REG - SEGRO PLC - Final Results - Part 1
Released: 25/02/2010
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SEGRO PLC
25 February 2010
SEGRO PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2009
Resilient financial results
· Net Rental Income up 10.0% to £269.4 million (2008: £244.9 million) and Adjusted Profit Before Tax (recurring rental
profits) up 16.8% to £104.3 million, reflecting inclusion of Brixton results for the last four months of the year.
· Adjusted EPS of 18.3 pence (2008: 29.1 pence), reflecting dilutive effects of rights issue.
· Loss for the year reported under IFRS of £234.1 million (2008: £938.1 million) and basic loss per share of 41.3 pence
(2008: 312.2 pence).
· Adjusted NAV per share of 362 pence (2008: 459 pence - pro-forma) reflects second half investment property valuation
gains of 9.8% in the UK (excluding Brixton assets) and a deficit of 3.1% in Continental Europe; 7.1% valuation uplift on
Brixton assets between date of acquisition and year end.
· Final dividend of 9.4 pence per share making 14.0 pence for the full year (2008: 13.7 pence), in line with previous
guidance. Subject to shareholder approval, a scrip alternative will be offered for the final dividend.
Successful acquisition and integration of Brixton plc ("Brixton")
· £1,111.4 million enterprise value acquisition completed on 24 August 2009.
· Brixton business now fully integrated within SEGRO's operations - annualised cost savings of £12.8 million delivered;
one-off exceptional costs of £10.7 million incurred.
· Sale of Great Western Industrial Estate for £100 million in November represents an uplift of 7.5% over the valuation at
the date of acquisition.
Robust lettings performance despite weak occupancy market
· 465,000 sq m of space let generating annualised rental income of £29.6 million (existing SEGRO portfolio only), (2008:
522,000 sq m and £38.2 million of income). Primarily reflects significantly reduced development activity in Continental
Europe.
· Stable takebacks within existing SEGRO portfolio with 309,000 sq m returned representing annualised income of £20.6
million (2008: 300,000 sq m; £20.6 million).
· Group vacancy rate (by rental value) of 13.5% compared with 10.9% at June 2009 and 9.5% at December 2008, primarily
reflecting inclusion of the Brixton portfolio.
· UK portfolio vacancy, excluding Brixton assets, of 10.8% compared with 10.3% at June 2009 and 9.1% at December 2008.
Increase reflects disposals of let assets during 2009.
· Brixton portfolio vacancy of 22.1% compared with 20.6% at June 2009. Increase reflects sale of Great Western Industrial
Estate and net takebacks. Encouraging start to 2010 with momentum building up in the lettings pipeline.
· Continental European portfolio vacancy of 10.7% compared with 12.1% at June 2009 and 10.1% at December 2008. H2 2009
improvement reflects letting success with improved occupancy particularly in Poland, Czech Republic and Belgium since the
half year.
· Takebacks from insolvency at modest levels and better than expected at 1.6% of the rent roll (2008: 1.2%). A further
1.9% is represented by tenants in administration but still in occupation.
Prudent management of the Group's financial position
· Reduced development expenditure for the year of £191.5 million (2008: £323.2 million).
· £436.5 million of net proceeds from property and joint venture disposals (including £318.6 million completed in the
second half).
· Renegotiation of bank gearing covenants in February, £500 million rights issue completed in April and placing and open
offer for £242 million in July to underpin the Brixton acquisition.
· Weighted average debt maturity extended to 9.5 years through the £300 million 12-year bond issued in November, £100
million of new bank facilities, extension of £270 million of existing bank facilities and cancellation of £550 million of
short term facilities.
· Net debt of £2,420.1 million (2008: £2,495.8 million), with cash and undrawn bank facilities of £824.5 million. Adjusted
gearing ratio of 91.0% (2008: 119.0%).
Well positioned to benefit from a recovery in occupancy markets
· Potential rental income associated with empty properties of approximately £56 million (based on current ERVs) with a
further £21 million of empty property costs.
· Longer term, substantial land bank of 520 hectares (1,285 acres) has the capacity to develop up to 1.8 million sq m of
business space, generating annual rental income of approximately £147 million when fully let.
Ian Coull, Chief Executive, commented:
"2009 was one of the most extraordinary years in SEGRO's 89 year history.
Faced with the twin headwinds of rapidly falling asset prices and a weakening global economy at the start of the year, with
the support of our shareholders we weathered the storm, and completed the transformational acquisition of Brixton.
Whilst UK commercial property prices have surprised on the upside in the last quarter of the year and the situation in
Continental Europe appears to be stabilising, we remain cautious about occupier markets, particularly in the UK where we
expect the wider economy to lag much of the Continent for the coming year at least. Nonetheless, the Group is in a strong
position and is well placed to benefit from any recovery.
Our focus remains on staying close to our customers to minimise take-backs, leasing vacant space, financial and risk
management and continuing to seek further opportunities to capitalise on the present market conditions."
