REG-SEGRO PLC Results for the Year Ended 31 December 2021
18/02/2022 07:00
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Results for the Year Ended 31 December 2021
PAN-EUROPEAN PLATFORM CAPTURES RECORD DEMAND TO DRIVE OUTPERFORMANCE AND
SUPPORT A POSITIVE OUTLOOK
Commenting on the results David Sleath, Chief Executive of SEGRO said:
“2021 was a highly successful year for SEGRO as reflected in our full year
results which include a £4.1 billion portfolio valuation uplift and record
levels of rental growth. Investor and occupier supply-demand dynamics in the
industrial and logistics sector remain very favourable, led by the long-term
trends of digitalisation, supply chain resilience and an increasing focus on
sustainability.
“Our Responsible SEGRO ambitions have been received positively by our
customers, employees and other stakeholders and are becoming well integrated
into the way that we run and grow the business. During 2021 we made important
progress with our three priority areas of Championing low-carbon growth,
Investing in our communities and environments and Nurturing talent.
“Our established and experienced pan-European operating platform remains
focused on delivering excellence in customer service which, when combined with
the strong relationships and reputation that we have with our stakeholders,
provides us with a distinct advantage in an increasingly competitive sector.
These capabilities enabled us to invest almost £2 billion in 2021 to further
expand our pipeline of opportunities to support future growth. This pipeline,
alongside the high quality of our existing portfolio, the compounding effect
of rental growth and the strong start we have made in 2022, gives us continued
confidence in our ability to drive further sustainable growth in earnings and
dividends over the coming years.”
HIGHLIGHTS(A):
* Adjusted pre-tax profit of £356 million up 20 per cent compared with the
prior year (2020: £296 million). Adjusted EPS is 29.1 pence, up 15 per cent
(2020: 25.4 pence) including 1.1 pence relating to recognition of performance
fees from our SELP joint venture.
* Adjusted NAV per share up 40 per cent to 1,137 pence (31 December 2020: 814
pence) driven by portfolio valuation growth of 29 per cent, including ERV
growth of 13.1 per cent (2020: 2.5 per cent), yield compression, portfolio
asset management initiatives and development profits.
* Strong occupier demand, our customer focus and active management of the
portfolio generated £95 million of new headline rent commitments during the
period,including £49 million of new pre-let agreements, and a 13 per cent
average uplift on rent reviews and renewals (2020: £78 million)
* Net capital investment of £1.5 billion (2020: £1.3 billion) in asset
acquisitions, development projects and land purchases, less disposals.
* Continued momentum in the development pipeline with 1.1 million sq m of
projects under construction or in advanced pre-let discussionsequating to £82
million of potential rent, of which 70 per cent has been pre-let, providing
growth in earnings this year and next.
* Balance sheet well positioned to support further, development-led growth with
access to £1.1 billion of available liquidity and an LTV of 23 per cent at 31
December 2021 (31 December 2020: 24 per cent).
* 2021 full year dividend increased 10 per cent to 24.3 pence (2020: 22.1
pence). Final dividend increased by 11 per cent to 16.9 pence (2020: 15.2
pence).
FINANCIAL SUMMARY
2021 2020 Change
per cent
Adjusted(1) profit before tax (£m) 356 296 20.3
IFRS profit before tax (£m) 4,355 1,464 -
Adjusted(2) earnings per share (pence) 29.1 25.4 14.6
IFRS earnings per share (pence) 339.0 124.1 -
Dividend per share (pence) 24.3 22.1 10.0
Total Accounting Return (%)(3) 42.5 19.3 -
2021 2020 Change
per cent
Assets under Management (£m) 21,286 15,343 -
Portfolio valuation (SEGRO share, £m) 18,377 12,995 28.8(4)
Adjusted(5 6 )net asset value per share (pence, diluted) 1,137 814 39.7
IFRS net asset value per share (pence, diluted) 1,115 809 -
Net debt (SEGRO share, £m) 4,201 3,088 -
Loan to value ratio including joint ventures at share (per cent) 23 24 -
1. A reconciliation between Adjusted profit before tax and IFRS profit before
tax is shown in Note 2 to the condensed financial information.
2. A reconciliation between Adjusted earnings per share and IFRS earnings per
share is shown in Note 11 to the condensed financial information.
3. Total Accounting Return is calculated based on the opening and closing
adjusted NAV per share adding back dividends paid during the period.
4. Percentage valuation movement during the period based on the difference
between opening and closing valuations for all properties including buildings
under construction and land, adjusting for capital expenditure, acquisitions
and disposals.
5. A reconciliation between Adjusted net asset value per share and IFRS net
asset value per share is shown in Note 11 to the condensed financial
information.
6. Adjusted net asset value is in line with EPRA Net Tangible Assets (NTA)
(see Table 5 in the Supplementary Notes for a NAV reconciliation).
(A) Figures quoted on pages 1 to 19 refer to SEGRO’s share, except for land
(hectares) and space (square metres) which are quoted at 100 per cent, unless
otherwise stated. Please refer to the Presentation of Financial Information
statement in the Financial Review for further details.
