SEGRO Q3 IMS 2013

RNS Number : 2553R

SEGRO PLC

24 October 2013

 



24 October 2013

INTERIM MANAGEMENT STATEMENT FOR THE PERIOD 1 JULY TO 23 OCTOBER 2013

Continuing to deliver on strategic priorities; well placed for future growth

Highlights

·     Reshaping the existing portfolio: Disposed of £408 million of assets since 1 July 2013 at an average net initial yield of 5.9 per cent and an average 6.3 per cent premium to 30 June 2013 book values.

·     Delivering profitable growth through development and acquisition: Since 1 July 2013, we have bought £82 million of modern logistics warehouse assets (average net initial yield of 6.9 per cent) and development land in our core markets and signed six new pre-let developments (including our largest ever pre-let by area) totalling 117,000 sq m.

·     Introducing third party capital: The SEGRO European Logistics Partnership ('SELP') joint venture was completed on 11 October 2013, strengthening our position as a leading provider of logistics space in Continental Europe.

·     Reducing net debt: Adjusting for SELP, pro forma net debt (including our share of joint ventures' net debt) at 30 September 2013 has fallen to £1.9 billion (30 June 2013: £2.4 billion). We have a favourable liquidity profile with approximately £1 billion of cash and undrawn facilities.

·     Driving operational excellence: The shortage of available new space in our key markets and good levels of occupier demand have enabled us to secure £4.5 million of income from new pre-lets agreed in the period, whilst leasing of existing space in the third quarter will generate £3.4 million of new annualised rental income compared to take-backs of £3.5 million. Our vacancy rate, adjusted for the SELP JV and the forthcoming Neckermann disposal, increased marginally to 9.1 per cent (from 8.9 per cent at 30 June 2013).

David Sleath, Chief Executive, said:

"We have made further progress during the third quarter, following a strong first half, and our expectations for the full year remain unchanged. Our Continental European logistics joint venture has been completed and this will allow us to expand our platform in this growth sector. We have seen very encouraging activity in our development pipeline, including a major pre-let with ASICS Europe BV in Germany, our biggest pre-let to date.

"Investor interest in logistics assets continues to grow but we have been able to acquire some high quality assets at attractive yields, predominantly via off-market transactions. Our disposal programme is running ahead of target, reducing our financial leverage and providing us with the flexibility to take advantage of development and acquisition opportunities as they arise."

Operations

Summary of key data1		Q3 2013	Q3 2012	9M 2013	9M 2012
Take-up of existing space, excluding Neckermann2 (A)	£m	3.4	4.7	15.9	14.3
Space returned, excluding Neckermann (B)	£m	(3.5)	(2.0)	(16.2)	(15.1)
Net absorption of existing space (A-B)	£m	(0.1)	2.7	(0.3)	(0.8)
Taken back for redevelopment	£m	(1.4)	(0.1)	(2.9)	(0.5)
Neckermann net space leased / (returned)	£m	0.2	n/a	(9.5)	n/a
Take-up of developments completed during the period2 (C)	£m	0.8	5.5	5.0	8.7
Total take up2 (A+C)	£m	4.2	10.2	20.9	23.0

1.     All figures include joint ventures at share

2.     Annualised net rental income, after the expiry of any rent free periods

After a strong first half, we have made further operational progress during the third quarter, with £4.2 million of annualised net rent from the take-up of existing and new space. This is slower than the prior year, primarily due to the completion of eight developments in the third quarter of 2012 of 116,000 sq m and a particularly large letting at Polar Park. Without this letting, take-up of existing space would have been flat compared to last year and is in line with our expectations.

Occupier markets are starting to improve, albeit more slowly than investment markets. Rental growth remains muted, although there are some signs of improvement for grade A, well located urban logistics assets in the UK and Continental Europe. Despite the shortage of 'big box' logistics space, demand is being fulfilled by pre-let developments and competition for these projects is currently keeping rental growth largely in check.

Parcel delivery companies and other urban distributors have featured strongly in our letting and development activity in the year to date, including UK Mail signing a lease to double its space on the Slough Trading Estate by occupying a 4,300 sq m newly-refurbished unit on a 15 year lease and a major third party logistics provider leasing 5,700 sq m of urban logistics space at Premier Park, Park Royal.

