SEGRO Plc - Results for the six months ended 30 June 2019
Another period of strong performance with good earnings momentum driven by rental growth, active asset management and a record level of developments.
Commenting on the results, David Sleath, Chief Executive, said:
"Momentum has continued throughout our business in the first half of 2019 and we are on track for another strong year. 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.
"As anticipated, the structural trends of e-commerce and urbanisation that have been driving performance in our UK business for some time are now increasingly evident in our Continental European markets.
"Looking ahead, we expect the development programme to generate further significant and profitable new rental income over 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."
· Adjusted pre-tax profit up 19 per cent to £131.8 million (H1 2018: £110.6 million) reflecting record development completions in the period and rental growth captured through active asset management.IFRS profit before tax was £410.8 million (H1 2018: £570.9 million), which includes the impact of the revaluation of the portfolio.
· Adjusted EPS increased 13 per cent to 12.2 pence (H1 2018: 10.8 pence) reflecting the higher adjusted pre-tax profit and an increased number of shares following the equity placing in February 2019. IFRS EPS was 37.1 pence (H1 2018: 55.4 pence).
· EPRA NAV per share increased 4 per cent to 673 pence (31 December 2018: 650 pence), driven by a 3.5 per cent (H1 2018: 5.9 per cent) increase in the value of the portfolio. This was due to development and asset management gains as well as ERV growth across both the UK and Continental European portfolios.
· Future earnings growth underpinned by over 700,000 sq m of development projects under construction or in advanced pre-let discussions capable of generating £50 million of rent, reflecting a yield on cost of 7 per cent, most of which is de-risked through pre-leasing agreements.
· Interim dividend increased by 13.5 per cent to 6.30 pence (2018 interim dividend: 5.55 pence), in line with our guidance to set the interim dividend at one-third of the previous full year dividend.
FINANCIAL AND OPERATING HIGHLIGHTS1
Strong operational performance driven by active asset management and supported by continued good occupier demand
· Secured £33.3 million of new headline rent in the period (H1 2018: £39.8 million). This was driven by new pre-lets of £15.2 million (H1 2018: £30.4 million), net rent roll growth of £8.4 million on the existing space (H1 2018: £1.4 million) and increased lettings of recently completed speculatively developed space.
· 3.7 per cent like-for-like net rental income growth, including 4.3 per cent in the UK and 2.5 per cent in Continental Europe.
· Vacancy rate remains low at 4.8 per cent (31 December 2018: 5.2 per cent) due to the contribution from recently completed, pre-let developments and a high retention rate of 94 per cent with minimal take-backs.
Rental value growth and development uplift resulted in valuation gains across the portfolio
· Portfolio capital valuation surplus of 3.5 per cent (UK 2.3 per cent; Continental Europe 5.8 per cent). Valuation gains primarily driven by asset management, rental value growth (UK: 1.4 per cent; Continental Europe: 1.5 per cent) and development gains with continued yield compression in Continental Europe.
Continuing a disciplined approach to capital allocation to further enhance the portfolio and drive ongoing returns
· Net capital investment of £141 million involving £27 million of asset acquisitions, £220 million in new land and development capital expenditure, offset by £106 million of proceeds from disposals.
· £229 million of further capex to be invested in completing 34 development projects under construction, representing £36 million of potential rent, of which 65 per cent has been secured through pre-lets. Completions in the second half of 2019 will potentially generate £29 million of annual rent, of which £21 million has already been secured.
· Further 'near-term' pre-let projects are expected to commence in the coming months, with potential capex of £125 million and £14 million of associated rent.
· Total development capex for the year is expected to be in the region of £600 million (including land acquisitions), in line with expectations at the time of the equity placing in February.
Balance sheet positioned for further development-led growth, following equity placing and debt refinancing.
· Equity placing of £451 million completed in February 2019, providing capacity to continue to invest in the accretive development pipeline and future land acquisitions.
· Further debt re-financing activity with the repayment of £250 million 5.625 per cent SEGRO bonds due 2020 and the issue of €500 million 1.5 per cent SELP bonds due 2026.
· Look-through LTV ratio of 24 per cent (31 December 2018: 29 per cent) and £1.6 billion of cash and undrawn facilities.
1 Figures quoted on pages 1 to 12 refer to SEGRO's share, 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.
The structural trends that have been driving demand in our markets are still very evident in 2019. As part of this, occupier demand for high quality warehouse and logistics assets should continue to reflect the ongoing need for many of our customers to improve their supply chains, whilst positive investor demand for the asset class should be supported by institutions and others looking to increase their exposure to urban and big box warehousing.
We expect that SEGRO's ongoing property performance will be supported by these themes and driven by our active asset management, rental growth and further development activity. Rental growth will likely be strongest in urban warehousing, where the supportive trends of the technological revolution (including e-commerce) and urbanisation combine, and we are especially well positioned to maximise the potential of this with 64 per cent of our portfolio in these assets. Since 2016 we have been actively increasing our development activity and we enter the second half of the year with a strong pipeline of over 700,000 sq m of developments under construction or in advanced negotiation, the majority of which is de-risked through pre-let agreements. This pipeline, combined with active asset management of our portfolio, should allow us to further increase our net rental income over the coming years, driving sustainable dividend growth.
We remain alert to a variety of potential macro-economic risks, but their impact on our current trading activity has so far remained very limited. As growing numbers of urban-based consumers and businesses demand an increased volume of goods and services delivered to their doors faster than ever before, we believe that the demand for high quality, well-located warehousing will remain strong and are therefore confident about our future prospects.