Fitch Ratings has published Tritax EuroBox plc's Long-Term Issuer Default Rating (IDR) and assigned a senior unsecured rating of 'BBB-'. The Outlook is Stable.

The ratings reflect the company's strong-quality, albeit concentrated, portfolio of big-box real-estate assets and their long-term, inflation-indexed leases. Tritax EuroBox plans to increase its investment property portfolio to EUR1.2 billion by FYE22 (year-end September) from EUR838 million at FYE20 through identified acquisitions, partly funded by its recent EUR230 million equity issue. We forecast net debt/EBITDA to fall below 9x in FY21 before increasing to around 10.5x in FY23. Interest cover, at above 4x, benefits from low (non-legacy) average cost of debt.

Similar to other logistics property companies, Tritax EuroBox's operations have been resilient to the negative impact of the pandemic. In FY20, the company had a 96% rent collection rate, with the remaining 4% deferred into 2021. It did not offer tenants any rent reduction and we expect all rent deferrals to be paid.

KEY RATING DRIVERS

Concentrated Big-Box Portfolio: Tritax EuroBox at FYE20 owned a EUR838 million portfolio of 12 big-box logistics assets across six countries in continental Europe. The assets are located near urban population centres in key transport infrastructure corridors, with around 65% of the portfolio (by value) in Germany, Spain and Italy. The company focuses on large big-box assets (average size: 76,000 sqm), where supply is more constrained by planning restrictions. The assets are all modern with an average age of around four years and have high eaves between 10 and 25 metres, reliable power supply and strong data connectivity.

Acquisition-Led Growth: Using the equity proceeds and additional debt, Fitch expects the company to acquire around EUR380 million of newly developed big box assets in 2021 and 2022. Its two largest acquisitions in Bavaria and Hesse are both pre-let on 14- and 15-year leases, respectively. The other acquisition in Germany and two in Italy will have a one-year license fee plus a one-year rental guarantee, starting from construction. The strategy of acquiring pre-let assets or assets with a rental guarantee also ensures that occupancy remains high (FYE20: 100% including rental guarantees).

Although acquisition yields have compressed to below 4% in Germany, by sourcing off-market acquisitions (through Dietz AG and Logistics Capital Partners Limited), Tritax EuroBox buys at or above 4%.

Leverage Influenced by Equity Issuance: Net debt/EBITDA (using annualised rental income from acquisitions and developments) was 11x in FY20 and loan-to-value (LTV) was 38%. After the EUR230 million equity issue in March, we forecast net debt/EBITDA to dip in FY21, before increasing to 11x in FY22 and around 10.5x in FY23. Fitch expects the company to undertake another equity issue once the equity proceeds and additional debt are committed to acquisitions and as its LTV rises towards its medium target of 45%.

Its net debt/EBITDA is sensitive to small amounts of equity not yet being deployed or acquisitions being delayed. The timing and quantity of future equity issuance and acquisitions, along with company dividends, will be the primary influence on cash flow leverage. Fitch forecasts interest coverage to remain above 4x, benefitting from a low cost of (non-legacy) euro-denominated debt.

Low Development Exposure: Development activity will represent a small portion of the company's expansion strategy. It will consist of extensions to enhance existing sites, which must be pre-let or benefit from a rental guarantee prior to construction. Committed capex at FYE20 consisted of around EUR47 million for extensions in Barcelona and Strykow. The combined income yield on cost of these developments is around 6.5%.

Long-term, Inflation-linked Leases: The visibility and stability of rental income is supported by a long weighted average lease length of 9.1 years (FYE20), with 38% of rental income contracted for over 10 years. Fitch does not expect significant rental growth in big-box logistics assets, but 95% of leases are subject to some form of mostly annual indexation. The high level of investment made by some tenants on automation technology supports the long-term leases as it enables tenants to amortise their investments over a longer period. In some cases, such as at Mango's warehouse in Barcelona, the assets are these companies' key global distribution hubs, where tenant fit-out can sometimes exceed the value of the building.

Increased E-Commerce Penetration: The acceleration of e-commerce penetration, resulting from pandemic-related lockdowns and physical store closures, will support demand for big-box logistics assets. We expect the majority of tenant demand to come from retailers and third-party logistics providers, who are aiming to maximise the efficiency of their logistics network. Tritax EuroBox's large, well-located assets are suited to tenants looking to reduce logistics costs by consolidating several medium-sized assets into a single, central, more heavily automated warehouse.

