Annual Financial Report

SEGRO plc (the Company) Availability of 2011 Annual Report and Accounts The 2011 Annual Report and Accounts is now available to view at www.SEGRO.com/investors. The following documents will be mailed to registered shareholders of the Company on 19 March 2012: * 2011 Annual Report and Accounts; * Notice of the 2012 Annual General Meeting; and * Form of Proxy for the 2012 Annual General Meeting. In accordance with Listing Rule 9.6.1 a copy of each of these documents will be submitted to the National Storage Mechanism and will be available for viewing on 19 March 2012 or shortly thereafter. The Notice of the 2012 Annual General Meeting will be available to view on the Company's website from this date. The information below, which is extracted from the 2011 Annual Report and Accounts, is included solely for the purpose of complying with DTR 6.3.5. This information should be read in conjunction with the Company's 21 February 2012 announcement of its 2011 Final Results (available at www.SEGRO.com). This material is not a substitute for reading the full 2011 Annual Report and Accounts. All page numbers and cross-references in the extracted information below refer to page numbers and notes to the financial statements, in the 2011 Annual Report and Accounts. Principal Risks and Uncertainties Managing Risk Responsibly Effective risk management is integral to delivering our strategic priorities. The process for identifying, assessing and reviewing risks faced by the Group is described in the Governance Report section page 60. Principal risks and uncertainties facing the Group are described below. STRATEGIC RISKS 1. The Economic Environment Risk compared to previous year: â†‘ Risk Mitigation Changes in the economic environment could also Changes in the The Board monitors the create opportunities, for macro-economic external financial which the Group has a environment in the UK and environment closely and strong track record of Continental Europe could maintains a capital acting quickly to take have a significant impact structure that allows for advantage. on the Group's a degree of market performance. SEGRO has turbulence. The Group has Commentary approximately one-third stated its intent to of its business in further reduce leverage, The economic environment Continental Europe and which is the most remains difficult to the ongoing Eurozone effective way that it can predict and there is sovereign debt crisis is prepare to address major increasing uncertainty therefore a particular changes in the economic surrounding the solvency concern. environment (also see of the weaker Eurozone Capital Structure risk). countries and their banks. If macro-economic conditions were to worsen SEGRO has a diverse SEGRO's exposure to a then this could result in customer base with over potential collapse in one reduced demand for 1,600 customers and is not of the weaker Eurozone business space, increased over-reliant on a countries is difficult to customer insolvency and particular industry or assess and depends on the falling asset values. sector. level of contagion to the This could, in turn, slow banking sector and the the rate of portfolio Geographically, the wider European economy. recycling due to a portfolio is located Management continues to reduction of potential predominantly in the work with external buyers and available relatively stronger advisors to review the investment capital and European economies. potential impact of such increase the financial an event and to see if risks detailed opposite. The split by net asset there are further value is: UK 68%, Germany practical steps that the In addition to its 9%, France 8%, Poland 6%, Group could take to potential macro-economic Belgium 4%, Netherlands protect shareholder value. impact, significant 2%, Italy 2% and Czech changes to the Republic 1%. Income information is composition of the detailed in the Financial eurozone could indirectly The Financial Review on Review on page 46. impact on the efficacy of page 49 details the the Group's hedging Group's foreign exchange arrangements and the exposure to the euro and continued availability of the hedging arrangements individual bank funding. to protect income and net asset value. 2. Portfolio Performance Risk compared to previous year: â†‘ Risk Mitigation during down cycles. Management considers that The reshaping strategy The Group's three areas of the portfolio currently detailed in this Annual focus within this sector contains too many Report is designed to are: non-income producing or rebalance the portfolio by non-core assets and that reducing the number of * Multi-occupier estates if this is not addressed non-income producing and the business could non-core assets and by * Logistics (larger underperform relative to recycling this capital `big-box' distribution its peers. into stronger target warehouses) markets and assets. Modern, higher-value use Target markets were chosen properties, such as data by analysing the market to centres, suburban offices assess its size, economic and R&D facilities. growth potential, the attractiveness of the Commentary local real estate investment market, the The reshaping strategy supply/demand dynamics and will take place over the the competitive landscape. medium term and should The Group then considered result in SEGRO holding its position in each the appropriate balance market and only between stabilised and geographies where we have opportunity assets that we a critical mass and a believe is needed to strong market position achieve the returns that already, or where we our shareholders require. believe such a position can be relatively quickly The reshaping strategy is achieved have been detailed in the Chief targeted. Executives Review on pages 4 to 11. * Industrial property, in which SEGRO is a Portfolio rebalancing and specialist, is a reinvestment plans are high-yielding sector detailed in the and attractive asset Performance Review on page class due to its 30. potential to deliver above average rental growth and greater resilience 3. Implementing Strategic Changes Risk compared to previous year: â†‘ Risk Mitigation External agents and advisors are involved Performance could suffer The Executive Committee alongside SEGRO's own if the Group was to fail has established detailed personnel to identify to execute the plans to deliver the potential acquisition medium-term strategic strategic changes targets and to ensure that plans announced on 8 announced in November asset disposals and November 2011. 