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Next FTSE 100 change saw the rise of Tritax Big Box (LSE: BBOX) to the FTSE equivalent of the Premier League!
It's worth mentioning that we won't know if Tritax joins the top table until tomorrow. Still, I still think it's a great stock, and I'd be happy to buy some shares when I can next time.
Here is the reason!
A real estate investment trust
Tritax is a real estate business that makes money from properties it buys and rents out. For favorable tax conditions, it is established as a real estate investment trust (REIT). The good news for investors is that as part of this restructuring, it must return 90% of profits to shareholders. In terms of property, Tritax is one of the largest property providers in the UK, which is a growing sector.
Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice.
Shares had a great 12-month period, rising 16%. This time last year, they were trading at 137p, compared to current levels of 160p. I think this is surprising, given the economic problems that are weighing on the commercial real estate market, but more on that later.
Bull and bear bag
On the downside, higher interest rates and rampant inflation are hurting the real estate sector, including the commercial side of things. The increased likelihood of rent defaults, net asset values (NAVs) being lowered, and high-cost debt have presented a host of challenges for Tritax and others. If these problems persist, growth, earnings, and returns may be constrained. I'll be watching.
Another risk I will look at is adoption. Tritax has grown to use them, and they are great when they work. However, they can have costly financial implications if they don't. Also, returns and balance sheets may be damaged if this happens.
Moving on to the bullish side, Tritax's dominant position in the rising commodity market is a rallying point. The evolution of shopping habits and the e-commerce boom has led to a huge increase in the need for warehouses for businesses to serve their customers. This has helped Tritax to increase revenue and presence. Again, there are no signs of demand slowing down – in fact, there is a lack of supply relative to demand levels.
Next, due to the size of Tritax's assets – large warehouses – it often commits its tenants to long-term leases. In context, the average lease in its agreements is 12 years. This can help keep the income stable.
Finally, from a return perspective, the shares offer a dividend yield close to 5%. However, I understand that benefits are not guaranteed.
Final thoughts
Whether Tritax joins the first UK index or not is a moot point to me. It can be a guava feather, and a symbol of great growth and progress. However, I will still happily buy shares either way.
Being a dominant player in a growing sector, an attractive rate of return, and the fact that performance and growth have met the threshold for potential increases helped me make my decision today.
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