In the third quarter, we have negotiated a lease surrender at West Drayton, Heathrow from an occupier of an 11,900 sq m, 14 year old bespoke building. In addition to taking a surrender premium, we intend to redevelop the site speculatively, creating 8,600 sq m of light industrial space in an under-supplied market. Construction is currently planned to commence in April 2014.

The unadjusted vacancy rate at 30 September 2013 was 9.9 per cent (30 June 2013: 9.5 per cent), following disposals in the quarter and a 20bps reduction in the contribution from short-term lets; removing short-term lets adds 1.2 percentage points to the vacancy rate (30 June 2013: 1.4 percentage points).  

On a pro forma basis, adjusting for the impact of SELP and Neckermann, the vacancy rate at 30 September 2013 was 9.1 per cent (30 June 2013: 8.9 per cent). Adjusted vacancy in the core portfolio was 8.7 per cent (30 June 2013: 8.5 per cent) and the non-core adjusted vacancy was 11.2 per cent (30 June 2013: 10.8 per cent).

Development

Since the start of the year we have completed 11 developments that are currently 78 per cent let and should yield £5 million of annualised rent when fully let, reflecting a c.10 per cent yield on cost. We have completed three developments since 1 July 2013, creating 26,000 sq m of logistics warehouses in Germany and Poland, of which 55 per cent is already let.

Since 1 July 2013, we have signed six new development contracts, all fully pre-let, which will produce £4.5 million of annualised rental income when delivered. The most significant of these are:

·     A pre-let within SELP to ASICS Europe BV, the international sportswear manufacturer, for a 72,000 sq m European distribution centre in Krefeld, near Dusseldorf on a 10 year lease. Construction will be in two phases, the first commencing in December 2013, for delivery in the second half of 2014, and the second scheduled for completion in the second half of 2015.

·     A pre-let with a major convenience store chain in Poland, for 23,900 sq m of logistics space.

·     A pre-let with GeoPost UK Limited in Radlett, St Albans for a 3,400 sq m cross-dock parcel delivery centre. Construction will commence in December 2013, with completion scheduled for August 2014.

We currently have 18 developments approved, contracted or under construction, representing £14 million of future annualised rental income and £78 million of future capital expenditure. Our development pipeline is 77 per cent pre-let.

Third party capital

We completed the SELP joint venture on 11 October, creating a €1 billion logistics joint venture in Continental Europe. In preparation for this transaction, we purchased the outstanding 50 per cent stake in our Belgium joint venture for €33.2 million for subsequent injection into SELP.

Portfolio re-shaping

We have continued to recycle capital actively and have exceeded our £300-£500 million disposal target for the year.

Continued investor appetite for attractive yields has driven demand for industrial and logistics assets in the UK and Europe. The UK and Germany are seeing the strongest investment interest, whilst interest in France and Poland is improving. Demand for prime assets in these markets is growing and is now extending to better quality secondary assets, particularly in the UK and Germany. The Netherlands and Belgium are currently of lesser interest to investors due to the weaker occupier markets.

Disposals, amounting to approximately £560 million in the year to date (including £9 million of non-core land), have continued to focus our portfolio in line with our previously stated strategy and provide us with ample financing headroom to take advantage of growth opportunities from developments and acquisitions. Year to date, we have acquired around £126 million of assets, including £45 million of modern logistics space in London and south-east England.

·     Disposals: Since 1 July 2013, we have completed or announced £408 million of disposals at an average net initial yield of 5.9 per cent (7.4 per cent topped up) and an average 6.3 per cent premium to 30 June 2013 book values.

Month	Asset / Portfolio	Gross proceeds (£m)	Net initial yield (%)
July	IQ Winnersh, UK	245.1	5.8 / 7.43
July	Neckermann (target completion 4Q13)	39.3	n/a
August	Frankfurt industrial	1.1	12.0 / 12.03
September	West Cross Industrial Park, UK	75.0	5.4 / 6.83
September	London industrial estates	30.3	6.4 / 7.23
September	Czech logistics	9.1	9.2 / 10.33
Various	UK, Belgium land	7.6	n/a
	Disposals since 1 July 2013	407.5	5.9 / 7.43,4

3.     Including the benefit of top-ups

4.     Yield excludes land disposals

·     Acquisitions: We have completed approximately £82 million of acquisitions since 1 July 2013. These assets have been purchased at an average net initial yield of 6.9 per cent.

