27 July 2023
If you are covering Segro’s results for the six months ended 30 June 2023, please see the following comment from Oli Creasey, equity research analyst at Quilter Cheviot:
“UK commercial property prices fell sharply in 2022, and the logistics market was one of the worst hit, owing to tight investment yields that were highly vulnerable to interest rate rises. Segro, the UK and European industrial a logistics REIT, was part of this downturn. Today’s half year results from the company provide comfort that we may be close to the bottom for property values despite rates continuing to climb.
“The company NAV fell just -3%, as property values fell -1.4%. The negative impact came mostly from the European properties – the UK portfolio value was down just -0.6% in the period, and several subsectors actually recorded positive value growth. The properties in Greater London and the South East were the only UK properties to see further falls as yields remain tightest in these areas, but even here the valuation decline was modest, typically between -1% and-2%. There has been some further yield expansion, but this has been largely offset by rental growth: +4.3% in the UK.
“It should be noted that while the supply and demand dynamics remain healthy in the sector, and the rental growth remains comfortably positive, the rental growth story is partly complicated. This H1’23 rental growth figure is lower than H1’22, but higher than H2’22 – which seems fair we would argue as confidence in the economy is higher than late last year, but not as high as it was when interest rates were still very low. This represents a recovery of sorts, although not a full one.
“Of some concern is the rising cost of debt. Despite the healthy rental growth, Segro’s EPS only rose +2%, which feels a little lacklustre. The cause is largely the rising cost of debt, plus some one-off transaction costs, with borrowing costs nearly doubling since the first half of last year. However, it should be noted that Segro has made good use of interest rate caps, meaning that while the company is exposed to the first leg of interest rate rises, that exposure has dropped off now rates are higher. 91% of the company’s debt is now using a fixed or capped interest figure; that number was only 65% at the beginning of 2022. Segro has hedged its exposure fairly well; we are wary of any company which still has significant exposure to floating rate debt.”
