Segro upbeat on development pipeline after decent first half

Segro reported a period of “strong” performance with “good” earnings momentum in its half-year results on Wednesday, which its said was driven by rental growth, active asset management and a record level of developments.

The FTSE 100 property investment and development company said its adjusted pre-tax profit was up 19% year-on-year to £131.8m for the six months ended 30 June.

It put that growth down to record development completions in the period, and rental growth captured through active asset management.

IFRS profit before tax was £410.8m, down from £570.9m, with that figure including the impact of the revaluation of its portfolio.

Segro’s adjusted earnings per share were ahead 13% to 12.2p, which the board said reflected the higher adjusted pre-tax profit and an increased number of shares following the equity placing in February.

IFRS earnings per share fell to 37.1p, from 55.4p at the same time last year.

The company’s EPRA net asset value per share was 4% higher year-on-year at 673p, which was reportedly driven by a 3.5% improvement in the value of the portfolio - slower than the 5.9% growth it saw in the first half of 2018.

Segro said that portfolio growth was due to development and asset management gains, as well as estimated recovery value growth across both the UK and continental Europe portfolios.

The board said the firm’s future earnings growth was underpinned by more than 700,000 square metres of development projects under construction or in advanced pre-let discussions, which would be capable of generating £50m of rent, reflecting a yield on cost of 7% - most of which was de-risked through pre-leasing agreements.

It increased the interim dividend by 13.5% to 6.30p, in line with its guidance to set the interim dividend at one-third of the previous full-year dividend.

On the operational front, Segro reported “strong” performance, driven by active asset management and supported by continued good occupier demand.

It said it secured £33.3m of new headline rent in the period, down from £39.8m year-on-year.

That was driven by new pre-lets of £15.2m, down from £30.4m, net rent roll growth of £8.4m on the existing space, improving from £1.4m in the first half of 2018, and increased lettings of recently-completed speculatively developed space.

Net rental income growth was 3.7% on a like-for-like basis, which consisted of 4.3% growth in the UK and 2.5% in continental Europe.

The company’s vacancy rate remained “low” at 4.8%, improving from 5.2% on 31 December, which was put down to the contribution from recently-completed pre-let developments, and a high retention rate of 94% with “minimal” take-backs.

Segro reported a portfolio capital valuation surplus of 3.5%, consisting of a 2.3% surplus in the UK and 5.8% in continental Europe.

Those valuation gains were primarily driven by asset management, rental value growth of 1.4% in the UK and 1.5% in continental Europe, and development gains with continued yield compression in continental Europe.

The board said it was continuing a “disciplined approach” to capital allocation, in a bid to further enhance the portfolio and drive ongoing returns.

Net capital investment totalled £141m in the period, which involved £27m of asset acquisitions and £220m in new land and development capital expenditure, offset by £106m of proceeds from disposals.

A further £229m of capital expenditure was to be invested in completing 34 development projects under construction, representing £36m of potential rent, of which 65% had been secured through pre-lets.

Completions in the second half of 2019 would potentially generate £29m of annual rent, of which £21m had already been secured.

Further 'near-term' pre-let projects were expected to start in the coming months, with the board reporting potential capital expenditure of £125m and £14m of associated rent.

Total development capital expenditure for the year was expected to be in the region of £600m, including land acquisitions, which would be in line with expectations at the time of the equity placing in February.

Looking at its balance sheet, Segro said it was positioned for further development-led growth, following its equity placing and debt refinancing.

The equity placing of £451m was completed in February, which provided the company with the capacity to continue to invest in its accretive development pipeline and future land acquisitions.

Further debt refinancing activity continued in the period, with the repayment of £250m 5.625% Segro bonds due 2020, and the issue of €500m 1.5% SELP bonds due 2026.

The company reported a look-through loan-to-value ratio of 24%, down from 29% at the end of 2018, with £1.6bn in cash and undrawn facilities.

“Momentum has continued throughout our business in the first half of 2019 and we are on track for another strong year,” said Segro chief executive officer David Sleath.

“Our portfolio of high quality and well-located warehouse assets is performing well, as evidenced by strong rental growth and the low vacancy rate.

“Our development programme continues apace, capitalising on the ongoing, positive occupier demand across our markets.”

Sleath said that as anticipated, the structural trends of e-commerce and urbanisation that had been driving performance in the firm’s UK business for some time were now increasingly evident in its continental European markets.

“Looking ahead, we expect the development programme to generate further significant and profitable new rental income over [the] coming years.

“This addition to the top-line, combined with the compounding effect of rental growth through our asset management of the existing portfolio, should enable us to drive both sustainable earnings and further dividend growth.”