ii view: e-commerce warehouse play Segro flags rising rental income

Trading update from 1 January to 17 October

Chief executive David Sleath said: 

“Occupier market conditions remain supportive with demand in line with longer-term trends and supply constrained in our chosen sub-markets. This is resulting in continued rental growth.

“We have made good progress with disposals in recent months, although the overall volume of investment market transactions remains subdued due to the evolving macro-economic environment. Reassuringly, investors continue to hold conviction over the attractiveness of the sector, with market evidence from indices and recent transactions pointing to relatively stable asset values in the third quarter.”

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ii round-up:

Warehouse and industrial property owner Segro (LSE:SGRO) today flagged its expectation for a year of strong rental growth as demand for its properties continued.

New rents from the start of the year to mid-October totalled £58 million following good progress made on disposals, with £251 million completed or exchanged year to date. 

Shares in the FTSE 100 company drifted marginally lower in UK trading having fallen by less than 5% year-to-date, although they nearly halved last year. Rival Tritax Big Box Ord (LSE:BBOX) is up by around 2% year-to-date having performed much like Segro in 2022. GP surgery property owner Primary Health Properties (LSE:PHP) is down close to a fifth year-to-date.

Segro owns or manages over 10 million square metres (110 million square feet) of space in the UK and parts of Continental Europe with a value as of late June of £21 billion. 

The Real Estate Investment Trust flagged its focus on profitable development opportunities with £77 million of potential rent from projects currently on land it owns, and which is expected to begin shortly. 

Segro’s net debt rose to £6.2 billion as of late September from £6.07 billion in late June, with the cost of borrowing rising to 3% from a prior 2.9%. Some 89% of group debt is on fixed or capped rates, with no material near-term financing requirements and an average debt-mature of 7.2 years. 

In late July, Segro reported a 1.4% fall in the value of its properties given the challenging economic backdrop, with the adjusted net asset value (NAV) per share falling 3% from the end of 2022 to 937p per share. 

Broker UBS reiterated its ‘buy’ stance on the shares summarising the update as ‘reassuring’. Full-year results are scheduled for 16 February. 

ii view:

Tracing its history back to 1920, Segro today owns and develops urban warehousing and light industrial property. Its properties are in and around major cities and at key transportation hubs in the UK and in seven other European countries including France, Germany and Italy. Just over two-thirds of its income is UK generated with the balance coming from overseas. Group tenants include Amazon.com Inc (NASDAQ:AMZN), Tesco (LSE:TSCO), Ocado Group (LSE:OCDO), Royal Mail owner International Distributions Services (LSE:IDS) and British Airways owner International Consolidated Airlines Group SA (LSE:IAG). 

For investors, the difficult economic backdrop including heightened interest rates continue to overshadow property prices generally. The cost of net debt has risen, if only marginally, overseas operations give scope for currency headwinds, 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 Co (LSE:BLND) at over 6%.

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More favourably, the current share price of around 730p is comfortably below its half-year reported adjusted NAV of 937p per share. Structural themes of e-commerce and urbanisation also continue to underpin occupier demand, the annual dividend payment has risen for close to ten consecutive years fuelled by rising rental income, while potential to expand its property presence in Europe also warrants consideration.  

For now, and despite ongoing risks, this giant of the property sector looks to remain worthy of its place in diversified investor portfolios. 

Positives: 

• Diversity of both customer or tenant type and geographical location
• Close to ten years of consecutive dividend growth

Negatives:

• Uncertain economic outlook
• Rising group net debt

The average rating of stock market analysts:

Strong hold