CEO David Sleath talks e-commerce best ever-property drivers to the Logistics Skills Alliance

SEGRO, the UK leading real estate investment trust (REIT) of modern warehousing woke Blighty Radio Four listeners on the breakfast show this week with big 2017 figures and news e-retail was the key driver.

CEO David Sleath,

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.

CEO David Sleath,

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. Occupier demand in early 2018 is strong across all our markets and supply of modern warehouse space remains constrained. The prospects for rental growth, particularly in the UK, remain good, and rental values are improving in our Continental Europe urban warehouse portfolio. Investor appetite for prime warehouses remains unsated, attracted by the occupational market fundamentals.

Results for the Year Ended 31 December 2017

SEGRO plc (‘SEGRO’ / ‘Company’ / ‘Group’) announces its results for the year ended 31 December 2017.

SEGRO has delivered another strong set of financial, operating and portfolio performance metrics, and a record level of development completions, almost all of which have been leased.
Adjusted pre-tax profit up 25.7 per cent reflects our focus on customer and portfolio management (which delivered high customer retention rates, like-for-like rental growth and a low vacancy rate) and investment during the year (principally acquiring full ownership of the Airport Property Partnership portfolio and a record level of development capital expenditure).
Adjusted EPS up 5.9 per cent to 19.9 pence (2016: 18.8 pence1), incorporating the new shares issued in the March Rights Issue. IFRS EPS of 98.5 pence (2016: 51.6 pence1), also includes the impact of the 13.6 per cent increase (2016: 4.8 per cent increase) in the value of our portfolio.
EPRA NAV per share up 16.3 per cent to 556 pence (31 December 2016: 478 pence1).
Balance sheet significantly strengthened by the Rights Issue and debt refinancing activity. We completed £2.7 billion of financing activity for SEGRO and SELP, reducing the average cost of debt to 2.1 per cent and improving the efficiency and strength of the balance sheet.
Future earnings prospects underpinned by 1.2 million sq m of development projects under construction or in advanced pre-let discussions, equivalent to almost one-fifth of our current portfolio. The current development pipeline is capable of generating £43 million of rent, equating to a yield on cost of nearly 8 per cent, over half of which has been secured through pre-lets and lettings prior to completion. Our land bank and land under our control provide significant potential for future growth.
Final dividend increased by 6.1 per cent to 11.35 pence (2016 final dividend: 10.7 pence1).

FINANCIAL AND OPERATING HIGHLIGHTS1

Valuation gains across the portfolio reflect asset management and investor demand

Portfolio capital value growth of 13.6 per cent (2016: 4.8 per cent) driven mainly by a 15.8 per cent increase in the like-for-like value of our UK portfolio (2016: 4.6 per cent) and 6.2 per cent in Continental Europe (2016: 0.6 per cent). The increase reflects the benefits of active management of our portfolio, yield compression and improving rental values, enhanced by gains from our development activity.
Rental values (ERVs) increased by 3.1 per cent. Rental values in the UK increased by 3.9 per cent (2016: 4.7 per cent) and by 1.2 per cent in Continental Europe (2016: 0.3 per cent).

Strong development and asset management activity, supported by positive market conditions

19 per cent increase in new rent contracted in the period to £53.5 million (2016: £44.9 million), of which £28.6 million (2016: £23.4 million) is from new development pre-let agreements and lettings of speculative space prior to completion.
2.6 per cent like-for-like net rental income growth (5.1 per cent increase in the UK, 2.5 per cent decrease in Continental Europe) aided by a 9.5 per cent uplift on rent reviews and renewals, mainly from capturing reversionary potential accumulated in recent years in the UK portfolio.
Low vacancy rate of 4.0 per cent (31 December 2016: 5.7 per cent) and customer retention increasing to 81 per cent (2016: 75 per cent) of rent at risk from expiry or customer break, reflecting our focus on customer service.

Capital allocation focused on accretive development programme and acquisitions to build scale in our target markets

Net investment of £592 million in 2017 including development capital expenditure of £414 million and the acquisition of 50 per cent of the £1.1 billion APP portfolio.
Total development capex for 2018 again expected to exceed £350 million.
£43 million of potential rent from current development pipeline, of which over half has been secured through pre-lets and lettings prior to completion.
Further ‘near-term’ pre-let projects associated with £22 million of rent are at advanced stages of negotiation.

Balance sheet strengthened with £2.7 billion of new financing during the year

£573 million of (gross) proceeds from the Rights Issue in March provided capital to acquire the APP portfolio and to pursue further development.
£2.1 billion of new debt for SEGRO and SELP was signed during the year, repaying more costly, less flexible debt, significantly improving our capital structure, improving the average cost of debt to 2.1 per cent (2016: 3.4 per cent) and the average debt maturity to 10.8 years (2016: 6.2 years).
Look-through LTV ratio of 30 per cent (31 December 2016: 33 per cent).