OPERATING SUMMARY & KEY METRICS
2021 2020
STRONG PORTFOLIO PERFORMANCE (see page 9):
Valuation increase driven by rental value growth, yield compression and active
asset management of the standing portfolio, supplemented by gains recognised
on completed development and buildings under construction.
Portfolio valuation uplift (%): Group 28.8 10.3
UK 32.2 9.6
CE 22.5 11.5
Estimated rental value (ERV) growth (%) Group 13.1 2.5
UK 18.8 3.1
CE 4.1 1.5
RECORD RENTAL GROWTH FROM ACTIVE ASSET MANAGEMENT (see page 11):
Operational performance captured significant new rent, including leases signed
with existing and new customers from a wide range of sectors, highlighting the
versatility of our urban portfolio.
Total new rent signed during the period (£m) 95 78
Pre-lets signed during the period (£m) 49 41
Like-for-like net rental income growth (%): Group 4.9 2.1
UK 5.6 0.9
CE 3.6 4.3
Uplift on rent reviews and renewals (%): Group 13.0 19.1
UK 18.7 28.2
CE 1.5 0.5
Vacancy rate (%) 3.2 3.9
Customer retention (%) 77 86
Visibility of customer energy use (%) 54 41
Operating carbon emission (tonnes CO2e) 280,575 312,115
RECORD LEVEL OF INVESTMENT ACTIVITY FOCUSED ON SECURING PROFITABLE GROWTH (see
page 19):
Capital investment continues to focus on development and acquisition of assets
with opportunities for future growth, as well as sourcing land to extend our
development pipeline. Development capex for 2022, including infrastructure,
expected to be c.£700 million.
Development capex (£m) 649 531
Asset acquisitions (£m) 997 603
Land acquisitions (£m) 326 286
Disposals (£m) 515 139
EXECUTING AND GROWING OUR DEVELOPMENT PIPELINE (see page 14):
Our active and largely pre-let development pipeline continues to be a key
driver of rent roll growth with a record year of completions. Potential rent
of £82 million from projects currently on site or expected to commence
shortly.
Development completions:
– Space completed (sq m) 839,200 835,900
– Potential rent (£m) (Rent secured, %) 52 (93%) 47 (84%)
Embodied carbon emissions (kgCO2e/m(2)) 391 400
Current development pipeline potential rent (£m) (Rent secured, %) 62 (60%) 54 (66%)
Near-term development pipeline potential rent (£m) 20 27
OUTLOOK
We enter 2022 with considerable confidence in the outlook for the business and
its ability to deliver continued growth. The effects of the pandemic are
ongoing, and we remain mindful of macroeconomic and geopolitical risks, but
the world is adapting quickly and learning how to function alongside Covid-19
with the lasting impacts on the way that we live and work strengthening
occupier demand. It has highlighted the importance of global supply chains
facilitated by high-quality logistics space and we have positioned our
business to take advantage of these structural tailwinds.
Against a backdrop of strong demand from an increasingly diverse range of
businesses, combined with historically low vacancy rates across Europe, we
expect rental growth to continue across our markets. We believe that the
growth rate will be highest where developable land is in short supply, for
example in urban markets such as London and Paris. This acute supply-demand
imbalance delivered record rental growth during 2021, resulting in significant
accumulated rental reversion in the portfolio which we will be working hard to
capture during 2022 and the coming years.
Our record levels of capital investment over the past two years have resulted
in a significant number of projects currently under construction, with a high
level of pre-leasing, and a large pipeline of future projects. This allows us
to both provide much-needed modern, sustainable space for our customers and to
generate additional rental income. We continue to prioritise further
opportunities to grow our development pipeline, positioning SEGRO to benefit
from the long-term structural trends within the occupier market.
Inflationary pressures remain but we expect to be able to offset these in our
existing portfolio by capturing the significant reversion in lease reviews and
renewals, whilst benefiting from indexation provisions in our remaining leases
which represent approximately 40 per cent of our rent roll. Rental growth has
also allowed us to maintain the profitability of our development programme
despite the additional cost pressures arising from increased construction and
material costs.
The unique supply-demand dynamics of the industrial sector have attracted
increasing competition from both investors and developers, but we are
confident in our ability to source profitable new opportunities to grow. As
evidenced during 2021, the combination of our significant portfolio of modern
assets in the most desirable locations across Europe together with our
well-established operating platform provides us with a clear competitive
advantage. This, alongside the meaningful and lasting changes we are making
through our Responsible SEGRO focus areas will help us to ensure that our
business continues to prosper, creating shared value for our customers,
employees, shareholders, local communities, investors and all of our other
stakeholders.
