The next FTSE 100 reshuffle could see the rise of Tritax Big Box (LSE: BBOX) to the FTSE’s equivalent of the Premier League!
It’s worth mentioning that we won’t know if Tritax is joining the top table until tomorrow. Nevertheless, I still think it’s a great stock, and would be happy to buy some shares when I next can.
Here’s why!
Real estate investment trust
Tritax is a property business that makes money from assets it buys and rents out. In exchange for favourable tax conditions, it’s set up as a real estate investment trust (REIT). The good news for investors is that as part of this set up, it must return 90% of profits to shareholders. In terms of property, Tritax is one of the largest logistics property providers in the UK, which is a burgeoning sector.
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The shares have had a decent 12-month period, up 16%. At this time last year, they were trading for 137p, compared to current levels of 160p. I reckon this is impressive, given economic issues suppressing the commercial property market, but more on that later.
The bull and bear case
From a bearish view, higher interest rates and rampant inflation have hurt the property sector, including the commercial side of things. Increased chances of rent defaults, net asset values (NAVs) being driven down, and costlier debt have presented a myriad of challenges for Tritax and others. If these issues persist, growth, earnings, and returns could be dented. I’ll be watching.
Another risk I’ll keep an eye on is acquisitions. Tritax has grown using them, and they’re great when they work out. However, they can have costly financial implications when they don’t. Plus, returns and balance sheets could be harmed if this were to happen.
Moving over to the bullish side, Tritax’s dominant position in the burgeoning logistics market is a plus point. Evolving shopping habits and the e-commerce boom have led to a huge spike in demand for warehouses for businesses to cater to their customers. This has helped Tritax grow earnings and presence. Plus, there’s no signs of demand slowing — in fact, there is a lack of supply relative to levels of demand.
Next, due to the scale of Tritax’s assets – large warehouses – it usually ties its tenants down to long-term leases. For context, the average lease on its agreements is 12 years. This can help keep earnings stable.
Finally, from a returns view, the shares offer a dividend yield close to 5%. However, I do understand that dividends are never guaranteed.
Final thoughts
Whether or not Tritax joins the UK’s premier index is a bit of a moot point for me. It would be a feather in the firm’s cap, and a sign of great growth and progress. However, I’d still happily buy some shares either way.
Being a dominant player in a burgeoning sector, an attractive level of return, and the fact that performance and growth has met the threshold of potential promotion have helped me make my decision today.