CONFERENCE CALL FOR INVESTORS AND ANALYSTS
At 9:30 AM today BST a live webcast results presentation will be available from SEGRO's website at:
http://www.segro.com/segro/Investors/Investors-Home.htm
A conference call facility also will be available to listen in at 09.30 hours on the following number:
Dial in: +44 (0) 203 037 9101
From midday the conference call will be available on a replay basis on the following number:
Replay Phone Number: +44 (0) 208 196 1998
Access Code: 3324776
CONTACT DETAILS FOR INVESTOR / ANALYST AND MEDIA ENQUIRIES RESPECTIVELY:
SEGRO Siva Shankar Tel: + 44 20 7399 4500
The Maitland Consultancy Liz Morley Tel: + 44 20 7379 5151
Liz Morley
Tel: + 44 20 7379 5151
Subject to shareholder approval at the AGM, a scrip dividend will be offered for future dividends. The timetable for the
2009 final dividend timetable will be as follows:
Ex Dividend Date 31 March 2010
Calculation Period for the Middle Market Price 31 March - 8 April 2010
Record Date 6 April 2010
Middle Market Price available and announced 9 April 2010
Final Date for Election 14 April 2010
AGM 29 April 2010
Payment Date 6 May 2010
AGM
29 April 2010
Payment Date
6 May 2010
The terms used in this report are defined in the Glossary of Terms at the end of this release.
Neither the content of SEGRO's website nor any other website accessible by hyperlinks on SEGRO's websites is incorporated
in, or forms, part of this announcement.
Forward-looking statements: This announcement may contain certain forward-looking statements with respect to SEGRO's
expectations and plans, strategy, management objectives, future developments and performance costs, revenues and other
trend information. These statements and forecasts involve risk and uncertainty because they relate to events and depend
upon circumstances that may occur in the future. There are a number of factors which could cause actual results or
developments to differ materially from those expressed or implied by these forward-looking statements and forecasts.
Certain statements have been made with reference to forecast price changes, economic conditions and the current regulatory
environment. Any forward-looking statements made by or on behalf of SEGRO speak only as of the date they are made. SEGRO
does not undertake to update forward-looking statements to reflect any changes in SEGRO's expectations with regard thereto
or any changes in events, conditions or circumstances on which any such statement is based. Nothing in this announcement
should be construed as a profit forecast. Past share performance cannot be relied on as a guide to future performance.
Summary Financial Statement Tables
INCOME STATEMENT
2009 2008
Net rental income (£m) 269.4 244.9
Adjusted profit before taxation 1 - recurring rental profits (£m) 104.3 89.3
Realised (losses)/profits on disposals of property and investment in joint ventures 2 (£m) (41.2) (6.9)
Unrealised property valuation losses 2 (£m) (287.9) (979.6)
Loss after taxation (£m) 234.1 938.1
Unrealised property valuation losses 2 (£m)
(287.9)
(979.6)
Loss after taxation (£m)
234.1
938.1
BALANCE SHEET
31 December 2009 31
December 2008
Total properties, including share of joint ventures (£m) 5,314.2 4,821.7
Net assets excluding minority interests (£m) 2,592.5 2,007.5
Adjusted net assets (£m) 3 2,652.6 2,094.9
Net assets per share (pence) 4 354 668
Adjusted diluted net assets per share (pence) 3,5 362 698
Net debt (£m) 2,420.1 2,495.8
Debt to equity 6 (%) 91.0 119.0
Loan to value 7 (%) 47.0 53.3
Net debt (£m)
2,420.1
2,495.8
Debt to equity 6 (%)
91.0
119.0
Loan to value 7 (%)
47.0
53.3
1. Profit before tax based solely on recurring rental profits - excludes realised and unrealised property gains or losses
from investment, development, owner occupied and trading properties, fair value of derivatives gains or losses, other
investment income or loss and exceptional items.
2. Including amounts in respect of investment and development properties, trading properties and disposals of the Group's
investment in joint ventures.
3. Shareholders' funds adjusted to add back deferred tax associated with investment and development properties.
4. The comparative period's NAV per share has been restated following the rights issue on 7 April 2009 and the share
consolidation effective from 31 July 2009. Further information on this is included within the Financial Review.
5. NAV per share adjusted to add back deferred tax associated with investment and development properties and to reflect the
dilution caused by shares held on trust for employee share schemes.
6. Net debt as a percentage of net assets adjusted to add back deferred tax associated with investment and development
properties.