WEBCAST / CONFERENCE CALL FOR INVESTORS AND ANALYSTS
A live webcast of the results presentation will be available from 08:30am (UK
time) at:
https://www.investis-live.com/segro/61e7ee290ba3f0120025ce33/fy21
(https://cts.businesswire.com/ct/CT?id=smartlink&url=https%3A%2F%2Fprotect-eu.mimecast.com%2Fs%2FCEImCJZJkCp0EQxIv74Wn%3Fdomain%3Dsegro-comms.com&esheet=52581323&newsitemid=20220217005681&lan=en-US&anchor=https%3A%2F%2Fwww.investis-live.com%2Fsegro%2F61e7ee290ba3f0120025ce33%2Ffy21&index=1&md5=e0067cc443e92f627d29629789b2db44)
The webcast will be available for replay at SEGRO’s website at:
http://www.segro.com/investors
(https://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww.segro.com%2Finvestors&esheet=52581323&newsitemid=20220217005681&lan=en-US&anchor=http%3A%2F%2Fwww.segro.com%2Finvestors&index=2&md5=9e15477da0650cb43cf228fcb0f281d6)
shortly after the live presentation.
A conference call facility will be available at 08:30 (UK time) on the An audio recording of the conference call will be available until 25 February
following number: 2022 on:
Dial-in: +44 (0)800 640 6441 UK: +44 (0) 203 936 3001
+44 (0) 203 936 2999 Access code: 040051
Access code: 032585
A video of David Sleath, Chief Executive discussing the results will be
available to view on www.segro.com
(https://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww.segro.com&esheet=52581323&newsitemid=20220217005681&lan=en-US&anchor=www.segro.com&index=3&md5=2b1a46255d38bc5f0f5658f98eaf9f64)
, together with this announcement, the Full Year 2021 Property Analysis Report
and other information about SEGRO.
CONTACT DETAILS FOR INVESTOR / ANALYST AND MEDIA ENQUIRIES:
SEGRO Soumen Das Tel: + 44 (0) 20 7451 9110
(after 11am)
(Chief Financial Officer)
Claire Mogford Mob: +44 (0) 7710 153 974
(Head of Investor Relations) Tel: +44 (0) 20 7451 9048
(after 11am)
FTI Consulting Richard Sunderland / Claire Turvey / Tel: +44 (0) 20 3727 1000
Eve Kirmatzis
FINANCIAL CALENDAR
2021 full year dividend ex-div date 17 March 2022
2021 full year dividend record date 18 March 2022
2021 full year dividend scrip dividend price announced 24 March 2022
Last date for scrip dividend elections 13 April 2022
2021 full year dividend payment date 4 May 2022
2022 Q1 Trading Update 21 April 2022
Half Year 2022 Results (provisional) 28 July 2022
ABOUT SEGRO
SEGRO is a UK Real Estate Investment Trust (REIT), listed on the London Stock
Exchange and Euronext Paris, and is a leading owner, manager and developer of
modern warehouses and industrial property. It owns or manages 9.6 million
square metres of space (103 million square feet) valued at £21.3 billion
serving customers from a wide range of industry sectors. Its properties are
located in and around major cities and at key transportation hubs in the UK
and in seven other European countries.
For over 100 years SEGRO has been creating the space that enables
extraordinary things to happen. From modern big box warehouses, used primarily
for regional, national and international distribution hubs, to urban
warehousing located close to major population centres and business districts,
it provides high-quality assets that allow its customers to thrive.
A commitment to be a force for societal and environmental good is integral to
SEGRO’s purpose and strategy. Its Responsible SEGRO framework focuses on
three long-term priorities where the company believes it can make the greatest
impact: Championing Low-Carbon Growth, Investing in Local Communities and
Environments and Nurturing Talent.
See www.SEGRO.com
(https://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww.SEGRO.com&esheet=52581323&newsitemid=20220217005681&lan=en-US&anchor=www.SEGRO.com&index=4&md5=92a7d9b1ab7a67042adf05c3925926f3)
for further information.
Forward-Looking Statements: This announcement contains 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. All statements other than historical fact are, or
may be deemed to be, forward-looking statements. Forward-looking statements
are statements of future expectations and all forward-looking statements are
subject to assumptions, risk and uncertainty. Many of these assumptions, risks
and uncertainties relate to factors that are beyond SEGRO's ability to control
or estimate precisely and which could cause actual results or developments to
differ materially from those expressed or implied by these forward-looking
statements. Certain statements have been made with reference to forecast
process changes, economic conditions and the current regulatory environment.
Any forward-looking statements made by or on behalf of SEGRO are based upon
the knowledge and information available to Directors on the date of this
announcement. Accordingly, no assurance can be given that any particular
expectation will be met and you are cautioned not to place undue reliance on
the forward-looking statements. Additionally, forward-looking statements
regarding past trends or activities should not be taken as a representation
that such trends or activities will continue in the future. The information
contained in this announcement is provided as at the date of this announcement
and is subject to change without notice. Other than in accordance with its
legal or regulatory obligations (including under the UK Listing Rules and the
Disclosure Guidance and Transparency Rules of the Financial Conduct
Authority), SEGRO does not undertake to update forward-looking statements,
including to reflect any new information or changes in events, conditions or
circumstances on which any such statement is based. Past share performance
cannot be relied on as a guide to future performance. Nothing in this
announcement should be construed as a profit estimate or profit forecast. The
information in this announcement does not constitute an offer to sell or an
invitation to buy securities in SEGRO plc or an invitation or inducement to
engage in or enter into any contract or commitment or other investment
activities.