Month	Property type	Location	Acquisition price (£m)	Net initial yield (%)
August	Big box logistics	Midlands, UK	18.1	7.5
September	Urban logistics	Park Royal, UK	15.3	6.1
September	Big box logistics	East London, UK	30.0	6.9
Various	Land	UK, Paris	18.4	n/a
	Acquisitions since 1 July 2013		81.8	6.95

5.     Yield excludes land acquisitions

During the period, we have continued to take advantage of attractive development and investment opportunities to reinvest some of our disposal proceeds in order to build critical mass in and around selected major conurbations, transportation hubs and corridors, in line with our strategic objectives. Transactions of particular note include:

·     Completion of a 50-50 joint venture with Roxhill Developments Limited in September 2013, investing in the 'Rugby Gateway' development site. The 50 hectares (c.125 acres) of land are situated in an excellent location for 'big box' logistics, within easy reach of the M6, M1, M69, M5 and M40 motorways, and can accommodate up to 168,000 sq m of prime logistics assets. Our intention is to develop the site on a pre-let basis and we are already seeing healthy interest from potential tenants.

·     Completion of the off-market acquisition of a £30 million logistics warehouse in Barking, East London in September 2013. The location is close to the A13 and A406, and has easy access to Central London. It is fully let to London City Bond Limited until 2028 and will generate a 6.9% net initial yield. We expect that the regeneration of East London and its limited supply of good quality logistics space will deliver attractive income and capital returns.

Financing

As at 30 September 2013, net debt (including our share of joint ventures' net debt) was £2.2 billion (30 June 2013: £2.4 billion) and £1.9 billion adjusted for the completion of the SELP transaction. In addition, we have a €152 million (£128 million) receivable due from our SELP JV partner at 3 months' notice and which yields 7% p.a.

On a pro forma basis, we had approximately £1 billion of undrawn facilities and cash at 30 September 2013 (30 June 2013: £325 million). The pro forma weighted average maturity of Group gross borrowings was 8.9 years at the same date (30 June 2013: 7.8 years).

Outlook     

Our expectations for the rest of the year remain unchanged from the time of our half year results announcement on 31 July 2013. Investor demand for modern, well-located warehouse assets continues to strengthen which is starting to drive a reduction in yields. Investor demand for more secondary assets in weaker locations remains relatively limited. The improving economic environment is beginning to feed through to the occupier market, for which there is a shortage of new space in most of our markets. We are seeing good levels of leasing activity in our core markets, particularly for our new developments, and we are letting existing and newly-developed space ahead of valuers' rental assumptions. We are well placed to continue the progress against our strategic objectives.

We will publish our results for the year to 31 December 2013 on 26 February 2014.

CONFERENCE CALL FOR INVESTORS AND ANALYSTS

There will be a conference call at 08.30 hours (UK time) today on the following number:

Telephone:        [phone]

Access code:    62812445#

Please note that a playback facility and web-link will also be available shortly after the call as follows:

Telephone:        [phone]

Access code:    642651#

Web-link:          www.segro.com/investors

CONTACT DETAILS FOR INVESTOR / ANALYST AND MEDIA ENQUIRIES:

SEGRO	Justin Read (Group Finance Director) Harry Stokes (Head of Investor Relations and Research)	Tel: [phone] Tel: [phone]
Tulchan	David Shriver/Peter Hewer	Tel: + 44 (0) 207 353 4200

This IMS, the most recent Annual Report and other information are available on the SEGRO website at http://www.segro.com/investors.

Neither the content of SEGRO's website nor any other website accessible by hyperlinks from SEGRO's website are incorporated in, or form part of, this announcement.

Forward-looking statements: This announcement may contain 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 price 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 announcement should be construed as a profit forecast. Past share performance cannot be relied on as a guide to future performance.

About SEGRO

SEGRO is a leading owner-manager and developer of modern warehousing, light industrial and data centre properties with £4.7 billion of assets (as at 30 June 2013, including our share of assets held in joint ventures), principally concentrated in London's Western Corridor (including the Thames Valley) and in key conurbations in France, Germany and Poland. We also own offices and more specialised buildings in the Thames Valley, Brussels and Milan and smaller industrial property investments in Belgium, the Netherlands and the Czech Republic.

The Group serves over 1,400 customers spread across a diverse range of industry sectors. It has 5.2 million sq m of built space and a passing rent roll of £311 million (as at 30 June 2013).

For further information see www.SEGRO.com.

SEGRO is a Real Estate Investment Trust (REIT) and is listed on the London Stock Exchange.

 

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