Morning Note: Market News and an Update from Tritax Big Box REIT.

Market News

Fed Chair Jerome Powell said “many paths are possible,” keeping the door open for a potential rate cut in July. He emphasised a cautious approach but noted the Fed would move swiftly if signs of labour market weakness emerge. Other officials, including Governors Waller and Bowman, also signalled openness to easing policy soon. Treasuries were firmer across the curve – the 10-year currently yields 4.30%. Gold trades at $3,330 an ounce.

A preliminary US intelligence assessment indicated that recent US strikes on three Iranian nuclear facilities have only temporarily delayed Tehran’s nuclear program, fuelling concerns of renewed regional tensions.

However, the oil price continued to fall yesterday and is now down 13% this week and back to levels preceding Israel’s Iran attack. The price has steadied somewhat this morning, with Brent Crude trading at $68 a barrel.

US equities last night – S&P 500 (+1.1%); Nasdaq (+1.4%). The S&P is now less than 1% off its 19 February record close, while Nasdaq is around 1.3% below its December peak. Big tech was mostly higher, although Tesla was a notable laggard, as was the oil sector. FedEx fell 6% after hours on a weak profit forecast for this quarter.

In Asia this morning, stocks were also firm: Nikkei 225 (+0.4%); Hang Seng (+1.3%); Shanghai Composite (+1.1%). The FTSE 100 is currently 0.3% higher at 8,791. Sterling trades at $1.3620 and €1.1735.

The EU is planning retaliatory tariffs if President Trump sets baseline levies on the bloc, people familiar said.

Source: Bloomberg

Property News

Tritax Big Box REIT has announced a recommended offer for Warehouse Group. The deal increases the group’s asset base by 12% and represents a good strategic fit with potential for rent reversion and cost synergies. The shares currently trade on a 20% discount to December 2024 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 £6.6bn portfolio is spread across more than 100 logistics assets and around 128 investment tenants, with a weighted average unexpired lease term of 10.3 years. The largest tenant is Amazon, representing 15% of rental income.

In addition to organic growth through asset management and rental growth, the company has expanded via acquisition. Through Tritax Symmetry, the group owns a strategic land portfolio for the development of Big Box assets which provides the opportunity to more than double the company’s existing rent roll over the next decade. In addition, last year’s merger with UK Commercial Property REIT added high-quality urban logistics assets (i.e. smaller boxes) in a deal that enhances Tritax’s customer offer and drives accelerated rental growth through early capture of significant rental reversion. The company has also initiated a new strategic leg in the data centre market with a 147 MW data centre development opportunity and further 1GW pipeline.

At present, Tritax is 90%+ 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.

Against this backdrop, Tritax has today announced a recommended cash and share offer for Warehouse Group. The deal has been recommended by the Warehouse independent directors who have withdrawn their recommendation that Warehouse shareholders vote in favour of an existing offer from Blackstone.

The Warehouse portfolio is primarily focused on multi-let industrial warehouses in the so-called urban and last-mile markets. The £805m portfolio is comprised of 6.9mn square feet of assets with annual rent of £42.5m.

Based on last night’s Tritax closing share price of 150.6p, and assuming the payment of 3.2p of dividends, the offer represents 114.2p per Warehouse share, valuing the company at £485.2m, versus the current market cap. of Tritax of £3.7bn. This is a 38.6% premium to the undisturbed share price and a 4.8% premium to the value of the current Blackstone offer. The acquisition represents a discount of 1.7% to Warehouse’s last reported EPRA NTA per share.

Under the terms of the acquisition, for each Warehouse Share, shareholders will be entitled to receive 0.4236 new Tritax Shares (57% of the value) and 47.2p in cash (43% of the value). Following completion of the acquisition, Warehouse shareholders would hold 6.8% of the combined group’s issued share capital.

The company believes the deal has compelling strategic and financial rationale because of:

·        it consolidates Tritax’s exclusive position as the leading listed UK logistics pure-play platform with an enhanced portfolio value of £7.4bn and provides shareholders with increased liquidity, a lower cost of capital, and listed ownership of the sector with structural dynamics supporting long-term prospects.

·        the acquired assets complement Tritax’s big box logistics portfolio with assets in the urban and last mile markets, in key micro-locations and underpinned by a diverse tenant base, and further enhancing its customer offering via a broader range of property size, location, and uses.

·        shorter-dated leases with significant exposure to open market rent reviews, provide an accelerated pathway to capturing the 25% of rental reversion in Warehouse’s urban logistics assets, complementing the 28% rental reversion within the Tritax portfolio.

·        financial synergies are expected to enhance adjusted EPS accretion in first full year post completion with immediate cost synergies of £5.5m p.a. through a lower effective fee rate and economies of scale. This together with higher rental income growth is expected to support EPS accretion and dividend progression, alongside an industry leading EPRA cost ratio.

Pro forma leverage of the combined group is expected to be 32%, taking account of the cash consideration payable to Warehouse shareholders and expected transaction costs. This is comfortably within the company’s loan-to-value guidance of below 35%.

Source: Bloomberg