2011. Implementation is acquisitions take place on well underway and progress competitive terms. The main implementation is being tracked against a risks are associated with series of key performance The Group is committed to our ability to: indicators. recycle a significant amount of the portfolio * Sell non-core assets The organisation has been and recognises that the at acceptable prices realigned and the new pace of this change needs positions of Chief to be managed in order to * Identify and acquire Operating Officer and protect dividend paying suitable assets Chief Investment Officer capacity. established. The revised * Move quickly and take structure improves the Commentary opportunities as and Group's ability to deliver when these are portfolio changes while The Strategy and Key available maintaining a strong day Performance Indicators are to day operational detailed in the Chief * Manage portfolio performance. Executive's Review on recycling to mitigate pages 4 to 15. the impact on earnings, dividends and leverage. FINANCIAL AND OPERATIONAL RISKS 4. Capital Structure Risk compared to previous year: â†’ Risk Mitigation Commentary Failing to maintain an The Group sources debt and Key financial ratios are appropriate and equity capital from a detailed in the Financial cost-effective capital variety of sources Review on pages 48 and 49. structure for any point including, where in the market cycle appropriate, third-party could, if the Group holds capital to achieve a too much debt when the balanced and market is falling, cost-effective capital increase the risk of structure. covenant breach (see Solvency and Covenant The Group is currently Breach risk overleaf). targeting a loan to value ratio of 40% over the If the Group holds too medium-term. This will be little debt when the achieved mainly through market is rising, it using proceeds from the could underperform recycling programme to against peers. help pay down debt and reduce leverage. This position is intended to provide additional downside protection against valuation declines and to offer increased financial flexibility. 5. Availability and Cost of Borrowing Risk compared to previous year: â†’ Risk Mitigation Interest rate sensitivity is mitigated by using Deterioration in debt The Group monitors its key fixed rate debt market conditions, a financial ratios and seeks instruments. At 31 worsening of the to maintain a strong December 2011, 74% of net Company's credit profile investment grade credit borrowings were at fixed or a general rise in rating. rates. interest rates could impact the availability The Group also monitors Commentary and cost of borrowing changes to credit market with a direct impact on conditions and to the Treasury policy, key both the solvency of the broader financial financial ratios, debt Group and the returns it environment and seeks to maturity profile, the generates. diversify debt funding interest rate hedging with an appropriate mix of position and related bank and capital market sensitivities are detailed debt financing. The Group in the Financial Review on also seeks to spread debt pages 48 and 49. maturities and to refinance debt well ahead of its contractual maturity. During 2011 the Group agreed new or extended bank facilities totalling â‚¬440 million (Â£ 367 million). The Group has only Â£10.4 million of committed debt facilities that mature before 31 December 2012. 6. Solvency and Covenant Breach Risk compared to previous year: â†‘ Risk Mitigation Commentary A material fall in the The Group has a flexible Treasury policy, funding Group's property asset funding strategy and headroom, financial values or rental income manages liquidity in covenant ratios and could lead to a breach of accordance with related sensitivities are financial covenants Board-approved Treasury detailed in the Financial within its debt funding Policies which are Review on pages 48 and 49. arrangements. This could designed to ensure that result in the the Group has adequate cancellation of debt funds for its ongoing funding which would, in needs. turn, leave the Group without sufficient The Board monitors long-term resources financial covenant ratios (solvency) to meet its closely and undertakes commitments. scenario and sensitivity analysis to inform its financial planning. 7. FOREIGN EXCHANGE RATES Risk compared to previous year: â†’ Risk Mitigation Commentary Changes in the sterling The majority of foreign Foreign exchange hedging to euro exchange rate currency assets are policy, the hedging could reduce the sterling matched by borrowings position and related value of Continental denominated in the same sensitivities to gearing, European assets and currencies. This provides earnings and NAV are earnings. a hedge against the value detailed in the Financial of the Group's overseas Review on page 49. Significant exchange rate assets and earnings. changes could also impact the Group's gearing ratio. 