ii view: Segro exposed to data-centre boom at a discount

Full-year results to 31 December

• Net rental income up 7% to £628 million
• Adjusted pre-tax profit up 15% to £470 million
• Adjusted Net Asset Value (NAV) unchanged at 907p per share
• Final dividend of 20.2p per share
• Total dividend for the year up 5.4% to 29.3p per share
• Net debt down 17% to £5 billion

Chief executive David Sleath said: 

"We have strong conviction in the enduring structural trends that are driving occupier demand for our space. Our business, with its high-quality, well-located, urban-weighted portfolio, exceptional land bank and strong balance sheet is primed for further growth.”

“Having seen conversations with occupiers pick up pace in recent weeks, we expect leasing and pre-letting activity to increase. This would support attractive, compounding earnings and dividend growth in the medium-term, with significant additional value upside from our data centre pipeline."

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ii round-up:

Property giant Segro (LSE:SGRO) today announced its third-best annual increase in rental income as the UK’s biggest Real Estate Investment Trust (REIT) by stock market value flagged its exposure to growing data centre demand. 

Net rental income for the year to 31 December rose 7% year-over-year to £628 million, with the additional tailwind of lower interest rates pushing adjusted pre-tax profit up 15% to £470 million. Having created Europe's largest hub of data centres in Slough, Segro is now developing a series of potentially fully fitted data centres in Europe.   

Shares in the FTSE 100 company rose 1% in UK trading having come into these latest results down 11% over the last year. That’s similar to office and shop owner Land Securities Group (LSE:LAND) and in contrast to a 15% gain for the FTSE 100 index over that time. 

Segro owns or manages properties worth around £20.3 billion including modern warehouses and industrial properties. A final dividend of 20.2p per share leaves the total dividend for the year up 5.4% to 29.3p per share. 

A year-end adjusted net asset value (NAV) of 907p per share remains unchanged from late 2023. Development completions added £37 million of potential new headline rent, with a further £51 million of potential rent from development projects under construction or in advanced negotiations.

Segro properties are located in and around major cities and at key transportation hubs in the UK and seven other European countries including France and Germany.

Accompanying management outlook comments pointed to confidence in prospects for further growth, with its chosen markets having a shortage of modern, sustainable space, and restrictive planning policies limiting the supply of competing space. 

ii view:

Segro is a UK Real Estate Investment Trust (REIT) with a stock market listing in both London and Paris. The FTSE 100 company owns or manages 10.3 million square metres of space (111 million square feet). Segro tenants come from a range of different industries with Transport and Logistics tenants such as GXO its biggest segment at 23%. That’s followed by Retail, including Amazon.com Inc (NASDAQ:AMZN), at 18%, and Food and General Manufacturers next at 15%. Other well-known tenants include Federal Express, British Airways owner International Consolidated Airlines Group SA (LSE:IAG), Tesco (LSE:TSCO) and Ocado Group (LSE:OCDO). 

For investors, an uncertain economic outlook both in the UK and Europe remains an overhang. An occupancy rate of 94%, although robust, is down from 95% in 2023. Fellow REITs such as British Land Co (LSE:BLND) have now taken an interest in logistical properties, while the forecast dividend yield of under 4.5% is less than that of more office focused rivals such as Land Securities at over 6%.

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On the upside, a current share price of around 732p is below reported adjusted NAV of 907p per share. Exposure to expected growth in data centres now sits alongside the structural themes of e-commerce and urbanisation. The annual dividend payment has risen for more than eight consecutive years, fuelled by rising rental income, while geographical diversity exists given its properties across continental Europe.  

On balance, and despite ongoing risks, this giant of the property sector looks to remain worthy of a place in diversified investor portfolios.  

Positives: 

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

Negatives:

• Uncertain economic outlook
• Increased competition

The average rating of stock market analysts:

Strong hold