7. Net debt as a percentage of the total property portfolio excluding joint ventures.
Analysis of Investment Properties 1
Valuation Valuation gain/(loss) 2 Topped-up True equivalent
Year H2 net initial yield 3 yield
£m % % % %
UK by asset type
Logistics warehousing 166.3 (1.8) 4.7 5.9 8.0
Industrial 2,503.5 (2.1) 8.3 6.6 8.4
Offices 471.9 (2.2) 12.5 7.7 8.1
Retail 30.0 1.9 15.4 7.2 7.7
Total UK 3,171.7 (2.1) 8.9 6.8 8.4
UK by geographical territory
Thames Valley 1,189.8 (3.9) 9.8 7.3 8.4
London 1,286.2 1.1 9.7 5.9 7.9
National Markets 695.7 (4.4) 6.0 7.6 9.1
Total UK 3,171.7 (2.1) 8.9 6.8 8.4
Continental Europe by asset type
Logistics warehousing 654.3 (11.5) (4.3) 7.5 8.6
Industrial 427.0 (8.7) (1.7) 7.0 8.3
Offices 151.6 (9.3) (2.5) 6.7 7.0
Retail 26.0 14.0 (0.2) 6.6 6.5
Total Continental Europe 1,258.9 (9.9) (3.1) 7.2 8.1
Continental Europe by Country
Germany 319.1 (9.6) (1.5) 7.6 8.1
Belgium 205.8 (9.7) (2.5) 7.0 7.1
The Netherlands 76.7 (8.6) (3.7) 7.6 8.8
France 344.7 (10.3) (4.4) 6.5 8.4
Spain 1.1 (15.4) (11.0) 9.0 5.9
Italy 94.6 (4.0) (3.9) 6.6 7.1
Poland 182.0 (11.3) (4.0) 7.7 8.8
Czech Republic 34.9 (17.7) 2.7 8.2 9.7
Total Continental Europe 1,258.9 (9.9) (3.1) 7.2 8.1
Group Total - Investment Properties 4,430.6 (4.4) 5.5 6.9 8.3
76.7
(8.6)
(3.7)
7.6
8.8
France
344.7
(10.3)
(4.4)
6.5
8.4
Spain
1.1
(15.4)
(11.0)
9.0
5.9
Italy
94.6
(4.0)
(3.9)
6.6
7.1
Poland
182.0
(11.3)
(4.0)
7.7
8.8
Czech Republic
34.9
(17.7)
2.7
8.2
9.7
Total Continental Europe
1,258.9
(9.9)
(3.1)
7.2
8.1
Group Total - Investment Properties
4,430.6
(4.4)
5.5
6.9
8.3
Notes
1 Excludes assets in the course of construction, land, trading properties and assets held within joint ventures
2 Includes Brixton since date of acquisition. Excluding Brixton, the UK H209 gain would be 9.8%.
3 Net initial yield adjusted to include notional headline rent in respect of let properties which are subject to a rent
free period at the valuation date.
Further details of the Group's property portfolio can be found on the Group's website at:
www.SEGRO.com
Lettings & Other Property Data
Lettings Analysis
Area (000's sq m) Rent pa (£m) 1
Lettings 2009 Lettings 2008 Space Returned 2009 Space Returned 2008 Lettings 2009 Lettings 2008 Space Returned 2009 Space Returned 2008
UK 2
Lettings of new developments 41.4 52.7 7.6 8.6
Existing vacant 134.2 125.9 8.6 8.3
UK Total 175.6 178.6 299.7 166.8 16.2 16.9 20.4 11.9
Continental Europe
Lettings of new developments 169.5 262.9 8.5 16.0
Existing vacant 136.8 80.0 6.3 5.3
Continental Europe Total 306.3 342.9 75.4 133.3 14.8 21.3 4.5 8.7
Group Total 481.9 521.5 375.1 300.1 31.0 38.2 24.9 20.6
133.3
14.8
21.3
4.5
8.7
Group Total
481.9
521.5
375.1
300.1
31.0
38.2
24.9
20.6
1. Annualised rent, after the expiry of any rent free periods.
2. Includes Brixton since date of acquisition.
Vacancy Analysis
By rental value
Completed Investment Properties 31-Dec-09 % 30-Jun-09 % 31-Dec-08 %
UK (excluding Brixton)
- Investment properties 10.7 10.5 9.3
- Trading properties 12.1 11.6 27.0
- Share of joint ventures 10.7 2.6 0.2
Total 10.8 10.3 9.1
Brixton portfolio
- Investment properties 23.6 22.1
- Trading properties - -
- Share of joint ventures 0.8 8.7
Total 22.1 20.61
Continental Europe
- Investment properties 11.5 12.7 10.8
- Trading properties 7.1 9.5 4.8
- Share of joint ventures 4.9 4.9 21.1
Total 10.7 12.1 10.1
Group total
- Investment properties 14.2 11.3 9.8
- Trading properties 7.4 9.6 6.4
- Share of joint ventures 3.1 3.1 5.1
Total 13.5 10.91 9.5
Total
10.7
12.1
10.1
Group total
- Investment properties
14.2
11.3
9.8
- Trading properties
7.4
9.6
6.4
- Share of joint ventures
3.1
3.1
5.1
Total
13.5
10.91
9.5
1. Brixton portfolio excluded from 30 June 2009 Group total vacancy figures.
Lease Expiries & Break Options
Passing rent subject to lease expiry or break options (investment and trading properties) 2010 (£m) 2011 (£m) 2012 (£m) 2013 (£m) 2014 (£m)
Lease Expiries
UK 18.3 11.5 15.0 19.6 16.5
Continental Europe 4.4 3.0 8.0 9.7 4.5
Group Total 22.7 14.5 23.0 29.3 21.0
Break Options
UK 12.1 15.5 12.3 8.8 4.1
Continental Europe 9.1 8.2 12.8 11.5 9.4
Group Total 21.1 23.7 25.1 20.3 13.5
UK
12.1
15.5
12.3
8.8
4.1
Continental Europe
9.1
8.2
12.8
11.5
9.4
Group Total
21.1
23.7
25.1
20.3
13.5
Note: Included within the lease expiries from 2010 to 2014 is approximately £18m at rental income which has also been
included in the amounts subject to break option.