Neither the content of SEGRO's website nor any other website accessible by
hyperlinks from SEGRO's website are incorporated in, or form part of, this
announcement.
CHIEF EXECUTIVE’S REVIEW
2021 was an exceptionally busy year for SEGRO as our teams worked hard to
capitalise on the favourable market dynamics that are currently benefitting
the industrial property sector. The pandemic brought about the acceleration of
already strong structural drivers, resulting in record levels of warehouse
take-up across Europe during 2021 and this has attracted increased investment
into the sector. We have worked diligently throughout the pandemic, to
position our business so that we could emerge in an even stronger position and
this is already paying off, resulting in strong rental growth and a high
number of development completions.
Responsible SEGRO is the framework that we use to explain how we do business
in the best interests of our stakeholders and the long-term success of our
business. Last year we set new priorities within this that focus on the key
areas where we believe we can make the greatest business, environmental and
social contribution. During 2021 we worked hard to integrate these into the
management of our portfolio and the day-to-day running of our business to
ensure that, as we grow as a company, the value that we create for our
stakeholders also increases, and so that we can deliver on our Purpose of
‘creating the space that enables extraordinary things to happen’.
Looking back on 2021, the main highlights included:
* A significant increase in our rent roll, arising from a combination of active
asset management of our existing portfolio, our expanded development programme
and market rental growth.
* Increased visibility on the carbon emissions from our leased buildings
(improving to 54 per cent now monitored from 41 per cent in 2021) and moving
the last of our markets onto a certified green energy tariff.
* 839,200 sq m of development completions creating space to be used by a wide
variety of industries including those linked to e-commerce, data centres and
creative industries.
* Undertaking life cycle assessments on over half of our new development
projects, equivalent to 440,000 sq m of new space, an important step in
reducing future embodied carbon emissions.
* Achieving the National Equality Standard (NES) accreditation following our
first audit, a reflection of our commitment to diversity and inclusion.
* Creating the framework for our Community Investment Plans (CIPs) and the
appointment of 41 Community Champions across the business to lead the projects
alongside our local community partners.
This activity has been reflected in significant growth across the board in all
of our key operating metrics and our balance sheet remains in good shape and
is positioned to support further growth.
The combination of a strong set of financial results in 2021 and our confident
outlook for 2022 and beyond means that we are recommending a 10.0 per cent
increase in our final dividend to 16.9 pence per share, resulting in a total
distribution of 24.3 pence for 2021 as a whole (2020: 22.1 pence).
Reflecting on 2021, there are three things that stand out for me:
* The strength, breadth and depth of occupier demand and the long-term nature of
the structural trends that underpin it;
* The ability of our teams to continue to find new opportunities to grow the
business in very competitive markets by leveraging their experience,
relationships and thinking creatively; and
* The progress that we have made in our Responsible SEGRO focus areas and the
alignment towards these goals that we are finding with our customers,
suppliers and other stakeholders.
E-commerce is still an important source of occupier demand across Europe and
continues to contribute significantly to our lettings performance, but we are
seeing new names emerge in the space (for example rapid grocery delivery
services and other ‘q-commerce’ businesses) and its impact is now being
felt more widely across the portfolio, for example in our urban estates in
Germany, France and Spain.
Distribution networks on the Continent still have a long way to go to be able
to cope with the increased strain that e-commerce is putting them under. Even
in the UK, where e-commerce penetration is significantly ahead of most markets
in Europe, retailers and logistics operators need to take additional space to
successfully handle e-commerce penetration rates approaching 30 per cent.
Due to the prime location, high quality and flexibility of our space we are
also seeing significant demand from other sectors, such as the creative
industries. More widely across Europe, take-up by businesses involved in
manufacturing has increased during 2021 as a result of a renewed focus on
supply chain resilience.
All of this combined is leading to very high levels of occupier demand. For
many lettings, there are multiple potential occupiers willing to pay a premium
to get the space that is crucial to the success of their business and this is
leading to very strong rental growth, particularly in markets where we have
carefully built strong positions, such as London, where supply is very
limited.
The situation in the occupier market is also attracting more and more
investment into our sector and has pushed up asset prices but also resulted in
competitive bidding situations for both standing assets and land in every
single market that we operate in. Despite this, our teams have been able to
find opportunities to acquire unique assets and development opportunities,
often in off-market situations, due to our reputation, scale position,
relationships and expertise.
A good example of this is the acquisition that we completed in South East
London for a complex redevelopment scheme where the vendors only presented to
a few potential purchasers who they knew would have the ability and appetite
to execute on it.
Our teams are also thinking creatively and finding other ways to source
opportunities, for example by doing asset swaps or building relationships with
local trader developers who have access to land plots. Once we own the land
our development teams consider how they can intensify land use and maximise
the value we create from it.
