ii view: Segro shares find support amid robust occupier demand

This major UK and European owner of warehouse and industrial property has halved in value year-to-date. We assess prospects. 

Third quarter and nine-month trading update to 19 October

• Net rents signed of £20 million, down from £26 million in Q3 2021
• Occupancy rate flat year-over-year at 96.7%
• No further material refinancing requirements until 2026 
• Full year development expenditure still expected to be around £700 million

Chief executive David Sleath said: 

“Segro has performed well throughout the third quarter of 2022, delivering excellent operational results with momentum continuing into the final quarter.”

ii round-up:

Warehouse and industrial property owner Segro (LSE:SGRO) today summarised its operational performance as "excellent", with no further material refinancing requirements until 2026 but with property values in retreat. 

Occupancy rates had proved flat year-over-year at 96.7%, with new rents of £20 million signed during the quarter and almost four-fifths of its debt on a fixed or capped interest rate. Less favourably, an outside survey of UK industrial property values pointed to a 10% fall during the quarter. 

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Segro shares rose by around 1% in UK trading having come into this latest trading announcement down by around half year-to-date. That’s similar to FTSE 250 rival warehouse owner Tritax Big Box Ord (LSE:BBOX) and London office owner Workspace Group (LSE:WKP). The FTSE 250 index itself has fallen by just over a quarter in 2022. 

Segro owns or manages over nine million square metres (104 million square feet) of space in the UK and parts of Continental Europe. Around two-thirds of its portfolio is in urban warehouse properties.  Its tenants include the likes of Sainsbury's, Amazon and Tesco-owned Booker. 

FTSE 100 firm Segro continues to invest in its development pipeline with full-year capital expenditure still expected to be around £700 million. Properties under development stand at around 1.3 million square metres representing £118 million of potential future rents. 

Segro’s net debt stands at £5.41 billion with a further 1% rise in benchmark rates from current levels calculated by management to increase the company’s cost of debt by 0.24%.

Full-year results are scheduled for 17 February. 

ii view:

Owner and developer of urban warehousing and light industrial property, Segro’s properties are spread between the Slough Trading estate, Heathrow, Park Royal and the Midlands. Just under 30% of its turnover is generated in Europe, with properties in France, Germany, Poland, and Italy.  

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For investors, a highly uncertain economic outlook including rising interest rates needs to be remembered. Falling property prices and elevated costs for businesses, likely including many of its tenants, also warrant consideration. 

On the upside, the structural themes of e-commerce and urbanisation continue to underpin occupier demand. The balance sheet appears to remain robust, while an estimated future dividend yield of around 4% is attractive. 

On balance, and with the shares now trading at a one-third discount to their EPRA Net Asset Value (NAV) compared to a premium at the start of 2022, long-term investors are likely to stay patient.  

Positives: 

• Diversity of both customer or tenant type and geographical location
• Over five years of consecutive dividend growth

Negatives:

• Uncertain economic outlook
• Some tenants did suffer Covid-19 disruption

The average rating of stock market analysts:

Buy