Chief executive's review
Overview of 2009
Faced with the twin headwinds of rapidly falling asset prices and a weakening global economy at the start of 2009, with the
support of our shareholders, we weathered the storm and completed the transformational acquisition of Brixton.
However, rather than being a 'game of two halves', 2009 was, in fact, a year comprised of four very different and distinct
quarters.
The first quarter was characterised by concerns over the wider economy causing customers to freeze any plans they
previously had for taking on new space and, wherever possible, occupiers reduced or consolidated their space commitments.
Meanwhile the investment market continued the free fall which commenced after the collapse of Lehman Brothers in September
2008 with the IPD property derivatives market suggesting that further falls in asset prices of 30 per cent could be seen in
2009. For SEGRO and, indeed, most companies in the sector, our priority became to ensure the Group was able to withstand
whatever the downturn threw at us. We completed a renegotiation of our banking covenants in February to provide further
headroom against such valuation falls, and this involved discussions with over 20 different banks and syndicate members. At
the beginning of March, having consulted major shareholders, we launched a fully-underwritten rights issue in order to
raise £500 million (net) of new equity and so provide the protection against what we felt was a "worst case" scenario.
We completed the rights issue at the start of the second quarter and, soon thereafter, it became clear that Brixton, our
long term UK competitor, was in financial difficulty. Having carefully considered the situation as well as the potential
difficulty in approaching our shareholders for equity for a second time within four months, we concluded this was an
opportunity too good to allow to pass by. Accordingly, we approached the Brixton board in May and, after considerable due
diligence, we launched our formal offer to buy the company on 9 July 2009.
During these first two quarters the general economic environment continued to decline and we saw asset prices fall
significantly. Our portfolio declined in value by 13.7 per cent in the UK making a 'peak to trough' fall of 43 per cent and
by 7.2 per cent in Continental Europe. However, our operating teams remained focused on their key priorities and we were
able to report a very good operating performance for the first half of the year. Achieving a sale of almost any asset was
extremely difficult with so few buyers willing to invest, but we nonetheless managed to dispose of properties for net
proceeds of £118 million in that period.
The third quarter saw the Group complete the Brixton acquisition, along with an equity placing and open offer which raised
net proceeds of £242 million and which allowed the enlarged Group to maintain the same balance sheet strength as had been
the case immediately after the rights issue. With the Brixton acquisition, we acquired a high quality, well located
portfolio in some of our core markets, completed at the bottom of the UK property market cycle. We were also able to
strengthen significantly the overall team by integrating SEGRO and Brixton employees. By the end of the third quarter, we
had integrated the two companies and introduced a new organisational structure resulting in a lower UK headcount than SEGRO
alone had prior to the acquisition. Through this carefully planned and well executed integration process, we secured the
cost synergies announced at the time of the offer to acquire Brixton. I am convinced this acquisition represents a rare,
transformational opportunity for our business which, in time, will show tremendous benefits for our shareholders.
Whilst the general economy and occupier market conditions remained weak throughout the third quarter, we continued to focus
on our customers and delivered satisfactory leasing results, albeit below the equivalent period in 2008. Meanwhile,
somewhat earlier than we had anticipated, the investment market showed the first signs of a recovery, with the UK IPD
monthly index registering a 1.1 per cent increase for September, the first improvement in the index since June 2007. We
took advantage of these improving investment market conditions by completing £158 million of asset disposals in the
quarter.
The final quarter of the year saw a continuation of the recovery in the investment market, with the UK IPD quarterly index
reporting an 8.1 per cent surge in property values (6.7 per cent for industrial assets), one of the best quarters since
IPD's records began. Our own UK portfolio which is valued every six months showed a 9.8 per cent improvement over the
second half of the year (excluding the Brixton assets) and our Continental European portfolio, where the market has been
lagging the UK, reported a decline of just 3.1 per cent which was smaller than we had anticipated.
The trigger for the turnaround in the investment market appears to have been the aggressive monetary policy stimulus put in
place by UK, US and Euro-zone monetary authorities in the early part of the year which, in turn, contributed to a
stabilisation of economic indicators and a sharp bounce back in world equity markets. This led to an improvement in the
relative attractiveness of property and a growing belief that, despite higher vacancy rates and downward pressure on rental
values, commercial property values had fallen too far, at least for prime stock. Although the availability of debt finance
has remained limited, demand for property has been boosted by exceptionally low short term interest rates which have led
investors to increasingly switch out of cash and into property to take advantage of higher yields.
With the improved investment market conditions, we continued to press ahead with our plans to dispose of assets that no
longer offered us significant upside. We completed £161 million of sales including Great Western Industrial Estate out of
the Brixton portfolio and our 50 per cent share of the shopping centre joint venture we had with Tesco for net proceeds of
£25 million. Meanwhile occupier markets remained challenging during the fourth quarter, particularly in the UK where we saw
increased takebacks. However, more encouragingly, evidence that some of the main European economies have already pulled
themselves out of recession, was supported by a good lettings quarter in our Continental European business.
