STRONG OCCUPIER DEMAND DRIVES FURTHER GROWTH IN RENTS, EARNINGS AND DIVIDENDS
RESULTS FOR THE YEAR ENDED 31 DECEMBER 2022
SEGRO PLC
SEGRO PLC (Paris:SGRO) (LSE:SGRO)
Commenting on the results David Sleath, Chief Executive of SEGRO said:
“SEGRO is today reporting strong operational results for 2022, including a record level of rent roll growth driven by our active asset management and a strong leasing performance. Our modern, well-located and highly sustainable warehouses continue to be in high demand from a diverse range of occupiers, underpinned by long-term structural drivers.
“Our strategy over the past decade has focused on cultivating a unique portfolio located in the most supply-constrained European urban and logistics markets, backed by a strong balance sheet to enable SEGRO to outperform through the property cycle. Our portfolio valuation fell in the second half of 2022 as investment yields rose and values weakened across the sector in response to macroeconomic conditions. However, the impact on our portfolio was mitigated by its high quality and the strong rental growth we delivered across all of our markets.
“Our prime portfolio, excellent land bank, development expertise, customer focus and balance sheet capacity mean we are well positioned to deliver attractive returns and further growth into the years ahead.”
HIGHLIGHTS1:
- Adjusted pre-tax profit of £386 million up 8.4 per cent compared with the prior year (2021: £356 million). Adjusted EPS increased by 6.5 per cent to 31.0 pence (2021: 29.1 pence, 28.0 pence excluding the 1.1 pence SELP performance fee recognised in 2021 resulting in a 10.7 per cent increase).
- Adjusted NAV per share down 15.0 per cent to 966 pence (31 December 2021: 1,137 pence) driven by a portfolio valuation decline of 11.0 per cent (2021: 13.1 per cent increase, H2 2022 16.6 per cent decrease). This was primarily driven by market-wide yield expansion in the second half, partly offset by estimated rental value growth (ERV) of 10.9 per cent, portfolio asset management successes and development profits.
- Net rental income of £522 million, up 18.9 per cent (2021: £439 million), driven by strong like-for-like rental growth of 6.7 per cent anddevelopment completions.
- Strong occupier demand, with our customer focus and active management of the portfolio generating a record £98 million of new headline rent commitments during the period (2021: £95 million), including £41 million of new pre-let agreements, and a 23 per cent average uplift on rent reviews and renewals.
- Net capital investment of £1.3 billion (2021: £1.5 billion)in asset acquisitions, development projects and land purchases, less disposals.
- 639,200 sq m of development completions delivered during 2022, at a yield on cost of 7.4 per cent. 80 per cent of this is already let to customers from a diverse range of sectors.
- Continued momentum in the development pipeline with 915,600 sq m of projects under construction or in advanced pre-let discussions equating to £86 million of potential rent, of which 75 per cent has been or is expected to be pre-let, supporting growth in earnings over the year ahead and into 2024.
- Significant progress with our Responsible SEGRO strategic priorities, de-risking and investing in the future of our business, including a ten per cent reduction in the average embodied carbon intensity of our development programme; the launch of ten Community Investment Plans (CIPs); and meaningful changes to promote diversity and inclusion across our business.
- £3.1 billion of new financing helping to maintain our long-average debt maturity of 8.6 years and providing high visibility on funding costs with no significant near-term debt maturities. Average cost of debt at 31 December 2022 of 2.5 per cent, and interest cover of 4.5 times.
- Strong balance sheet providing capacity to invest in our development programme and allowing us flexibility to make further commitments. We have access to £2.2 billion of available liquidity and a modest level of gearing reflected in LTV of 32 per cent at 31 December 2022 (31 December 2021: 23 per cent).