Integrated within the management of our portfolio and development pipeline we
have worked hard to progress our Responsible SEGRO ambitions. During 2021 we
have taken steps to understand our current position, for example through doing
life cycle assessments on over half of our development projects and
participating in a NES audit. These have enabled us to put the necessary
procedures, processes and frameworks in place to ensure that we achieve the
ambitions that we set out within our Responsible SEGRO priorities of
Championing low-carbon growth, Investing in our local communities and
environments and Nurturing Talent.
As expected, we are finding common ground with our customers, suppliers and
other stakeholders and aligning our interests to maximise the value created.
For example, many customers decided to lease our space because its
environmental credentials also helped them achieve their own sustainability
goals. In another case a supplier decided to apply for Living Wage
accreditation after we engaged with them in the process of achieving our own
accreditation. We also sponsored numerous apprentices to work in local
businesses and receive training to enable long-term career progression.
I am very proud to see how everyone within the business has embraced our
Responsible SEGRO ambitions and worked hard alongside their already busy jobs
to help make them come to life. I would like to thank them for this, and also
for the continued focus, dedication and commitment that they have shown over
the past two years whilst having to endure the restrictions and limitations
that have been put on both their work and personal lives due to the pandemic.
Quite simply, our business would not be in the position it is today without
their efforts.
It has been a very busy and highly successful year. One that has brought much
satisfaction and has really shown how our business delivers on its Purpose of
creating the space that enables extraordinary things to happen.
DELIVERING ON OUR STRATEGY IN 2021
Our Strategy has successfully positioned our business to benefit from the
structural trends that are driving both occupier and investor demand in our
markets. We continue to apply it to maximise our returns in increasingly
competitive markets.
OPERATIONAL EXCELLENCE
Our well-established operating platform is one of our key competitive
advantages and our focus on Operational Excellence across this platform is
crucial to the ongoing success of our business. It has helped us to develop
strong customer relationships and to deliver excellent returns from the
execution of our expanded development pipeline.
We have continued to actively manage our portfolio throughout 2021, resulting
in a record rent roll growth, a strong set of operational metrics and
opportunities to create value from our standing portfolio.
Our focus on Operational Excellence has also been important in keeping our
development pipeline on track despite the well-documented supply chain issues
that our industry faced during the year. Our close working relationships with
our contractors meant that we were able to complete the projects scheduled for
delivery this year with minimal disruption.
DISCIPLINED APPROACH TO CAPITAL ALLOCATION
Given the strong investor interest in our sector and the competitiveness of
investment markets it has been more important than ever this year to maintain
a disciplined approach to capital allocation.
We continue to focus the majority of our investment into our development
programme and to create future opportunities for development (for example land
acquisitions and assets with short-term income and redevelopment potential),
as we generally see better returns from this than investing our capital in
completed assets.
The investment acquisitions that we did make in 2021 were in key strategic
markets, helping us to increase our presence in North and South London. The
majority were also off-market opportunities that we were able to create,
leveraging on our reputation and the relationships of our local teams.
We also decided to capitalise on the strength of the investment markets to
dispose of a number of assets that we had identified as having maximised their
returns through our annual asset review process. The proceeds from these sales
will be recycled into our future investments.
EFFICIENT CAPITAL AND CORPORATE STRUCTURE
As we continue to invest in the growth of our business it is important to take
steps to maintain our Efficient Capital and Corporate Structure.
We aim to balance operational and financial risk by keeping the loan to value
ratio (“LTV”) at an appropriate level, making sure that, should the
property cycle turn, we can absorb lower valuations whilst giving us the
capacity to take advantage of any resulting investment opportunities. The
strong investor appetite for industrial assets in 2021 resulted in record
portfolio valuation growth and means our LTV is below our target of 30 per
cent at 23 per cent as of 31 December 2021.
Our financing during 2021, has been debt: we raised €500 million via our
inaugural Green euro bond in September at a low coupon of 0.5 per cent as well
as a further €500 million for our joint venture SELP.
PORTFOLIO UPDATE – SIGNIFICANT VALUATION GROWTH
Our portfolio comprises two main asset types: urban warehouses and big box
warehouses. The demand-supply dynamics in both asset classes continue to be
positive.
Urban Warehouses
Urban warehouses account for 67 per cent of our portfolio value. They tend to
be smaller warehouses, and are located mainly in and on the edges of major
cities where land supply is restricted and there is strong demand for
warehouse space, particularly catering for the needs of last mile delivery
and, around London, from data centre users.
Our urban portfolio is concentrated in London and South-East England (82 per
cent) and major cities in Continental Europe (18 per cent), including Paris,
Düsseldorf, Frankfurt, Berlin and Warsaw. These locations share similar
characteristics in terms of limited (and shrinking) supply of industrial land
and growing populations, while occupiers are attracted to modern warehouses
with plenty of yard space to allow easy and safe vehicle circulation. We
believe that this enduring occupier demand and limited supply bodes well for
future rental growth.
