SEGRO sees solid rental growth in third quarter

Property investment and development company SEGRO updated the market on its trading for the period from 1 July to 18 October on Thursday, reporting that it contracted £8.8m of new headline rent in the third quarter, including £3.8m in rent from existing space.

The FTSE 100 firm said total contracted headline rent for the nine months to 30 September was £36.4m, which was 3% ahead of what the board called a “very strong” prior year comparator.

It completed 313,000 square metres of fully let developments, which the board said would generate £12m of headline rent - the largest of which was a 156,000 square metre fulfilment centre for Amazon in Rome.

Strong lettings of existing space and development completions in the third quarter have contributed to an improvement in the vacancy rate to 4.1 per cent (30 June 2017: 5.5 per cent). “In particular, we have let the final speculatively developed warehouses at Rugby Gateway in the Midlands and Navigation Park in Enfield to DHL, meaning both estates are now fully let,” the board said in its statement.

“In addition, we have let one of the two remaining warehouses at Origin in West London to Amazon.

“These three transactions added £2.4m of headline rent.”

SEGRO added that it continued to capture reversionary potential from its UK portfolio, with new headline rents on review and renewal approximately 15% higher in the UK and 1.5% lower in continental Europe in the nine months to 30 September.

It signed new, unconditional pre-let agreements totalling £1.3m of headline rent during the third quarter, including to retailer Leroy Merlin near the inland port of Gennevilliers, close to the centre of Paris.

At 30 September, 725,000 square metres of space was in the current development pipeline, equating to potential future headline rent of £41m, down from 920,400 square metres and £46m at 30 June.

Those projects were 54% let or pre-let by rent, from 68% at 30 June, which the board said reflected the completion of developments in the third quarter which were entirely pre-let.

“The current development pipeline is expected to generate a yield on total development cost of approximately 8%,” the board said.

“Developments capable of generating £14 million of headline rent are expected to complete in the fourth quarter, of which £9m has been secured.

“We are on course to invest in excess of £350m in our development pipeline in 2017.”

During the third quarter, SEGRO said it invested £17m in four land acquisitions for future development in the UK, Italy and Spain, two of which were already subject to pre-let agreement.

The board pointed out that the CBRE Monthly Index reported a 3.1% increase in UK industrial property capital values for the third quarter and a 9.1% increase for the first nine months of 2017.

It said the strong investor demand for pan-European portfolios acquired in recent months provided evidence of the enduring appeal of the asset class across its markets.

During the third quarter, the company completed an asset swap in continental Europe, selling a £34m wholly-owned asset in Paris in exchange for a big box warehouse in Lyon which was acquired by the SELP joint venture for £36.2m, of which SEGRO’s share was £18.1m.

It also sold a small industrial estate near Stansted Airport, formerly held within the APP joint venture.

Neither of the disposed assets was core to its business, the board said, and acquiring the warehouse in Lyon was in line with its strategy of building scale in the “important and undersupplied” logistics hub in France.

Financing activity improved the balance sheet by extending its maturity, and reduced the cost of debt, the board added.

On 11 October, SEGRO completed the tender of £550m of outstanding bonds at a cash cost of £677m, and the new issue of £750m of new 12 and 20 year bonds.

The impact of those transactions increased the average maturity of group debt by three years to 10.8 years, reduced the average cost of debt by around 0.5% to approximately 2.5%, and thereby reduced the company’s annualised interest cost by approximately £10m.

EPRA net asset value would be approximately £127m - or 13p per share - lower.

Net debt - including its share of debt in joint ventures - at 30 September was £2.3bn.

SEGRO said the look-through loan to value ratio at 30 September, based on asset values at 30 June and adjusted for development expenditure, acquisitions and disposals, was 31%.

“The positive momentum in SEGRO's business has continued, driving increased rental income across both existing and new space,” said chief executive David Sleath.

“During the third quarter, we have completed new big box distribution warehouses for Yoox Net a Porter and Amazon in Italy, and a new urban parcel distribution warehouse for Fedex/TNT in Paris, reflecting demand related to e-commerce which continues to be an important component of our business.”

Sleath said investor appetite for prime warehouse assets remained “strong”, attracted by the structural drivers of occupier demand, limited supply and the prospect of rental growth particularly in the UK and in urban warehousing in continental Europe.

“These trends in occupier and investor demand provide a supportive backdrop for SEGRO's performance for the remainder of 2017 and into 2018.”

SEGRO said the 2017 full year results would be published on 16 February 2018.