ii view: Warehouse owner Segro reports record new rents

Growing e-commerce demand, a progressive dividend and European expansion. We assess prospects.

Full-year results to 31 December

• Adjusted pre-tax profit up 11% to £296.5 million
• Adjusted net asset value (NAV) per share up 16.3% to 814p
• Net debt up 28% to £2.33 billion from December 2019
• Final dividend per share up 5.6% to 15.2p

Chief executive David Sleath said: 

“Segro delivered another strong set of financial results in 2020, with record lettings driven by our customer focus and the increasing demand for prime industrial properties from a wide occupier base.

“The pandemic has reinforced the importance of efficient and resilient distribution networks to facilitate the provision of a wide variety of goods and services, leading to increased demand for warehouse space. 2020 saw a record level of investment for Segro as we seek to capitalise on these favourable trends, giving us confidence in our ability to drive further growth in rental income, earnings and dividends over the coming years."

ii round-up:

Industrial property owner Segro (LSE:SGRO) today reported a 16% jump in the value of assets per share to 814p as demand for e-commerce warehouse space remained elevated under the pandemic. 

The hike beat City forecasts for an improvement nearer to 760p per share and came as Segro secured an annual record in new rents of £77.9 million, up 18% on 2019. 

Segro shares gained more than 1% in UK trading, leaving them up by more than 5% over the last year. Shares of shop and office owners Land Securities (LSE:LAND) and British Land (LSE:BLND) are down around 35% and 18% respectively over the last year. 

Segro remains the biggest real estate investment trust listed on the UK market. Its stock market value of more than £11 billion is bigger than that of the second and third biggest property companies, Land Securities Group and British Land, combined.

The company owns or manages 8.8 million square metres, or 95 million square feet of space, in both the UK and seven other European countries. Its tenants include Sainsbury (LSE:SBRY), Amazon (NASDAQ:AMZN) and Tesco (LSE:TSCO)-owned Booker.

Segro, which marked its 100th birthday back in May, completed 835,900 square metres of new developments during the year, potentially adding £47 million of rent. It also made just over £600 million of asset purchases. It continues to develop and invest in flexible business space along the M3, M4 and M40 corridors from London, along with building a significant position in continental Europe.

Like many companies over the last year, it also announced a series of environment goals. These included a move to becoming net-carbon neutral by 2030 driven by changes in its development activity and the operation of its existing buildings.

Empty properties or vacancy rates remained low at 3.9%, down from 4% in 2019. Aided by heightened demand and a shortage of modern warehouse space. Rental growth and confidence in the outlook both fed into a 5.6% increase in the final dividend – making for a full year increase of 6.8% to 22.1p per share. 

ii view:

Segro’s properties range from modern big box warehouses, used primarily for regional, national and international distribution hubs, to urban warehousing located close to major population centres and business districts. Formerly known as Slough Estates, its Slough industrial park still provides the backbone of its portfolio. 

The company remains underpinned by the structural themes of e-commerce and urbanisation driving occupier demand. Covid-19 looks to have further emphasised the importance of supply chains and the trend towards online retail. 

For investors, Segro’s dividend paying abilities, emanating from its flow of rental payments, arguably provides the key attraction. A historic dividend yield of around 2%, although not huge, is not insignificant in a world of ultra-low and even negative interest rates. Expanding growth in European e-commerce also offers attraction.

But a current premium of the share price at around 980p over its NAV per share of 814p suggests the shares are not obviously cheap, injecting some near-term caution.  

Positives: 

• Diversity of both customer or tenant type and geographical location
• Five or more years of consecutive annual dividend increases

Negatives:

• Some tenants have suffered Covid-19 disruption
• Valuation: trades at a premium to NAV

The average rating of stock market analysts:

Strong hold