Big Box Warehouses
Big box warehouses account for 29 per cent of our portfolio value. They tend
to be used for storage, processing and distribution of goods on a regional,
national or international basis and are, therefore, much larger than urban
warehouses.
They are focused on the major logistics hubs and corridors in the UK
(South-East and Midlands regions), France (the logistics ‘spine’ linking
Lille, Paris, Lyon and Marseille), Germany (Düsseldorf, Berlin, Frankfurt and
Hamburg) and Poland (Warsaw, Łódz, Poznań, and the industrial region of
Silesia). 29 per cent of our big box warehouses are in the UK and the
remaining 71 per cent are in Continental Europe.
Occupier demand has been very strong across the UK and Continental Europe
during 2021, helping drive vacancy to record low levels, leading to above
average rental growth in most of our markets.
The nature (and typical location) of big box warehouses tends to mean that,
over time, supply is able to increase more easily to satisfy demand, as there
is more land available in out of town locations. We therefore believe that the
prospects for significant rental growth in big box warehouses on a longer-term
basis are, and have always been, more limited than for urban locations but
this asset class brings other benefits including lower asset management
intensity and long leases which help to ensure a sustainable level of income.
In addition, by holding the majority of our Continental European big box
warehouses in SELP, we receive additional income from managing the joint
venture which increases total returns.
Valuation gains from market-driven yield improvement, asset management and
development
Warehouse property values across Europe increased significantly during the
year. Investment volumes also hit record levels in both the UK and Continental
Europe. Both investor and occupier demand for the asset class remained strong.
The Group’s property portfolio was valued at £18.4 billion at 31 December
2021 (£21.3 billion of assets under management). The portfolio valuation,
including completed assets, land and buildings under construction, increased
by 28.8 per cent (adjusting for capital expenditure and asset recycling during
the year) compared to 10.3 per cent in 2020.
This primarily comprises a 29.0 per cent increase in the assets held
throughout the year (2020: 9.5 per cent), driven by strong yield compression
in most markets (70 basis points across the whole portfolio) and a 13.1 per
cent increase in our valuer’s estimate of the market rental value of our
portfolio (ERV). In total, our portfolio generated a total property return of
35.6 per cent (2020: 14.6 per cent).
Assets held throughout the year in the UK increased in value by 34.5 per cent
(2020: 9.2 per cent), outperforming the MSCI Real Estate UK All Industrial
Quarterly index which increased by 31.2 per cent over the same period. The
performance was due to yield compression and the continued capture of
reversionary potential in lease reviews and renewals, particularly in London.
The true equivalent yield applied to our UK portfolio was 3.7 per cent, 60
basis points lower than at 31 December 2020 (4.3 per cent) reflecting strong
rental growth, yield compression and the impact of newly completed
developments. Rental values improved by 18.8 per cent (2020: 3.1 per cent).
Assets held throughout the year in Continental Europe increased in value by
18.7 per cent (2020: 10.2 per cent) on a constant currency basis, reflecting a
combination of yield compression to 4.0 per cent (31 December 2020: 4.8 per
cent) and rental value growth of 4.1 per cent (2020: 1.5 per cent).
More details of our property portfolio can be found in Note 27 to the
Financial Statements and in the 2021 Property Analysis Report available at
www.segro.com/investors
(https://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww.segro.com%2Finvestors&esheet=52581323&newsitemid=20220217005681&lan=en-US&anchor=www.segro.com%2Finvestors&index=5&md5=2d11424c91ff3015fa7049fbefe24019)
.
Valuations: What to expect in 2022
Capital growth forecasts are notoriously difficult given the multitude of
drivers (particularly interest rates and credit spreads) most of which are
outside our direct control.
Nevertheless, the prospects for our portfolio of big box and urban warehouses
remain strong, supported by structural drivers of occupational demand and
relatively limited amounts of new supply. This means that we are optimistic
about the potential for further rental value growth, particularly in our urban
warehouse portfolio.
Prime yields continue to appear attractive compared to government (risk-free)
bond yields and although recent interest rises have narrowed this premium, the
volume of capital looking to invest in industrial assets should continue to be
supportive of valuations.
We believe that our high-quality portfolio and our focus on asset management
will enable us to outperform the wider market.