- 2022 full year dividend increased 8.2 per cent to 26.3 pence (2021: 24.3 pence). Final dividend increased by 7.7 per cent to 18.2 pence (2021: 16.9 pence)
FINANCIAL SUMMARY
| 2022 | 2021 | Change per cent | |
| Adjusted3 profit before tax (£m) | 386 | 356 | 8.4 |
| IFRS3 (loss)/profit before tax (£m) | (1,967) | 4,355 | – |
| Adjusted3 earnings per share (pence) | 31.0 | 29.12 | 6.5 |
| IFRS3 earnings per share (pence) | (159.7) | 339.0 | – |
| Dividend per share (pence) | 26.3 | 24.3 | 8.2 |
| Total Accounting Return (%)4 | (12.8) | 42.5 | – |
| 2022 | 2021 | Change per cent | |
| Assets under Management (£m) | 20,947 | 21,286 | – |
| Portfolio valuation (SEGRO share, £m) | 17,925 | 18,377 | (11.0)5 |
| Net true equivalent yield (per cent) | 4.8 | 3.8 | |
| Adjusted67 net asset value per share (pence, diluted) | 966 | 1,137 | (15.0) |
| IFRS net asset value per share (pence, diluted) | 938 | 1,115 | – |
| Net debt (SEGRO share, £m) | 5,693 | 4,161 | – |
| Loan to value ratio including joint ventures and associates at share (per cent) | 32 | 23 | – |
| 1. Figures quoted on pages 1 to 19 refer to SEGRO and SEGRO’s share of joint ventures and associates, except for land (hectares) and space (square metres) which are quoted at 100 per cent, unless otherwise stated. Please refer to the Presentation of Financial Information statement in the Financial Review for further details.2. 2021 comparator included 1.1 pence recognised for SELP performance fee, excluding this Adjusted EPS for FY21 was 28.0 pence. For further information on the SELP Performance fee see Note 6 to the condensed financial information.3. The primary driver of the difference between Adjusted profit before tax and IFRS loss before tax (£1,967m IFRS loss before tax versus £386m Adjusted profit before tax) and earnings per share (31.0p Adjusted earnings versus -159.7p IFRS earnings) is the unrealised valuation deficit on our portfolio recognised in IFRS but not recognised in our Adjusted profit and earnings metrics. Further information and reconciliations between the Adjusted and IFRS metrics can be found in Note 2 (Adjusted profit) and Notes 11 (Earnings per ordinary share) to the condensed financial information.4. Total Accounting Return is calculated based on the opening and closing adjusted NAV per share adding back dividends paid during the period.5. Percentage valuation movement during the period based on the difference between opening and closing valuations for all properties including buildings under construction and land, adjusting for capital expenditure, acquisitions and disposals.6. A reconciliation between Adjusted net asset value per share and IFRS net asset value per share is shown in Note 11 to the condensed financial information.7. Adjusted net asset value is in line with EPRA Net Tangible Assets (NTA) (see Table 5 in the Supplementary Notes for a NAV reconciliation).8. FY21 comparators in table on page 3 have been adjusted to take £10 million capitalised interest out of development capex and to account for £503 million of acquisitions that were reclassified as ‘covered land’ from ‘completed properties’ after FY21 results and now presented as land acquisitions. |
OPERATING SUMMARY & KEY METRICS
| 2022 | 2021 | ||
| MARKET RENTAL GROWTH REMAINS STRONG DUE TO TIGHT SUPPLY-DEMAND DYNAMICS, PORTFOLIO VALUATION IMPACTED BY MACRO ECONOMIC ENVIRONMENT (see page 9): | |||
| Valuation decline driven by increased yields (100bp on average) and partly offset by estimated rental value (ERV) growth, active asset management of the standing portfolio, and gains recognised on completed development and buildings under construction. | |||
| Portfolio valuation change (%): | Group | (11.0) | 28.8 |
| UK | (13.1) | 32.2 | |
| CE | (7.3) | 22.5 | |
| ERV growth (%) | Group | 10.9 | 13.1 |
| UK | 11.5 | 18.8 | |
| CE | 9.9 | 4.1 | |
| RECORD GROWTH IN RENTAL INCOME DRIVEN BY HIGH OCCUPIER DEMAND AND ACTIVE ASSET MANAGEMENT OF OUR PRIME PORTFOLIO (see page 11): | |||
| Existing portfolio contributed strongly to our rent roll growth through continued rental growth, the capture of reversion in the UK portfolio and indexation provisions on the Continent, supplemented by pre-lets signed during the year. | |||
| Total new rent signed during the period (£m) | 98 | 95 | |
| Pre-lets signed during the period (£m) | 41 | 49 | |
| Like-for-like net rental income growth (%): | Group | 6.7 | 4.9 |
| UK | 7.7 | 5.6 | |
| CE | 4.9 | 3.6 | |
| Uplift on rent reviews and renewals (%): | Group | 23.3 | 13.0 |
| (note: excludes uplifts from indexation) | UK | 28.0 | 18.7 |
| CE | 1.7 | 1.5 | |
| Occupancy rate (%) | 96.0 | 96.8 | |
| Customer retention (%) | 76 | 77 | |
| Visibility of customer energy use (%) | 68 | 54 | |
| Corporate and customer carbon emission (tonnes CO2e) | 272,218 | 280,575 | |
| INVESTMENT ACTIVITY REMAINS DISCIPLINED AND FOCUSED ON SECURING PROFITABLE GROWTH (see page 13): | |||
| Capital investment continues to focus on our development programme (through capex and securing land to provide future growth opportunities). Development capex for 2023, including infrastructure, expected to be in excess of £600 million. | |||
