ii view: UK property giant Segro bullish about 2024

Full-year results to 31 December

• Adjusted pre-tax profit up 6% to £409 million
• Adjusted Net Asset Value (NAV) per share down 6.1% to 907p
• Final dividend up 4.9% to 19.1p per share
• Total dividend for the year up 5.7% to 27.8p per share
• Net debt up 5% to £4.97 billion

Chief executive David Sleath said: 

“Segro delivered a strong operating performance in 2023, despite the weaker macroeconomic backdrop. Significant rental uplifts on the standing portfolio and our profitable development programme have driven further growth in both earnings and dividends.

“Last year, tighter monetary conditions resulted in a modest, yield-driven valuation decline; however, we are reassured by continued rental growth across our markets. Market expectations for lower interest rates, if sustained, provide a positive backdrop for a recovery of investment market sentiment as the year progresses.”

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ii round-up:

Segro (LSE:SGRO), the UK’s biggest property company, or REIT (Real Estate Investment Trust) by stock market value, today detailed increased rental income and said it was optimistic about the outcome in 2024 given the likelihood of interest rate cuts.

The owner of warehouse and industrial properties announced a 12.5% gain in annual net rental income to £587 million, helping adjusted pre-tax profit rise 6% to £409 million and the total dividend payment for 2023 increase by 5.7% to 27.8p per share. 

Shares in the FTSE 100 company rose 1% in UK trading having risen by close to a fifth in 2023. That’s similar to student accommodation owner UNITE Group (LSE:UTG), ahead of little change at office and shop owner British Land Co (LSE:BLND), and a 4% gain for the FTSE 100 index itself.   

Segro owns or manages properties worth close to £21 billion. Over 400 lease events in 2023 helped generate new rent commitments of £88 million and included a near one-third average uplift on rent reviews and renewals. 

Over the next three years, Segro hopes to increase its passing rents, or the amount which tenants are currently contracted to pay, by half.

Against the backdrop of heightened interest rates, a 4% property valuation decline over 2023 (although better than the 11% fall in 2022), dragged adjusted Net Asset Value (NAV) per share down 6% to 907p per share. 

Broker UBS reiterated its ‘buy’ rating on the shares post the results, highlighting a fair value per share target of 950p. A first-quarter trading update is scheduled for 18 April. 

ii view:

Segro is a UK Real Estate Investment Trust (REIT), with a stock market listing in both London and Paris. Tracing its history back to 1920, today it owns and develops urban warehousing and light industrial property. Its properties are located in and around major cities and at key transportation hubs in the UK and in seven other European countries including France, Germany and Italy. Tenants from a range of different industries include Royal Mail owner International Distributions Services (LSE:IDS), Amazon.com Inc (NASDAQ:AMZN), FedEx Corp (NYSE:FDX), British Airways owner International Consolidated Airlines Group SA (LSE:IAG) and Tesco (LSE:TSCO). 

For investors, the difficult economic backdrop including high interest rates, continues to overshadow property prices generally. Interest rates on its borrowings used to finance development projects increased, values for its European properties fell more than those in the UK, while the forecast dividend yield of close to 4% sits below that of more office focussed rivals such as Land Securities Group (LSE:LAND) and British Land at around 6%.

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On the upside, the current share price of around 844p remains below the latest reported adjusted NAV of 907p per share, and structural themes of e-commerce and urbanisation continue to underpin occupier demand. The annual dividend payment has also risen for more than eight consecutive years, fuelled by rising rental income, while potential to expand its property presence in Europe also warrants consideration.  

On balance, and despite ongoing risks, Segro looks to remain worthy of consideration for diversified portfolios of investors wanting exposure to the UK property sector.  

Positives: 

• Diversity of both customer or tenant type and geographical location
• Progressive dividend payment

Negatives:

• Uncertain economic outlook
• Higher group net debt

The average rating of stock market analysts:

Strong hold