2009 Performance Delivering against our stated priorities
In the context of this difficult economic backdrop and somewhat volatile investment market, I am very pleased to be able to
report progress made against the priorities we set out to achieve at the start of the year. These were to stay close to our
customers, to continue recycling capital by selling mature and non-core assets, to manage the Group's financial position
and to capitalise on the economic environment. Following the acquisition of Brixton, we can report good progress on the
additional priorities of integrating the two businesses and delivering the promised synergies.
Staying close to our customers
Staying close to our customers and delivering high levels of customer service is critical to our retention rates at lease
expiry or break option and to our leasing success; it also helps us to manage situations where customers are facing
financial difficulties.
Despite reduced enquiry levels and a much reduced development programme, we have achieved robust letting figures for the
year, delivering £29.6 million of annualised rental income in 2009, from the letting up of 465,000 sq m (2008: £38.2
million of annualised rental income in 2008 from letting up of 522,000 sq m). Whilst the economic environment meant that
many customers have been looking to reduce their costs and consolidate space, our overall income retention rates for the UK
held up relatively well at 52 per cent compared with 64 per cent in 2008. Take-backs over the year amounted to 309,000 sq m
in total (2008: 300,000 sq m) representing £20.6 million of annualised rental income (2008: £20.6 million). Note: all these
amounts exclude the Brixton portfolio which is discussed separately below.
Within the takeback figures, customer insolvencies have been lower than we expected at the start of the year. Although the
loss of 49 customers and £5.9 million of annualised rental income (representing 1.6 per cent of the total rent roll) is an
increase compared to recent years, most of this is attributable to a small number of cases where the amounts involved were
relatively large.
At year end, our vacancy rate by rental value for the Group was 13.5 per cent compared to 10.9 per cent at 30 June 2009 and
9.5 per cent at December 2008. Excluding the Brixton portfolio the underlying group vacancy rate was 10.7 per cent at year
end. In the UK, the existing portfolio (excluding Brixton) has seen the vacancy rate increase from 10.3 per cent as at 30
June 2009 to 10.8 per cent, mainly as a result of disposals (1.1 per cent impact) and takebacks. In Continental Europe, the
vacancy rate has decreased from 12.1 per cent at 30 June 2009 to 10.7 per cent as a result of lettings successes
particularly in Belgium, Czech Republic and Poland.
The biggest impact on our overall vacancy rate has been the addition of the Brixton assets which had a vacancy rate of 20.6
per cent as at 30 June 2009, which has increased to 22.1 per cent as at 31 December 2009. This increase is mainly due to
the impact of the sale of Great Western Industrial Estate and to net takebacks equivalent to annualised rental income of
£2.9 million.
We have made good progress since the start of the new year applying SEGRO's approach to the Brixton portfolio and achieving
a number of letting successes. Given the high quality and location of the assets and the more pragmatic approach now being
taken by our leasing teams, we are confident that we will reduce the vacancy rate in the Brixton portfolio to 15 per cent
within three years of the acquisition.
Capital recycling
As described earlier, throughout the year we continued to recycle capital from mature or non-core assets. In total, the
Group generated net sales proceeds of £395 million from the disposal of investment properties, at an average net initial
yield of 8.3 per cent. In addition, we generated £10 million of proceeds from land sales, £7 million of proceeds from
trading sales and £25 million net, from the sale of the Group's joint venture interest with Tesco.
Financial and risk management
Maintaining the Group's balance sheet strength has been a key priority, particularly in light of the declining market
conditions in the first half of the year and the forecasts from several sources which suggested a further substantial
deterioration over the balance of 2009 and 2010. Accordingly, we strengthened our position by renegotiating our banking
covenants, completing a £500 million rights issue, raising further equity of £242 million (net) to underpin the Brixton
acquisition, negotiating £100 million of new bank facilities, extending £270 million of existing bank facilities, and
cancelling £550 million of short term facilities. Finally, in November, we became the first real estate company to re-enter
the corporate bond market, with the issuance of a £300 million, and a 12 year unsecured bond, further details of which can
be found in the Financial Review.
In addition to generating liquidity from the disposals referred to above, we significantly reduced our exposure to
speculative development. Development activity was and continues to be focused on pre-lets with no new speculative
developments started during 2009. Our total development expenditure in the year amounted to £192 million, which compares to
£323 million in 2008 and £367 million in 2007 and our remaining commitments at 31 December 2009 amount to £28 million
(including £7 million of commitments relating to land purchases).
Capitalising on the current economic environment
At the start of the year, we indicated that we would look for opportunities presented by the market environment, although
we did not expect to be making any significant investments until the latter part of the year at the earliest. However, the
opportunity to acquire Brixton represented a unique opportunity to transform and strengthen our UK business and,
accordingly, we moved swiftly to consider and, ultimately, complete the acquisition.