| Development capex (£m) | 787 | 6398 | |
| Asset acquisitions (£m) | 155 | 4948 | |
| Land acquisitions (£m) | 712 | 8298 | |
| Disposals (£m) | 367 | 515 | |
| EXECUTING AND GROWING OUR DEVELOPMENT PIPELINE (see page 14): | |||
| Our active and largely pre-let development pipeline remains a key driver of rent roll growth and attractive returns on capital. Potential rent of £86 million from projects currently on site or expected to commence shortly. | |||
| Development completions: | |||
| – Space completed (sq m) | 639,200 | 839,200 | |
| – Potential rent (£m) (Rent secured) | 46 (80%) | 52 (93%) | |
| Average embodied carbon intensity (kgCO2e/m2) | 353 | 391 | |
| Current development pipeline potential rent (£m) (Rent secured) | 67 (73%) | 62 (60%) | |
| Near-term development pipeline potential rent (£m) | 19 | 20 |
OUTLOOK
Our long-standing disciplined approach to portfolio management means that SEGRO has one of the best and most modern pan-European industrial warehouse portfolios, through which we can serve our customers’ entire regional and local distribution needs. Two-thirds of this portfolio is located in Europe’s most attractive urban markets, often in substantial clusters in key sub-markets, where the lack of available land means that supply-demand dynamics are tightest and where long-term growth and returns are therefore likely to be the highest. This is complemented by the remaining one-third of our portfolio, comprising clusters of high-quality logistics warehouses situated at key hubs along major transportation corridors.
Occupier demand for warehouse space across Europe continues to be positive and is derived from a wide variety of customer types. Our space is flexible and can be adapted to suit businesses from many different industries which, when coupled with our relentless focus on customer service through our market-leading operating platform, is reflected in high customer satisfaction and retention rates, as well as our asset management and leasing performance. Our business is therefore both resilient and positioned to support growth sectors and adapt to trends, including e-commerce, the digital sector (data centres), urbanisation and the consequential need for industrial and distribution space close to the end customer from a very broad range of businesses.
Supply and availability of modern, sustainable warehouse space in the locations most desired by occupiers remains extremely limited across Europe. Vacancy levels are at historic lows and supply is likely to remain constrained given recent increases in financing and construction costs. We expect this contrast between positive demand and limited supply to drive further growth in rental levels. We already have £130 million of reversionary potential embedded in the portfolio (most of which will be captured through the five-yearly rent review process), as well as indexation provisions in almost half of our leases, both of which underpin future like-for-like rental income growth even before any further growth in market rental levels.
Our sizeable, mostly pre-let current development programme and well-located land bank, provide us with further potential to grow our rent roll profitably and allows us significant optionality due to the short construction periods of our assets. We will continue to be led by customer demand and our Disciplined approach to capital allocation as we make decisions regarding the execution of future projects.
With modest leverage, a long-average debt maturity of 8.6 years, no near-term refinancing requirements and virtually all of our debt at fixed or capped rates, we have significant financial flexibility to continue to invest capital in the development and acquisition opportunities that offer the most attractive risk-adjusted returns.
Macroeconomic factors caused a sharp correction in interest rates in the second half of 2022, with a consequential impact on real estate volumes, property yields and asset values. As we enter 2023, there are early signs of liquidity returning to the investment markets as investors see value at current levels of pricing. As the path of future interest rates becomes more evident, we believe there is a significant volume of capital ready to be deployed into the industrial and logistics sector due to its attractive fundamentals. We will continue to respond tactically to changes in market conditions, but our long-term strategic focus is to ensure that our properties are of the highest quality and the most sought after, able to generate superior long-term growth, and therefore command a valuation premium.
We will also continue to invest in and de-risk the future of our business via the significant progress we have made with our Responsible SEGRO strategic priorities.
Our prime portfolio and market-leading operating platform combine to create a strong competitive advantage, and position us to create value through the cycle for all of our stakeholders. We therefore remain confident in our ability to deliver attractive returns and continued growth in earnings and dividends into the future.