SEGRO posts strong set of results as growth continues

SEGRO took the wraps off a strong set of financial, operating and portfolio performance metrics on Friday, reporting a record level of development completions for the 2017 year, almost all of which have been leased.

The FTSE 100 industrial property developer said pre-tax profit was up 25.7% to £194.2m, which the board put down to its focus on customer and portfolio management delivering high customer retention rates, like-for-like rental growth and a low vacancy rate.

Some of the growth was due to investment during the year - primarily the acquisition of full ownership of the Airport Property Partnership portfolio and a record level of development capital expenditure.

The outlook was rosy, as management said developments could yield 8% and take the group portfolio close to £10bn, while occupier demand was strong across all markets amid a constrained supply of modern and quality warehouse space. Prospects for rental growth were seen as good, especially in the UK, and improving on the continent.

For 2017, adjusted earnings per share were up 5.9% to 19.9p, incorporating the new shares issued in the March rights issue. IFRS EPS rose to 98.5p from 51.6p, which also included the impact of the 13.6% increase in the value of SEGRO’s portfolio, compared to the 4.8% portfolio growth reported in 2016.

Its EPRA net asset value per share was up 16.3% to 556p.

The balance sheet was significantly strengthened by a rights issue, as well as debt refinancing activity. It completed £2.7bn of financing activity for SEGRO and SELP, reducing the average cost of debt to 2.1% and improving the efficiency and strength of the balance sheet.

Future earnings prospects were underpinned by 1.2m square metres of development projects under construction or in advanced pre-let discussions, equivalent to almost one-fifth of its current portfolio.

The board explained that its current development pipeline was capable of generating £43m in rent, equating to a yield on cost of nearly 8% - over half of which had been secured through pre-lets and lettings prior to completion.

The land bank and land under control also provided “significant potential” for future growth.

SEGRO declared a final dividend increase of 6.1% to 11.35p.

“SEGRO has delivered another strong set of results in 2017 with some of our best ever operating metrics, underpinned by record levels of development completions - almost all of which is pre-leased - our active investment and asset management, as well as further portfolio valuation growth,” said chief executive David Sleath.

“Occupier demand in early 2018 is strong across all our markets and supply of modern warehouse space remains constrained.”

Sleath said the prospects for rental growth, particularly in the UK, remained good, with rental values improving in the company’s continental Europe urban warehouse portfolio.

Investor appetite for prime warehouses also remained unsated, attracted by the occupational market fundamentals.

“The structural drivers of demand in our sector - urbanisation, growth of the digital economy and e-commerce - are likely to underpin occupier demand for some time to come and these, coupled with our modern, well-located assets, our current development pipeline and our land bank all offer significant opportunities for future growth.”

SEGRO shares were up 7% to new post-crisis highs at 593.8p on Friday morning.

Analyst Mike van Dulken at Accendo Markets said demand and future prospects are "underpinned by favourable supply/demand dynamics amid changes to social and business trends, including urbanisation, digitisation, e-tailing and convenience, that favour both warehouses and flexible business space".

With more central bank rate hikes on the cards, the refinancing "is likely a canny move", he added.

Van Dulken noted that SEGRO's circa 3% yield is towards the lower end of a FTSE property sector paying anywhere from 1.8% for the more London-centric SHB, GPOR and DLN to a more competitive 4-7% at bigger retail-focused rivals INTU, HMSO, BLND, LAND.

"A solid report card, with attractive fundamentals and an outlook which are sure to maintain interest in what is perhaps the more conservative end of a steady-eddy sector. That said it’s not as if the company hasn’t already proved itself, having easily outpaced both large and mid-cap property sector rivals since the eve of the Brexit vote with gains of 36%, challenged only by self-storage group Safestore (+30.4%) and while several larger sector peers languish in the red to the same degree."