Brexit yet to hit UK warehouse sector as Segro delivers another year of solid returns

The annual results of Segro were solid, confirming recent trailing trends for the London-based developer, whose shares have appreciated by 117% in the past five years and over 20% since November, giving it a current market cap of about £4bn. 

The surprising outcome of the Brexit vote “has had little apparent impact on occupier and investor demand for well located, modern urban and big box warehouses”, in 2016, Segro said in its annual results released on February 17. It added that the values of UK commercial real estate fell in the aftermath of Brexit but the impact “was relatively minor” for industrial assets compared to other real estate sectors.

Its top-line, as gauged by gross rental income, rose 7% to £225.5m from £210.7m year-on-year, with net rental income rising 4.3% to £180.6m from £173m one year earlier. Net rental income rose by £7.6m thanks to “the positive net impact of investment activity, development completions and the strengthening of the euro during the period, offset by the impact of disposals”.

A solid operating performance led to a rise in adjusted profit after tax, up 11.1% to £152.6m from £137.3m in 2015. Adjusted earnings per share (EPS) and dividends per share rose 7.1% and 5.1%, respectively, comfortably beating domestic and European inflation rates last year – EPS was underpinned by a 4% rise in like-for-like net rental income, low vacancy rates at 5.7% and a strong contribution from development completions.

Segro is particularly focused on sustainable growth that should be achieved based on a sound cost base, which is measured by the total cost ratio (TCR), a key measure of cost management. The TCR for 2016 increased marginally to 23% from 22.2% for 2015. 

Chief Executive David Sleath said: “We have had a record year for development completions, delivering 422,000 sq m of new warehouse space, of which 80% is now let.

“We have a high-quality pipeline of developments under construction and more under discussion, reflecting the continuing strength of occupier demand for, and short supply of, well located, modern urban and big box warehouses,” he added.

SEGRO plc and its UK subsidiaries achieved Real Estate Investment Trust (REIT) status from 1 January 2007. It currently owns, manages and develops modern warehouses and light industrial property totaling over 6m sq m of space valued at £8bn.

Other highlights of the year included “£325m of new equity raised to fund development” and the sale of £565m of non-core assets at a blended 5.9% yield.

Development capex is expected to be in excess of £300m this year, it added.

Source: Transport Intelligence, February 21, 2017

Author: Alessandro Pasetti