Concentrated Tenant Base: We expect tenant concentration to remain a feature of this expanding portfolio as the company's large big-box assets are often let to a single tenant. The lack of tenant diversification is mitigated by the currently high demand for strong-quality logistics space and the ability to sub-divide these large single-let assets into smaller units. This reduces the likelihood that a unit would be vacant for an extended period. The company's tenants span a wide range of sectors, with the majority being retailers (in-store, online and omnichannel) and third-party logistics companies. Pro-forma for the proposed acquisitions, we expect the top five tenants to represent around 50% of annualised rent.

Expansion to Lower Cost Base: Compared with industrial peers, Tritax EuroBox has a more expensive cost base (higher EBITDA/net rental income and European Public Real Estate Association cost ratio). The higher costs result from the Tritax management fee, which is calculated as a percentage of net asset value and the associated costs of operating in multiple continental European countries, although this should ease with planned growth. In Fitch's view, this higher cost base is a hindrance to Tritax's core financial ratios.

Fitch has published a Spotlight Report on Tritax EuroBox - https://www.fitchratings.com/site/re/10154926

DERIVATION SUMMARY

Tritax EuroBox's rating is lower than that of Fitch-rated logistics property companies SEGRO PLC (BBB+/Stable) and SELP (BBB+/Stable). Tritax EuroBox's portfolio of around EUR1.2 billion (pro-forma for acquisitions and disposals) is smaller in scale than SELP's EUR4.2 billion portfolio of big-box assets. This means that Tritax EuroBox has higher asset-and-tenant concentration than SELP. However, Tritax EuroBox's weighted average lease length of 9.1 years is longer than SELP's and SEGRO's, at 5.5 years and 7.5 years respectively. Whereas SEGRO's portfolio includes both edge-of town urban warehouses and big-box assets in the UK and continental Europe, both Tritax EuroBox and SELP focus on big-box assets in continental Europe.

Tritax EuroBox's forecast net debt/EBITDA of around 10.5x is higher than SEGRO's forecast net debt/EBITDA of 7.5x-8.5x and SELP's forecast net debt/EBITDA of around 9x. The lower net debt/EBITDA of SEGRO and SELP includes their higher levels of development activity, which requires future spend and entails risk, and is supported by their greater income yield on development cost relative to the yield on acquisition of new assets. The lower income returns generated by Tritax EuroBox reflect its longevity of income, and with its lower development appetite the company assumes less execution and leasing risk.

KEY ASSUMPTIONS

Rental growth of 1% per year, related to indexation, based on annualised rental figures

Acquisitions of EUR413 million during FY21-FY22

Disposals of EUR65.5 million in FY21, related to the sale of Lodz asset

Expansionary capex of around EUR47 million in FY21-FY23

Equity issue of EUR230 million in FY21

Cash dividend distributions equal to 95% of FFO until FY23

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Net debt/EBITDA below 9.5x using annualised rental income (with a 0.5x tolerance to account for the timing of equity proceeds and subsequent acquisitions)

EBITDA net interest cover above 4x using annualised rental income

Increased asset-and-tenant diversification

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Net debt/EBITDA above 10.5x using annualised rental income (with a 0.5x tolerance to account for the timing of equity proceeds and subsequent acquisitions)

EBITDA net interest cover below 3x using annualised rental income

Decrease in the portfolio's weighted average lease length to below six years

Material increase in development spending or an increase in acquisitions that are not pre-let

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Healthy Liquidity: At FYE20, Tritax EuroBox had EUR24 million of cash and cash equivalents and access to EUR81 million of undrawn revolving credit facilities (RCFs). It does not have any short-term debt maturities. Available liquidity, pro forma for the EUR31 million acquisition of an asset in Nivelles (November 2020) and a EUR65.5 million disposal of the Lodz asset (February 2021), is sufficient to cover its EUR45 million committed capex. The nearest debt maturity is in October 2023 when its EUR100 million RCF matures. All its debt is unsecured.

Fitch expects Tritax EuroBox will take time to deploy the recent EUR230 million equity proceeds, with some acquisition spend taking place in FY22. This will lead to a temporary increase in liquidity.

DATE OF RELEVANT COMMITTEE

10 March 2021

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

RATING ACTIONSENTITY/DEBT	RATING		
Tritax EuroBox plc	LT IDR	BBB- 	Publish

senior unsecured

LT	BBB- 	New Rating

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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