SEGRO eyes £1.2bn of potential developments

SEGRO says its EPRA NAV per share up was 8.0 per cent to 500 pence over the course of 2016. They say this was driven by a 4.8 per cent like-for-like increase in the value of the portfolio, reflecting development gains, UK rental growth and asset management activities. The 4.8% increase comprises a 4.5 per cent increase in the value of completed properties, a 7.6 per cent increase in the value of properties under development and an 11.5 per cent increase in the value of their land bank.

The dividend was increased by 5.1% to 16.4p. This is being paid from adjusted EPS up 7.1 per cent to 19.7 pence (2015: 18.4 pence) was underpinned by a 4.0 per cent increase in like-for-like net rental income, a continued low vacancy rate at 5.7 per cent and a strong contribution from development completions. The 4.0 per cent like-for-like growth in net rental income, included 6.0 per cent growth in the UK and a 0.7 per cent fall in Continental Europe.

They completed 421,600 sq m of new space during the year. These projects were 80 per cent let as at 31 December 2016, generating GBP23.5 million of annualised gross rent, with a potential further GBP5.8 million to come when the remainder of the space is let. This translates into a yield on total development cost (including land, construction and finance costs) of 8.2 per cent when fully let.

Developments under construction have the potential to generate GBP27 million of new rent, of which 61 per cent has been pre-let. A further GBP27 million is available from conditional pre-let and potential speculative projects which are expected to start in the coming months. They entered a development partnership with Roxhill in February 2016 which gave access to 12 sites for big box warehouse development in the Midlands and South-East regions of the UK. These sites, over which SEGRO holds option agreements, could support development of over 1 million sq m of big box warehousing over 10 years.

They secured a 10 year agreement with the Greater London Authority to develop 35 hectares of industrial land across five sites in East London known collectively as East Plus. They think these could support around 140,000 sq m of urban distribution and light industrial space. The sites are situated along the A13 main road between London’s inner and outer ring-roads. They have started development of two sites, including a warehouse pre-let to DPD.

SEGRO estimate that the land bank can support 2.7 million sq m of development. The prospective capital expenditure associated with these projects is GBP1.2 billion and they estimate that they could generate GBP128 million of headline rent, representing a yield on total development cost (including land and notional finance costs) of 8.2 per cent. At 31 December 2016, they had GBP32 million of cash and and GBP535 million of bank credit facilities available. Approximately GBP200 million of SEGRO bonds mature in 2018 and they will assess refinancing options for these during 2017.

They received gross proceeds of GBP565 million and GBP24 million from disposals of assets and land respectively, reflecting an average 2.7 per cent premium to 31 December 2015 book values. The asset sales reflect an average topped-up initial yield of 5.9 per cent. Disposal activity during the year focused on selling non-strategic assets to third parties, including the GBP325 million Bath Road office portfolio in the UK and a number of more management-intensive industrial estates in the UK and Germany. Within the disposals were EUR179 million of wholly-owned Continental Europe big box warehouses which they sold to the SEGRO European Logistics Partnership (SELP) joint venture (SEGRO has a 50 per cent interest in SELP).

The vacancy rate at 31 December 2016 was 5.7 per cent (31 December 2015: 4.8 per cent), of which approximately a quarter represents speculative developments completed in 2015 and 2016. The increase in the vacancy rate was primarily the result of a higher level of speculative development completions during the year and the expected take-back of a large UK warehouse in November which added 0.8 percentage points to the rate.

SGRO : SEGRO eyes £1.2bn of potential developments