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BUSINESS REVIEW > Operating Review |
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Ian Coull Chief Executive |
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David Sleath Finance Director |
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“In 2007 SEGRO entered a new phase of its strategic development and delivered a strong performance. We produced excellent profits, underpinned by our customer focus and our core skills in asset management.”
Ian Coull
Overview of 2007
2007 was a transformational year for SEGRO, in which we became a UK REIT, achieved critical mass in Continental Europe, delivered a timely and well-executed disposal of our US business and divested the power station in Slough. The US sale enabled us to return £250 million to shareholders in the form of a special dividend (accompanied by a share consolidation), and provided funds to finance the Group’s future growth and development. Once again we have produced excellent profits underpinned by our customer focus and our core skills in asset management and development.
Adjusted profit before tax increased by 7.7 per cent to £153.7 million (2006: £142.7 million) comprising profit from both continuing operations (£131.3 million) plus discontinued operations (£22.4 million). This increase was driven by a strong contribution from acquisitions, rental income from the letting of existing properties and new developments, trading property disposal profits, and from other income. The positive impact of REIT and SIIC status were the main drivers of the reduction in our effective tax rate from 14.0 per cent in 2006 to 1.4 per cent in 2007.
We have made excellent progress in the growth of our Continental European business with £425.2 million (€620.8 million) of attractive acquisitions (at an average initial yield of approximately 7 per cent) and with development expenditure of £112.4 million (€164.1 million). Our acquisitions enabled us to establish a presence in new markets such as Lyon and Milan and strengthen our position in existing markets, such as Frankfurt, or with key customers (eg DHL). All of these acquisitions offer opportunities to enhance the initial yield through further development or asset management. Good occupier demand for our existing buildings and for newly completed developments enabled us to achieve very strong letting figures on the Continent of 298,000 sq m (up 76 per cent on 2006). In addition, 104,000 sq m of the current construction in progress and potential 2008 development starts are already pre-let. The vacancy rate of 5.9 per cent at year end is down significantly on the 8.7 per cent reported last year end.
Very strong lettings were also achieved in the UK with a record 298,000 sq m of space taken up by customers, some 62 per cent ahead of the level achieved in 2006 and helped by the delivery and take up of a number of well-timed and located development completions. £7.9 million of additional annualised income from developments came on stream during 2007. Overall UK vacancy reduced from 11.6 per cent to 10.8 per cent (8.5 per cent underlying) by 31 December 2007 with good levels of customer enquiries continuing into the New Year.
Space today*
Current portfolio
Built space at the end of December 2007 – 4.7 million sq m.
* Includes trading properties and 100% of joint ventures.
Space tomorrow
SEGRO’s development pipeline
Development potential of approximately 2.5 million sq m. |
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We made only a few, very carefully selected acquisitions in the UK in 2007, focusing on exceptional opportunities to complement existing holdings in key locations. Meanwhile, we generated some £232.8 million from the sale of UK properties (including trading properties), mostly in the first half of the year before investment market conditions deteriorated. As a result of our asset management, development and capital recycling in the UK, we have grown the UK rental income for the year by 3.8 per cent (excluding lease surrender premiums) and the average ERV of our investment portfolio increased by 6.0 per cent to £89.1 per sq m (£8.30 per sq ft). UK average rental growth from lettings and rent reviews was relatively subdued, showing a 1.4 per cent increase over December 2006 ERV, slightly above the 1.2 per cent level in the equivalent IPD indicator for industrial rents; within this, we achieved 3 per cent average growth from rent reviews.
NAV per share was 690 pence, down 3.9 per cent from last year end and adjusted diluted NAV per share (which adds back deferred tax on investment properties) was down 9.2 per cent (13.2 per cent since June 2007) at 704 pence. These declines reflect the well documented reduction in commercial property valuations affecting all sectors of the UK market in the second half of 2007. The IPD All Property Index showed a capital reduction of 11.7 per cent between June and December 2007, whilst Industrial recorded a 10.8 per cent reduction. Our UK investment portfolio showed a 11.3 per cent valuation reduction since June, with Continental Europe recording a 0.2 per cent positive movement in the same period.
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| Our Values |
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To sustain our success and grow in the future, we need to adapt and change, thinking innovatively about our business, our culture and the way we reward our people. |
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Our values articulate our behaviour, both as people and as a company: |
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Respect |
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Partnership |
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Energy |
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Responsibility |
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For more about SEGRO’s values see our website, SEGRO.com |
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Management changes
A number of management changes were made in 2007 which will ensure SEGRO is well placed for the years ahead. After three years leading the rapid and successful expansion of our Continental European business, Walter Hens is now using his proven deal-making skills to head up a newly created Group Business Development function. This function will be responsible for driving our relationships with major cross-border customers, particularly focusing on the ‘big box’ logistics market and on data centres.
We appointed Inès Reinmann to become head of our Continental European business from January 2008. Inès’s initial priorities will include reinforcing SEGRO’s processes to most effectively manage our burgeoning European business and to provide a strong platform for future growth.
In the UK we have restructured into three geographically-organised business units – the Slough Trading Estate, London Markets and National Markets. This structure is an evolution of the successful move to a regional structure which started over two years ago. As previously announced, John Heawood, Executive Director, UK Property, will be leaving the business in the summer of 2008. John has played an important role in developing the UK portfolio over a number of years and we wish him well for the future; a search for his replacement is well under way.