Property portfolio metrics at 31 December 2021(1)
Portfolio value, £m Yield(3)
Lettable Completed Land & develop-ment Combined property Combined property portfolio Valuation movement(2 3 Topped-up net Net true equivalent Vacancy
area sq m
portfolio )
initial
%
(ERV)
%
%
%
(AUM) (AUM)
UK
GREATER LONDON 1,293,451 7,005 327 7,332 7,339 38.1 2.7 3.5 2.8
THAMES VALLEY 661,111 2,878 224 3,102 3,102 28.4 3.6 4.1 4.0
NATIONAL LOGISTICS 619,089 1,247 470 1,717 1,717 27.8 4.0 3.8 -
UK TOTAL 2,573,651 11,130 1,021 12,151 12,158 34.5 3.1 3.7 2.8
Continental Europe
Germany 1,615,149 1,532 197 1,729 2,548 15.8 3.4 3.6 5.0
Netherlands 233,185 167 27 194 368 21.4 3.9 3.9 -
France 1,513,337 1,751 112 1,863 2,394 18.9 3.7 4.1 6.5
Italy 1,600,875 1,117 138 1,255 1,813 28.9 3.8 3.8 -
Spain 355,754 321 64 385 583 23.9 4.0 3.9 -
Poland 1,510,254 631 75 706 1,234 13.9 5.3 5.2 4.3
Czech Republic 169,514 90 4 94 188 21.6 4.4 4.8 2.9
CONTINENTAL EUROPE TOTAL 6,998,068 5,609 617 6,226 9,128 18.7 3.8 4.0 3.9
GROUP TOTAL 9,571,719 16,739 1,638 18,377 21,286 29.0 3.3 3.8 3.2
1 Figures reflect SEGRO wholly-owned assets and its share of assets held in
joint ventures unless stated “AUM” which refers to all assets under
management.
2 Valuation movement is based on the difference between the opening and
closing valuations for properties held throughout the period, allowing for
capital expenditure, acquisitions and disposals.
3 In relation to completed properties only.
ASSET MANAGEMENT UPDATE - CREATING VALUE THROUGH OPERATIONAL EXCELLENCE
Our continued focus on Operational Excellence has helped us to deliver a
record level of rental growth in 2021 and ensured the successful execution of
our expanded development programme.
Growing rental income from letting existing space and new developments
At 31 December 2021, our portfolio generated passing rent of £518 million,
rising to £579 million once rent free periods expire (‘headline rent’).
During the year, we contracted £95 million of new headline rent, an increase
of more than 20 per cent on 2020. New pre-let agreements continue to
contribute strongly to this number but we also grew rent on our existing space
significantly.
Our customer base remains well diversified, reflecting the multitude of uses
of warehouse space. Our top 20 customers account for 32 per cent of total
headline rent. Amazon remained as our largest customer during 2021, accounting
for 7 per cent of the total.
Almost half of our customers are involved in businesses affected by
e-commerce, including third party logistics and parcel delivery businesses,
and retailers. These businesses accounted for almost 60 per cent of our
take-up during the year.
* £15 million of net new rent from existing assets. We generated £26 million
of headline rent from new leases on existing assets (2020: £16 million) and
£9 million from rent reviews, lease renewals and indexation (2020: £13
million). This was offset by rent from space returned of £20 million (2020:
£13 million) including £2 million of rent lost due to insolvency (2020: £2
million).
* Rental growth from lease reviews and renewals. These generated an uplift of
13.0 per cent (2020: 19.1 per cent) for the portfolio as a whole compared to
previous headline rent. During the year, new rents agreed at review and
renewal were 18.7 per cent higher in the UK (2020: 28.2 per cent) as reversion
accumulated over the past five years was reflected in new rents agreed, adding
£5 million of headline rent. The 2020 comparator included the peppercorn
lease re-gears at Heathrow which are now all complete. In Continental Europe,
rents agreed on renewal were 1.5 per cent higher (2020: 0.5 per cent higher),
strengthening once again as market rental growth continues to outpace the
indexation provisions that have accumulated over recent years.
* Continued strong demand from customers for pre-let agreements. In addition to
increased rents from existing assets, we contracted a record £49 million of
headline rent from pre-let agreements and lettings of speculative developments
prior to completion (2020: £41 million). Included within this is a large data
centre redevelopment on the Slough Trading Estate, two units on some of the
last remaining plots at SEGRO Logistics Park East Midlands Gateway (SLP-EMG),
our first development at the recently announced SmartParc in Derby, projects
for a leading global online retailer in the UK, Italy and Spain as well as big
box space for retailers, third party logistics providers and manufacturers
across Continental Europe.
* Rent roll growth increased to £72 million. An important element of achieving
our goal of being a leading income-focused REIT is to grow our rent roll,
primarily through increasing rent from our existing assets and then from
generating new rent through development. Rent roll growth, which reflects net
new headline rent from existing space (adjusted for take-backs of space for
development), take-up of developments and pre-lets agreed during the period,
increased to £72 million in 2021, from £60 million in 2020.
Summary of key leasing data for 2021
Summary of key leasing data(1) for the year to 31 December 2021 2020
Take-up of existing space(2) (A) £m 26 16
Space returned(3) (B) £m (20) (13)
NET ABSORPTION OF EXISTING SPACE(2) (A-B) £m 6 3
Other rental movements (rent reviews, renewals, indexation)(2) (C) £m 9 13
RENT ROLL GROWTH FROM EXISTING SPACE £m 15 16
Take-up of pre-let developments completed in the year (signed in prior £m 43 33
years)(2) (D)
Take-up of speculative developments completed in the past two years(2) (D) £m 15 10
TOTAL TAKE-UP(2) (A+C+D) £m 93 72
Less take-up of pre-lets and speculative lettings signed in prior years(2) £m (47) (35)
Pre-lets signed in the year for future delivery(2) £m 49 41
RENTAL INCOME CONTRACTED IN THE YEAR(2) £m 95 78
Takeback of space for redevelopment £m (3) (4)
Known Takeback/letting from acquisition £m – (1)
Retention rate(4) % 77 86
1 All figures reflect exchange rates at 31 December 2021 and include joint
ventures at share.