Brixton integration
Following the acquisition, we added a new business priority of integrating the two businesses and delivering the promised
synergy savings. We have delivered the integration ahead of expectations at the time of the acquisition.
Outlook and Future Potential
As we look ahead into 2010 and beyond, the key questions we and many of our shareholders are asking are first, whether the
recovery in property investment markets in the UK will be sustained and whether it will be replicated on the Continent; and
second, what the prospects are for a recovery in occupancy markets and for industrial rents.
I believe the answers to these questions depend largely on the speed of recovery of the underlying economies and on the
fiscal and monetary policies of the main European governments. It has to be noted that whilst some of the main Western
European economies already appeared to be out of recession by the start of the fourth quarter, the recovery appears fragile
and there are threats to the stability of the Euro zone economies posed by the fiscal deficits of some of the Southern
European countries. Meanwhile the UK barely grew in the fourth quarter of 2009 and our expectation is that it will continue
to lag much of the Continent, at least for the balance of this year.
During 2010, we expect most of the countries in which we operate to continue their slow recovery, but with substantial
amounts of industrial vacancy, particularly amongst the larger logistics warehouses, it is likely to be some time before we
see overall demand for space outstripping supply. Whilst industrial rents have remained relatively resilient to date, we
expect to see modest falls continuing across most of the UK and Europe in the first part of 2010.
Regarding property values, IPD Industrial yields in the UK have already compressed by some 70 basis points since the trough
in the market last summer and it seems unlikely they will contract much further unless supported by a pick up in rents.
Indeed, faced with potentially rising interest rates, there must be some scope for yields to expand at some stage over the
next year. Meanwhile, the Continental European commercial property market has also shown signs of turning a corner towards
the end of 2009 with yields beginning to stabilise after suffering a later and softer landing than in the UK.
In terms of SEGRO's own prospects, we have a good quality, well located portfolio which is well placed to benefit from any
recovery in the underlying markets and continues to benefit from a strong tenant base. The Group's largest near-term
opportunity is from letting up vacant space, particularly within the Brixton portfolio and we are very focused on making
progress here. The current level of vacancy within the Group's entire portfolio represents a potential £56 million per
annum of additional rent with corresponding potential annualised vacant property cost savings of approximately £21 million.
Whilst it is not realistic to expect all of this space to become occupied, if the Group were able to reduce the annual
vacancy rate of the enlarged portfolio to the Group's recent historic trend level of around 10 per cent, we estimate this
could be worth an additional net rental income (including empty property cost savings) of some £23 million per annum.
Further out, our 520 hectare (1,285 acre) land bank offers both design-and-build and speculative development opportunities.
The pre-let market is showing signs of renewed activity after a slow 2009 and we are well-positioned to provide flexible
business space solutions to office, industrial and data centre markets. One of the strengths of the industrial asset class
is that development pipelines can be adjusted quickly compared to office and retail, because of relatively short lead-times
of six to nine months to completion for industrial projects. We are in active discussions with several potential customers
regarding pre-letting opportunities. As and when the demand-supply balance appears attractive, we will look to re-start
speculative development on a very selective basis.
In the near-term, however, we will complete our existing developments and strive to secure new pre-lets.
We currently have approximately 39,000 sq m under development and a further 10,000 sq m of committed development starts (of
which 71 per cent is pre-let), which is expected to generate income of £10.5 million per annum with remaining expenditure
to be incurred of approximately £21 million.
In conclusion, whilst markets have come a long way in the last 12 months, the recovery is still in its early stages. We
look forward to 2010 with considerably more optimism than was the case a year ago, but our priorities remain largely
unchanged:
· continue to stay close to our customers and minimise the portfolio vacancy level;
· ongoing financial and risk management;
· deliver further capital recycling in tandem with identifying attractive reinvestment opportunities, particularly pre-let
development; and
· continue to look selectively for other investment opportunities presented by the current market conditions.
Overall, it has been a momentous year for the industry and for our Group, and one that positions us positively for the
future. I am more confident than ever that we have a robust business model, an excellent portfolio and, most importantly,
the people with the right skills, capabilities and commitment to drive this Company forward.
Ian Coull, Chief Executive
Financial review
2009 was a year of significant corporate financial activity for SEGRO which leaves the Company well positioned for the
future.
bank covenant renegotiation
On 25 February 2009 the Group concluded a renegotiation of the gearing covenant contained within its banking agreements to
permanently increase the limit from 125 per cent to 160 per cent in order to provide additional financial flexibility. As
part of the agreements, SEGRO paid a one-off fee of £8.6 million and the weighted average margin over LIBOR and EURIBOR was
increased by 110 basis points over the previous levels.
£500 mILLION rights issue
On 4 March 2009, SEGRO announced a rights issue to raise £500 million (net of expenses) by issuing 5,240.7 million new
ordinary shares (pre share consolidation) at 10 pence per share on the basis of 12 new ordinary shares for every existing
ordinary share. The rights issue was approved by shareholders at the General Meeting held on 20 March 2009 and proceeds
were received in April 2009. The proceeds of the issue were used to pay down debt, although a significant proportion of
these facilities still remain available to be re-drawn if required.
