SEGRO progresses operational turnaround

SEGRO, the European-focused industrial property specialist, has made further operational progress during the third quarter.

The FTSE-250 company, with £4.8bn of assets, saw existing space generate new annualised rental income of £2.6m (Q3 2011: £0.3m) and a further £5.5m (Q3 2011: £5.3m) of new annualised rental income from the take-up of developments complete in the period.

There was a slight fall in the vacancy rate, which dropped to 9.0% (June 30th (9.1%), although this rate excludes any impact from Neckermann, which has filed for insolvency and contributes about £12m a year to SEGRO's rental income.

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SEGRO continues to receive rental payments through bank guarantees and expect 2012 Neckermann's rents to be covered by them. It will take back about 8,000 square metres (sqm) of space later this month and expects the company to vacate the rest of the 309,000 facility by February 1st 2013.

The company commented: "We have continued to see reasonable enquiries for new and existing space in most of our core markets although, with many customers continuing to take longer than normal to commit, the amount of new rent contracted in the period was at a similar level to the first two quarters of the year. Against this, the 'take-backs' in the period were significantly down on the first two quarters and on the equivalent period last year. Overall rental levels have generally been stable, with average headline rents continuing to be above the December 2011 valuers' ERV [estimated market rental value] and with rent free incentives remaining under 10% of headline rents."

Its development programme is very active, completing ten developments since the start of July, of which 71% are already let. It also signed three new pre-let developments in the period, totalling 35,500 sqm.

In the year-to-date, 161,500 sqm of new developments were completed, providing expected rental income of £10.9m when fully let.

Across the group, it now has 15 developments contracted or under construction, representing £14.8m of future annualised rental income and £85.3m of future capital expenditure. The development pipeline is 78% pre-let.

Having achieved its full-year disposal target, with the competion of £505m of non-core asset disposals it does not expect a similar pace of disposals to continue over the balance of the year.

Despite Eurozone concerns, its view is that investment market appetite remains strong for high quality industrial assets in the strongest locations in the UK, France, Germany and Poland, and the values of such assets appear to be holding up well. However, demand for secondary assets in less attractive locations continues to be more limited.

As at September 30th, net borrowings were unchanged from June 30th at £2bn. Its weighted average maturity of gross borrowings is 8.7 years, with no significant debt maturities before 2014.

Broker comment

Broker opinions differed slightly on the tenor of these results, although price targets are very similar.

Jefferies, with a 'hold' rating and a price target of 251p, commented: "The IMS [Interim Management Statement] shows robust performance for a company where the market thinks the dividend is at risk (we don't).

"Voids (9.0% vs 9.1%) are reasonable but the underlying leasing mechanics are much improved; net new rent of £2.6m was secured in 3Q12 (3Q11 £0.3m) and developments added £7.3m or £13.4m year-to-date. There was no valuation; prime is well bid while we see secondary values falling but the debate is when valuers recognise this trend."

Investec, with a 'buy' and a price target of 250p, wrote: "Today's statement tone is more upbeat than we have seen for some time, although this is clearly in the context of a difficult macro environment for Segro, and during its non-core asset disposal programme.

"Nonetheless, lettings were healthy, the mainly-pre-let development programme progressed strongly, and acquisitions of prime logistics in France confirm the company's ambitions on its steady-state income-generative strategy."

CM