Sales will reduce SEGRO’s holdings outside London and the South East. It aims for the portfolio to be split 50:50 between the UK and continental Europe
SEGRO this week announced a radical change in strategy involving the sell-down of £1.6bn of assets in order to rebalance its £5.4bn portfolio.
The four-point plan to transform the performance of the REIT, which is trading at a 40% discount to its June net asset value of 377p a share, was well received by the market (see box below).
It comes as a result of a detailed review of the company’s operations and business led by former finance director David Sleath, who took the helm of the company in April when Ian Coull stepped down.
Sleath said the strategy “builds on our great strengths as an industrial specialist”.
The proposals involve the company recycling capital through the sale of six large, non-strategic assets valued at £640m, including IQ Farnborough, which was put up for sale for £110m last month. It will also sell £1bn of other industrial and land holdings “over the coming years”.
Exit from Italy
The disposals will also see the industrial giant exit Italy, although its longer-term aim is for the portfolio to be split 50:50 between the UK and continental Europe. It is currently 70% UK with the balance in Europe.
The company said that, owing to the ongoing eurozone crisis, it is expecting to take a £150m write-down on non-core property values at the full-year end.
Sleath said that market conditions are likely to influence the timing of the company’s execution of the plan, but that he is committed to the “reshaping”.
The firm is also targeting a “more defensive”, reduced medium-term loan-to-value ratio of around 40% – down from its current 47% – although it said this could increase at various stages of the cycle.
A third plank of the strategy will see the company seek opportunities to partner with “third party capital providers” in an effort to support its growth and enhance the risk-adjusted return to its shareholders. This could include the sale of a stake in its £1bn Slough Trading Estate following its joint venture with Aviva Investors involving part of its Heathrow portfolio.
A final but key element of the plan involves a focus on high-quality assets in the strongest European markets, where it has or can achieve critical mass, and exploit “higher-value uses” within its core locations.
This includes buying and developing light industrial and higher-value uses within its core UK locations in London and the South East as well as Ile de France, Düsseldorf and Frankfurt.
In addition, it is planning to expand its logistics business at major transport hubs in the UK, France, Germany, Benelux, Poland and the Czech Republic.
The board said it expects to at least maintain the level of the dividend, which was 4.9p a share at the half-year, throughout the reshaping process. It remains committed to a “progressive” dividend policy as the plan progresses and earnings growth comes through.
Target portfolio: 75% stabilised, 25% opportunity
SEGRO’s target portfolio is made up of around 75% “stabilised assets”, defined as prime, high-quality and well-located assets with low vacancy, minimal capital expenditure requirements and above-average total return prospects. The balance would comprise “opportunity assets”, which include land holdings, developments under construction and secondary assets with asset management opportunities. The group’s current portfolio is split 72% “core” and 28% “non-core”. The core portfolio itself is split between stabilised (44%) and opportunity (56%). Its “future” portfolio comprises 44% industrial, 13% high-value assets, 39% logistics and 4% development and land.
The analysts’ take on new strategy and Q3 statement
Osmaan Malik, JP Morgan Cazenove: “We welcome the radical change in strategy, given SEGRO’s poor relative performance (11% underperfomance versus EPRA UK over the past 12 months), and consequently high discount of 40% to June NAV of 377p a share. Something needed to be done, and it is now up to management to deliver.
“We certainly see execution risk in this difficult market, but the strategy looks ‘right’, and the stock appears to be pricing in (a lot of) bad news anyway. We can gradually see SEGRO’s investment story change from ‘value trap’ to ‘window of opportunity’.”
Li Sun, Oriel Securities: “The company posted good operational results with its vacancy rate falling to 10.2% from 11.4% in June.”
The group signed 71 leases during the period, and although incentive levels rose, customer retention remained high at 71% for the nine months to 30 September.
Sun “applauded” management for the recent proactive capital recycling following £95.2m of sales during the first nine months of the year.