8. OPERATIONS Risk compared to previous year: â†’ Risk Mitigation Commentary The Group's ability to The Executive Committee The role of the Executive maintain its reputation, oversees internal policies Committee is detailed in revenues and value could and procedures that the Governance report on be damaged by operational address a range of page 58. failures such as: different operational areas, including Health Health and Safety accident * Health and Safety and Safety and rates throughout the Group incidents Sustainability. remain low. Safety information is detailed in * Environmental damage The business is actively the Sustainability Review managed to maintain on page 42. * Business systems or compliance with IT disruption regulations and to ensure that robust operational * Failing to attract, controls are in place. retain and motivate key staff. REAL ESTATE AND INVESTMENT RISKS 9. MARKET CYCLE Risk compared to previous year: â†’ Risk Mitigation Commentary The property market is The Board, Executive The market outlook is cyclical and there is an Committee and Investment detailed in the Chief inherent risk that the Committee monitor the Executive's Review on Company could either property market cycle on a pages 4 to 15. misinterpret the market continual basis and seek or fail to react to adapt the Group's appropriately to changing capital investment/ market conditions, which divestment strategy in could result in capital anticipation of changing being invested or market conditions. disposals taking place at the wrong time in the cycle. 10. INVESTMENT PLANS Risk compared to previous year: â†’ Risk Mitigation All new potential investments are subject to Investment decisions to High-level asset comprehensive due buy, hold, sell or management plans have been diligence involving develop assets could be established for all major experienced property teams flawed due to inadequate locations. During 2012 and external advisors. analysis, Inappropriate asset management plans Significant potential assumptions, and poor due will continue to be investments and disposals diligence or changes in updated to ensure that are reviewed by the the operating underlying assumptions are Investment Committee and, environment. robust and that capital where appropriate, the allocation is optimised Board. across the portfolio. Commentary A dedicated investment team has been created The approach to reporting to the Chief Development and Investment Investment Officer. is detailed in the Performance Review on The Group's major pages 24 to 32. development projects are generally pre-let to customers on a long lease; this reduces the risk associated with vacancy and income loss. Speculative development is limited to sites with high potential demand. RELATED PARTY TRANSACTIONS Group Transactions during the year between the Group and its joint ventures are disclosed below: 2011 2010 Â£m Â£m New loans during the year 0.7 5.1 Loans repaid during the year (0.4) (29.3) Loans outstanding at the year end 127.0 127.2 Dividends received 8.3 8.8 Management fee income 5.9 1.9 As disclosed in note 6, in 2010 the Group sold Â£237.1 million of property and joint venture investments into APP on an arm's length basis. Company Balances outstanding between the Company and external related parties at balance sheet date are Â£nil (2010: Â£14.0 million). Transactions between the Company and its subsidiaries eliminate on consolidation and are not disclosed in this note. Amounts due from subsidiaries are disclosed in note 17 and amounts due to subsidiaries are disclosed in note 18. None of the above Group or Company balances are secured. All of the above transactions are made on terms equivalent to those that prevail in arm's length transactions. Remuneration of key management personnel Key management personnel comprise Executive and Non-Executive Directors and any other members of the Executive Committee, as outlined in the Corporate Governance Report on page 58. Key management personnel compensation is shown in the table below: 2011 2010 Â£m Â£m Salaries and short-term benefits 4.4 3.9 Termination benefits 0.6 0.2 Post employment benefits 0.2 0.9 Share-based payments 0.1 1.2 Total remuneration 5.3 6.2 More detailed information concerning directors' remuneration, shareholdings, pension entitlements, share options and other long-term incentive plans, as required by the Companies Act 2006, is shown in the audited part of the Report on Directors' Remuneration on pages 64 to 74. STATEMENT OF DIRECTORS' RESPONSIBILITIES We confirm that to the best of our knowledge: * the financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and * the management report, which is incorporated into the Directors' Report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. By order of the Board David Sleath, Chief Executive Justin Read, Finance Director 20 February 2012 FORWARD LOOKING STATEMENTS This Annual Report contains certain forward looking statements with respect to SEGRO's expectations and plans, strategy, management objectives, future developments and performance, costs, revenues and other trend information. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that may occur in the future. There are a number of factors which could cause actual results or developments to differ materially from those expressed or implied by these forward looking statements and forecasts. Certain statements have been made with reference to forecast process changes, economic conditions and the current regulatory environment. Any forward looking statements made by or on behalf of SEGRO speak only as of the date they are made. SEGRO does not undertake to update forward looking statements to reflect any changes in SEGRO's expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based. Nothing in this Annual Report should be construed as a profit forecast. Past share performance cannot be relied on as a guide to future performance. Robin Healy Deputy Company Secretary +44 (0)20 7451 9082

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