Strong demand drives third quarter at Segro

The FTSE 100 firm said total contracted headline rent for the nine months to 30 September was £52m, 43% ahead of a “very strong” prior year comparator.

It said it completed 219,800 square metres of new developments in the quarter, down from 313,000 square metres year-on-year, which was reportedly capable of generating £10.6m of headline rent, of which £8.5m had been leased.

The vacancy rate increased slightly to 5.2% from 4.8%, which was said to have been primarily due to the completion of speculative developments during the period.

Segro said the vacancy rate on the standing portfolio remained stable.

The company said it continued to capture reversionary potential from its portfolio, with new headline rents on review and renewal 9.5% higher in the nine months to 30 September, up from 5.5% a year ago.

On the investment front, as at 30 September, 891,000 square metres of space was in the current development pipeline, equating to potential future headline rent of £46m - compared to 1.1 million square metres and £54m a year ago.

Of that, 71% had been secured, in line with last year’s performance.

Once complete and fully let, the pipeline was expected to generate a yield on total development cost of approximately 7%.

Developments capable of generating £10m of headline rent were expected to complete in the fourth quarter, of which £7m had been secured.

In 2018 to date, Segro invested £454m in its development pipeline - including land, infrastructure and asset development - with the board saying it remained on course to invest more than £500m in 2018 as whole.

Enduring investor demand for “high quality” warehousing continued to support capital values during the period, with Segro reporting that during the third quarter ot completed an off-market acquisition of a recently completed, speculatively -developed big box warehouse in the Netherlands for £22m, of which its share was £11m.

It also invested £25m in its land bank, of which approximately half was associated with development projects in London, Bologna and Lyon, due to commence “imminently”.

The firm disposed of £106m of land and assets during the third quarter, including the portion of the site of the former Nestlé factory in Hayes, West London, approved for residential development.

It retained the land zoned for industrial development, and intended to start construction of urban warehouses in what it described as a “supply-constrained market” in 2019.

On 11 October, it exchanged contracts to sell a 158,000 square metre warehouse in Rome for €118m, taking the opportunity to capitalise on “very strong demand” from a wide range of international investors, with the transaction completed on 16 October.

The CBRE Monthly Index reported a 2.3% increase in UK industrial property capital values for the third quarter, for a 9.4% increase for the first nine months of 2018.

Looking at the finances, Segro’s net debt - including its share of debt in joint ventures - as at 30 September was £2.8bn, in line with a year prior, equating to a proforma look-through loan-to-value ratio of 31%, up from 29%.

During the period, the company completed a US private placement of €300m 10-year and 15-year senior unsecured notes at a blended coupon of 2.2%, using the proceeds in part to repay the remaining 2019 bonds.

At 30 September, the average cost of debt - including Segro’s share of debt in joint ventures - was 1.9%, down from 2.0% as at 30 June.

As it disclosed in its half year results, the board expected to receive a performance fee from the SELP joint venture during the fourth quarter, currently estimated to have a net impact of approximately £10m on adjusted profit.

It said approximately 22% of the interim dividend was paid as scrip, resulting in the issue of 1.8 million new shares during the period.

Earnings per share for 2018 were expected to be based on an average of 1,009 million shares.

“Segro’s business has continued to perform well in the third quarter of 2018,” said chief executive officer David Sleath.

“Ongoing favourable occupier market conditions have enabled us to achieve another strong leasing performance for both new and existing space.

“The development pipeline is strong, with 891,000 square metres approved or under construction, of which 71% has been pre-leased.”

Sleath said that, in line with the company’s “disciplined approach” to capital allocation, it exchanged or completed disposals totaling more than £200m during the period at a “significant premium” to book value, taking advantage of strong investor demand and a limited supply of prime, well-located assets.

“The structural trends of e-commerce and urbanisation continue to underpin occupier and investor demand for prime warehouse space, notwithstanding near-term economic and political uncertainty in the UK.

“We remain optimistic about our prospects for the remainder of the year and into 2019.”

Segro said its 2018 full-year results would be published on 15 February.