Share consolidation
SEGRO completed a share consolidation on 31 July 2009, consolidating and re-classifying each 10 existing shares of the
Company of 1 pence each into 1 new share of 10 pence each. The purpose of this exercise was to establish an appropriate
number of shares in issue and likely share price for a company of SEGRO's size.
Acquisition of Brixton plc and placing and open offer
On 22 June 2009, SEGRO announced that agreement had been reached with Brixton for an offer to acquire the entire issued
share capital (271.7 million shares) on the basis of 0.175 SEGRO shares for each Brixton share. SEGRO's closing share price
on this date was 227.5 pence, reflecting an offer price of £108.2 million.
On 9 July 2009, both Boards approved the offer and SEGRO completed the acquisition of Brixton on 24 August 2009, at which
time the closing share price was 365.5 pence, resulting in consideration paid of £173.8 million, with a further £13.0
million of transaction costs incurred.
The book value of Brixton's net assets have been adjusted to reflect their fair value at the date of acquisition and
details of the fair value adjustments are outlined in note 4 to the Accounts. After fair value adjustments, Brixton's net
assets at the acquisition date were £195.4 million and the resulting gain of £8.6 million has been recognised in the income
statement.
One-off integration costs of £10.7 million were incurred during 2009 in relation to the acquisition of Brixton, broadly
consistent with the estimate of £11.0 million included in the Prospectus. £7.8 million of integration costs have been
included in the income statement at 31 December 2009, classified as exceptional administration expenses, with £2.9 million
included within Brixton's net assets acquired.
Annual synergy cost savings of £12.8 million have been delivered, slightly above the £12.0 million estimate made in the
Prospectus.
In conjunction with the acquisition of Brixton, SEGRO raised £241.7 million (net of expenses) by way of a placing and open
offer to maintain the enlarged Group's financial flexibility and covenant headroom at the levels achieved following the
rights issue in April 2009. The placing and open offer was fully subscribed, with 119 million shares issued at a price of
210 pence and trading of these shares commenced on the London Stock Exchange on 31 July 2009.
Analysis of movement in net asset value (NAV) in the year
Adjusted diluted NAV per share at 31 December 2009 was 362 pence, compared with 459 pence as at 31 December 2008 on a pro
forma basis adjusting for the effects of the rights issue as if it had occurred on 31 December 2008 (refer below). The
reduction from 31 December 2008 is largely as a result of the decline in property values in the first half of the year.
£m Number of shares Pence per share
Adjusted equity attributable to shareholders at 31 December 2008 as reported in the 2008 annual report(1) 2,094.9 434.6 482
Adjusted equity attributable to shareholders at 31 December 2008 restated for the discount element of the rights issue and share consolidation(1) 2,094.9 698
Rights issue 499.7 524.0 95
Pro forma adjusted equity attributable to shareholders as if the rights issue had occurred as at 31 December 2008(2) 2,594.6 566.2 459
Movements to 30 June 2009
Realised and unrealised property losses (507.5) (90)
Adjusted profit before tax - recurring rental profits 49.1 9
Dividends (23.4) (4)
Exchange (54.8) (10)
Other (62.8) (11)
Adjusted NAV at 30 June 2009 1,995.2 566.2 353
Placing and open offer 241.7 119.0 203
Brixton acquisition 195.4 47.6 411
Pro forma adjusted equity attributable to shareholders as if the placing and open offer and Brixton acquisition had occurred at 30 June 2009 (3) 2,432.3 733.0 332
Movements 30 June 2009 to 31 December 2009
Realised and unrealised property gains 163.5 22
Adjusted profit before tax - recurring rental profits 55.2 8
Dividends (31.6) (4)
Exchange 19.3 3
Other 13.9 1
Adjusted equity attributable to shareholders at 31 December 2009 2,652.6 733.0 362
Adjusted profit before tax - recurring rental profits
55.2
8
Dividends
(31.6)
(4)
Exchange
19.3
3
Other
13.9
1
Adjusted equity attributable to shareholders at 31 December 2009
2,652.6
733.0
362
1. The 2008 adjusted net assets per share calculation has been restated in the accounts following the rights issue and the
share consolidation in order to provide a comparable basis for the current year. The adjustment factor for the rights issue
is 6.92, which adjusts for the discount element of the rights issue. Further information on this is included in note 13.
2. In order to aid comparison with the 2009 year end position, the net proceeds from the rights issue of £499.7 million
have been added to the actual adjusted equity attributable to shareholders at 31 December 2008 and the adjusted net assets
per share at that date has been calculated using 566.2 million shares, which incorporates the number of shares issued as
part of the rights issue (net of own shares held).
3. The pro forma adjusted equity attributable to shareholders in relation to the placing and open offer and the Brixton
acquisition incorporates the Brixton net assets acquired of £195.4 million and the net proceeds from the placing and open
offer of £241.7 million into the net asset value and also adjusts for the new shares issued in relation to both those
events as if they had occurred on 30 June 2009.
A reconciliation between adjusted equity attributable to shareholders and total shareholders' equity is provided in note
13.
property valuation movements
Property losses of £344.0 million (2008: £970.6 million) are analysed in note 7 to the Accounts and include unrealised
losses of £289.9 million (2008: £963.7 million) and realised losses of £54.1 million (2008: £6.9 million).
