growth, but that has been removed by the emergence of mobile phone technology and a government focus on digitalising cash to reduce the black economy.

We believe the industry is at an inflection point in terms of sales growth driven by the global proliferation of smart devices which provide a way to pay and to be paid. In 2023, the company grew its acceptance locations by 17% as mobile phones and other devices became payment terminals.

During the latest quarter, Visa enjoyed strong trading reflecting healthy spending during the holiday season and improving trends in payments volume (+9% in constant currency, with debit up 10% and credit up 8%), processed transactions (+11% to 63.8bn), and cross-border volume growth (which includes a lot of e-commerce, +16%).

Growth in ‘new flows’ has been robust and is expected to outpace the consumer payments business over the long term. The company believes the total addressable market of the opportunity is massive – $145tn in B2B payments and $55tn in disbursements/payouts/P2P. Even though yields for new flows are lower than the consumer business, on average, the business utilises Visa’s existing infrastructure and takes advantage of the company’s massive scale and fixed operating costs, resulting in higher margins.

The group’s third growth engine is value added services — services that help its clients and partners optimise their performance, differentiate their offerings and create better experiences for their customers. Visa’s largest 265 clients now use an average of more than 20 of value-added services, such as cybersecurity, fraud, data analytics, and AI, all of which enhance the group’s competitive advantage.

Net revenue grew by 11% on a constant currency basis in the quarter to $9.51bn, above the market expectation of $9.36bn and the company guidance for growth in the high single digits.

Revenue was made up of service revenue (based on prior-quarters payment volume, +8% to $4.2bn); data processing (+9% to $4.7bn); international transaction revenue (+14% to $3.4bn); and other revenue (+32% to $912m). Client incentives, a contra-revenue item, were up 13% to $3.8bn.

The group continued to keep a tight rein on costs, with AI driving increased productivity – operating expenses were up 11% in the quarter, primarily driven in part by increases in personnel expenses. Adjusted EPS was up 15% on a constant currency basis, to $2.75, above the market expectation of $2.66 and company guidance of low double digits.

During the quarter, Visa generated $5.1bn of free cash flow. The group’s balance sheet remains strong, with cash, cash equivalents, and available-for-sale investment securities of $16.1bn at the end of December. The main capital allocation priority is to invest to grow the business, both organically and via acquisition.

Visa also has an ongoing commitment to return excess cash to shareholders. The group has a record of strong dividend growth, with the latest quarterly payout raised by 13% to $0.59. During the quarter, the company also bought back $3.9bn of its stock, leaving $9.1bn of remaining authorisation for shares repurchases.

On the regulatory front, the backdrop has recently become more uncertain. In September, the US Department of Justice (DOJ) filed a lawsuit accusing Visa of violating antitrust law by suppressing competition in debit card processing by threatening merchants with high fees and paying off potential rivals. Visa will fight the claims, which it calls meritless. Although the company is likely to be forced to alter some of its business practices, we believe its strong (secure and reliable) network will help it to defend its 60%+ market share. We also believe that in the absence of a settlement, it is likely to take several years for the decision/appeal process to reach a conclusion. Visa has a long-term track record of coping with regulatory challenges and has flexibility in its cost base to mitigate any bottom-line impact.

Overall, we believe the long-term growth prospects for Visa remain attractive, more so given the acceleration in recent years in the shift to e-commerce, tap-to-pay, and new digital payments, and in the number of acceptance points at SMEs. In addition, the broad application of digital payments by businesses and government provides a huge market opportunity.

The group has adjusted its guidance for the financial year to 30 September 2025: revenue growth on a constant dollar basis is now expected to be in the low double digits (above the previous target of high single-digit to low double-digits). EPS growth is now expected to be in the low teens (vs. at the high end of low double digits previously). For the current quarter, the company expects to generate revenue growth of high single-digit to low double-digits and EPS growth in the high single-digits.

In the near term, while some short-term economic uncertainty persists, the group remains confident in its ability to execute its strategy and expand Visa’s role at the ‘centre of money movement’. The ongoing shift to digital payments also provides a tailwind to growth, although a slowdown in overall consumer spending could be a drag on volumes. Spending across the network is very diversified, be it credit/debit, overseas/domestic, discretionary/non-discretionary spend, and low/high ticket spend. However, the company has previously said that if we do go into a recession, Visa is now stronger in debit – the card of choice in tougher times – than it was in the 2008/09 financial crisis. The group also highlights that if there is a downturn, they have plenty of flexibility on costs and client incentives. Note that half of the group marketing spend is variable.

Source: Bloomberg

Property News

Tritax Big Box REIT has issued a full-year trading update which highlights positive strategic progress via rent reviews, asset management initiatives, and new developments. Further details, including the year-end NAV, will be disclosed with the full-year results on 28 February. In the meantime, the shares languish on a 20% discount to the H1 NAV and offer a dividend yield of 5.2%.

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 £6.5bn portfolio is spread around 100 logistics assets and around 128 tenants, with a weighted average unexpired lease term of 10.3 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.

Last year’s 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 and the company has already sold £181.2m of assets, at the upper end of the £150m-£200m guidance, with a further £150m currently under offer. 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.

The group recently initiated a new strategic leg in the data centre market with a 147 MW data centre development opportunity and further 1 GW pipeline. The phase 1 data centre at Manor Farm is targeting exceptional returns with a 9.3% yield on cost to Tritax Big Box shareholders. There is potential for an accelerated delivery timeline of Phase 1 with practical completion and income recognition as early as H2 2027.

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 that it enters 2025 with growing confidence, driven by improving occupational market conditions and an expanded range of growth drivers. There was 5.4% like-for-like portfolio ERV growth during 2024, reflecting favourable supply/demand dynamics resulting in attractive levels of market rental growth for high quality logistics real estate. Underlying portfolio vacancy is 3.3%, with further 2.4% from speculative developments competed in November 2024 to give total of 5.7%, with the potential to add additional rent of £21.5m.

Tritax continues to crystalise value through asset sales and recycle capital into higher-returning development and investment opportunities. In 2024, the group made £306.2m of disposals above book value including the £181.2m of non-strategic UKCM assets highlighted above. In addition, the group continues to take advantage of market conditions to selectively acquire what it considers to be mispriced assets.

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. Rental income for 2024 will be disclosed with the full-year results.

Through active management, the group secured an additional £11.6m of contracted rent in 2024. Of this £8.4m came from rent reviews, reflecting an average 11.7% increase in passing rent, and 34.6% increase across all open market reviews. Another £3.2m came from other asset management initiatives.

A record 26% logistics portfolio reversion provides significant rental income growth opportunities 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 full-year payout will be announced with February’s results.

On the development front, the group is seeing an encouraging uptick in levels of activity in its pipeline. In 2024, £11.4m of contracted rent was secured, including 1.0m sq ft pre-let to a global leader in e-commerce, representing one of the UK's largest pre-lets in 2024. There was 1.9m sq ft of development starts, just below the guidance range. 79% of 2024 development starts were either pre-let or pre-sold with the remaining 21% under offer.

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).

The group remains financially robust – in 2024, LTV fell from 32% to 29%, just below the 30%-35% target range – with substantial covenant headroom. The current weighted average cost of debt is only 3.1%, with 93% of drawn debt either fixed or hedged, with an average maturity of 4.5 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 upgraded the group’s credit rating outlook to Baa1 (positive) from Baa1 (stable).

Source: Bloomberg