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Strategy and Business Model
SEGRO is an international property investment company which owns and manages Flexible Business Space designed to meet the current and future needs of our customers. Flexible Business Space is the term we use to cover warehousing, other industrial-type properties and offices in suburban locations. We develop and acquire properties throughout Europe, concentrating on major urban centres and logistics distribution corridors.
Our objective is to create value for our shareholders, underpinned by attractive dividends. Our strategy to achieve this is to acquire, develop and manage Flexible Business Space in locations likely to benefit from strong customer demand and long-term economic growth. We recycle capital by selling properties which do not fit our strategy or when we believe we can no longer add value to such properties.
We seek to develop or acquire industrial estates, business parks or equivalent clusters of properties with critical mass in each geographic market in which we operate.
SEGRO aims to provide a high standard of customer service and actively manages its portfolio of properties to optimise value through customer or asset management, development and redevelopment.
Over the past three years, we have been actively building a pan-European property portfolio, capitalising on the higher returns and lower borrowing costs available across Continental Europe. Property is a local business and our operational model is to employ local people with the necessary technical expertise and market knowledge to identify the right opportunities and to serve our customers in each location. This enables us to respond quickly to opportunities and changing circumstances.
We manage our business through two strategic business units – the UK and Continental Europe – complemented by a Group Business Development function (see graph) and supported by a number of corporate functions including Group Strategy, Finance, Procurement, Human Resources, Secretariat, Marketing and Corporate Communications.
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SEGRO’s commercial property management organisation chart |
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| Group Business Development |
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United Kingdom |
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Continental Europe |
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Group-wide co-ordination of multinational customer relationships |
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‘Big Box’ logistics |
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Data centres |
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Three Business Units: |
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London Markets |
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National Markets |
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Slough Trading Estate |
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Belgium |
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Czech Republic |
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France |
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Germany |
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Hungary |
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Italy |
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The Netherlands |
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Poland |
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Investment returns
All investment opportunities are subjected to a rigorous review and approval process overseen by the Group’s Capital Approvals Committee which comprises the Group Chief Executive, the Finance Director, Business Development Director, Head of UK, and Head of Continental Europe. Particularly large investments are also reviewed by the Board.
We assess all investment proposals against risk-adjusted financial return targets which are derived from the Group’s weighted average cost of capital, adapted for each project. This takes account of local market factors (such as currency, economic or political risk, tax rate) and project type (eg speculative or pre-let development).
Projects are reviewed as they progress to ensure they are on track to deliver the expected returns and a formal review of all previously completed investments is carried out and reported to the Board annually.
As 2007 progressed we adapted our internal hurdles for the approval of capital expenditure to reflect changing market conditions and, in particular, the risks associated with the declining investment market conditions and threat of global recession. Our current targets are to achieve total pre-tax returns (IRR) of between 9 per cent and 14 per cent from development projects, dependent on the location, type and profile of each project. |
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Development
SEGRO is a development-led property investment company and our development pipeline is a key driver of future growth. The Group has an extremely well-located land bank of approximately 534 hectares, with the potential to develop almost 2.5 million sq m of buildings over several years. At today’s prices, this would entail future development expenditure of approximately £1.7 billion and could produce annual rents in the region of £184 million (net of rents which will be given up on currently income-producing buildings to be redeveloped), giving an estimated cash yield of 11 per cent on future expenditure (including financing costs) or 8 per cent taking into account the current book value of the land bank (£662 million).
During 2007, 343,651 sq m of development space was completed, of which 252,206 sq m or 73 per cent had either been sold or let by the year end. This level of success, combined with our excellent lettings in 2007, and the pre-lets already secured, gives us particular confidence in the current development programme. 306,679 sq m of development was under construction at the end of 2007, of which 113,686 sq m had either been let or sold. At this stage of the year a further 465,529 sq m of developments has been provisionally scheduled to start construction in 2008 and this will be adapted as the year progresses to ensure that we are developing in line with market demand and that the consequential financial returns are likely to meet out requirements.
Identifying and acquiring attractive sites in good locations, managing the planning process, developing the right products to coincide with likely customer demand, and letting the space are our core competencies. A pre-requisite for any development proposal approval is a robust business case, clearly demonstrating that acceptable risk-adjusted returns will be delivered.
Based on current expectations and anticipated market conditions, we expect most of the current development pipeline to take approximately five years to deliver. |
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Customer focus
In recent years SEGRO has done much to improve its standards of customer service, seeking to reinforce long-term relationships with customers in general and to respond to the specific needs of specialised market segments. SEGRO aims to be a company that is easy for customers to deal with and has encouraged and rewarded employee behaviour that is aligned with these objectives.
SEGRO believes that focusing on customer satisfaction drives higher retention rates and helps to attract new business resulting in stronger overall returns. In the UK we measure our customers’ satisfaction annually and assess progress against internal and external benchmarks, enabling us to identify and act upon any issues of concern to customers. In the UK in 2007, 77 per cent of occupiers said their satisfaction levels were either ‘good’ or ‘excellent’, up on the 73 per cent score in the previous year. In Continental Europe many similar customer service initiatives have been employed in each country. In 2008 the next phase of this measurement will be a greater co-ordination of approach and the launch of a similar survey to that used so successfully in the UK.
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Sustainability
In managing SEGRO’s resources we are ever more conscious of the need to actively and sustainably manage resources in the widest sense. With environmental issues therefore also moving higher up our agenda, it was also the right time to give even greater focus to this area with the appointment of a dedicated senior manager. A search process was launched in late 2007 and, in early 2008, we announced an appointment for the new role of Head of Sustainability – reporting directly to the Group Chief Executive.
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