Unrealised losses include valuation deficits on investment, development and owner occupied properties of £273.8 million
(2008: £959.7 million) and impairment provisions of £16.1 million (2008: £4.0 million) on certain trading properties as the
fair value is deemed to be less than the original cost. Realised losses include losses on sale of investment properties of
£54.7 million (2008: £34.8 million) offset by profits from the sale of trading properties of £0.6 million (2008: £27.9
million).
The Group's trading property portfolio has an unrealised valuation surplus of £27.1 million at 31 December 2009 (including
share of joint ventures), which has not been recognised in the financial statements.
Total property return
Total property return is a measure of the ungeared return from the portfolio and is calculated as property gains and losses
(both realised and unrealised) plus net rental income, expressed as a percentage of capital employed.
Total property return for 2009 was -1.0 per cent, a significant improvement on the return in 2008 of -14.9 per cent and is
attributable to lower valuation deficits during the year. Excluding Brixton, total property return would have been -3.8 per
cent.
Adjusted profit before tax and earnings per share (EPS )
As recommended by the European Public Real Estate Association ("EPRA"), the Group has for a number of years presented
adjusted profit before tax and adjusted earnings per share figures in addition to the amounts reported under IFRS. These
amounts have excluded the effects of gains and losses associated with investment properties and certain financial
derivatives, exceptional items and taxes associated with such items. The Directors regard the presentation of adjusted
figures as providing useful additional information to highlight the underlying performance of the business.
In previous years, the adjusted earnings measures used by the Group included profits/losses on the sale of trading
properties and other investment income (i.e. gains and losses associated with certain non-property private equity
investments) within 'underlying earnings'. In March 2009 the Group revised its dividend policy such that, from 2009
onwards, dividends are based upon underlying recurring rental earnings excluding trading profits/losses and other
investment income. 'Adjusted profit before tax - recurring rental profits' accords with the approach taken with regard to
the new dividend policy and excludes trading profits/losses (including impairment losses) and other investment
income/losses which do not relate to the Group's core property rental business. Adjusted profit before taxation (on both
the previous reporting basis and on the basis of underlying recurring rental profits) can be analysed as follows:
2009 £m 2008 £m
Gross rental income 328.4 296.1
Property operating expenses (59.0) (51.2)
Net rental income 269.4 244.9
Share of joint ventures' recurring rental profits(1) 2.8 0.9
Administration expenses, excluding exceptional costs (40.3) (40.0)
Operating profit 231.9 205.8
Net finance costs excluding fair value movements on derivatives (127.6) (116.5)
Adjusted profit before tax - recurring rental profits 104.3 89.3
(Loss)/profit on sale of trading properties less provisions
- Group (15.5) 23.9
- Share of joint ventures (after tax) (4.3) 9.0
Other investment (loss)/income (8.0) 1.7
Adjusted profit before tax - previous reporting basis 76.5 123.9
- Group
(15.5)
23.9
- Share of joint ventures (after tax)
(4.3)
9.0
Other investment (loss)/income
(8.0)
1.7
Adjusted profit before tax - previous reporting basis
76.5
123.9
1 Comprises net property rental income less administration expenses, net interest expense and taxation.
A reconciliation between adjusted profit before tax and IFRS loss before tax is provided in note 2.
Adjusted profit before tax on the previous reporting basis decreased by £47.4 million compared to 2008. The decrease is
almost entirely due to provisions for impairment of trading properties being recorded in 2009 compared with trading
property profits of £23.9 million (including share of joint ventures) in 2008. Excluding profits/losses on trading
properties and other investment income losses, the adjusted profit before tax from the underlying recurring rental profit
showed a 16.8 per cent increase from £89.3 million to £104.3 million. This is primarily due to the Brixton acquisition,
which contributed £14.8 million to recurring rental profit during the 4 month period of ownership.
Adjusted EPS (recurring rental profits basis) of 18.3 pence per share is lower compared to the 2008 calculation of 29.1
pence per share, largely as a result of the dilutive impact of the rights issue during the year.
Rental income
Gross rental income for 2009 increased by £32.3 million (10.9 per cent) to £328.4 million. Gross rental income has
increased in the UK mainly due to the impact of the Brixton acquisition and increased in Continental Europe mainly due to
the letting of new developments and the beneficial impact of exchange rate movements. Like-for-like rental income on the
underlying portfolio comprising only of completed properties owned throughout both years decreased by 1.3 per cent from
£230.4 million to £227.3 million. Within this overall movement, the UK reported a 1.6 per cent decrease whilst in
Continental Europe, the decrease was 0.9 per cent.
Like-for-like rental income 2009 £m 2008 £m
Completed properties owned throughout 2008 and 2009 (like-for-like rents) 227.3 230.4
Development lettings 17.7 5.0
Properties taken back for development 0.3 1.5
Gross rental income pre acquisitions/disposals 245.3 236.9
Properties acquired
- More to follow, for following part double click [ID:nRSY6586Hb]
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