2 Headline rent.
3 Headline rent, excluding space taken back for redevelopment.
4 Headline rent retained as a percentage of total headline rent at risk from
break or expiry during the period.
Existing portfolio continues to perform well and delivered another set of
strong operating metrics
We monitor a number of asset management indicators to assess the performance
of our existing portfolio:
* High levels of customer satisfaction. Although the quality and location of our
portfolio is important to our customers, we believe that the service we
provide is crucial to maintaining high customer retention and low vacancy. We
carry out a rolling survey of our customer base throughout the year to
identify and rectify issues promptly. In 2021, 247 customers responded (a 25
per cent increase on 2020) and 97 per cent said that they would recommend
SEGRO to others (2020: 99 per cent) and 90 percent said they rated their
experience with SEGRO as ‘Excellent’ or ‘Very Good’ (2020: 87 per
cent).
* Vacancy has remained low. The vacancy rate at 31 December 2021 was 3.2 per
cent (31 December 2020: 3.9 per cent). This reduction was mainly due to a very
strong performance in letting recently completed speculatively developed space
across the portfolio. The vacancy rate on our standing stock remains low at
2.7 per cent (2020: 2.5 per cent). The vacancy rate is now at the bottom end
of our target range of between 4 and 6 per cent. The average vacancy rate
during the period was 3.8 per cent (2020: 4.8 per cent).
* Customer retention rate of 77 per cent. Approximately £55 million of headline
rent was at risk from a break or lease expiry during the period of which we
retained 74 per cent in existing space, with a further 3 per cent retained but
in new premises. We value the long-term relationships that we build with our
customers and always try to work with them to meet their changing
requirements. However, with vacancy at such low levels we do also take the
opportunity to create space for reletting and the capture of market rental
growth. We have also actively taken back space during 2021 to enable
redevelopment.
* Lease terms continue to offer attractive income security. The level of
incentives agreed for new leases (excluding those on developments completed in
the period) represented 6.3 per cent of the headline rent (2020: 6.8 per
cent). The portfolio’s weighted average lease length was maintained with 7.2
years to first break and 8.5 years to expiry (31 December 2020: 7.5 years to
first break, 8.8 years to expiry). Lease terms are longer in the UK (8.2 years
to break) than in Continental Europe (5.9 years to break), reflecting the
market convention of shorter leases in countries such as France and Poland.
A reduction in our operational carbon emissions and increased visibility of
the energy usage of our customers
Alongside the day-to-day management of our portfolio our teams also worked
hard during 2021 on our Responsible SEGRO commitment to Champion low-carbon
growth and be a net zero-carbon business by 2030. Within the asset management
of our existing portfolio, the greatest contribution that we can make towards
this is by reducing the operational carbon emissions from our warehouses
(including those made by the activities of our customers operating within
them). Our new targets, approved by the Science Based Targets Initiative
(SBTi), include the aim to reduce the absolute operating carbon emissions from
our portfolio by 42 per cent by 2030 (compared to a 2020 baseline), in line
with the 1.5 degree scenario. This includes all customer emissions and
captures the organic growth of the business.
One of the most meaningful changes that we can make is to procure energy for
our own operations, and for those markets where we procure energy on behalf of
our customers, in a way which reduces the operational emissions. We have been
moving our controlled portfolio on to renewable energy tariffs over the past
years and in 2021 we moved the last major contracts, in Poland and Czech
Republic, on to Green tariffs, which means that all SEGRO controlled
electricity is now zero-carbon. This was one of the main drivers of the 10 per
cent reduction in operating carbon emissions during 2021, equating to 31,500
tonnes of CO(2)e saved.
This certified renewable energy helps SEGRO and our customers reduce their
operating carbon footprint. Transitioning away from fossil fuels for warehouse
heating on to electricity, particularly generated on site, or alternative
sources of energy is an important next step in this strategy.
Our net zero-carbon goal includes Scope 3 emissions from our customers. Due to
the nature of typical lease terms we do not have operational control over the
majority of our buildings and therefore have limited visibility of how much
energy is used and how it is procured. Where this is the case we are engaging
with our customers and trying to positively influence them but an important
first step is to get a full picture of their energy usage. During 2021 we have
improved our visibility and we have collected data on 54 per cent of our total
property footprint by area (up from 41 per cent during 2020). Improving
visibility allows us to better identify opportunities to help our customers
operate their buildings more efficiently, saving them both carbon emissions
and money. We are also increasingly requiring customers to use renewable
energy within the terms of their leases (a “Green lease”) to ensure that
our portfolio carbon footprint improves.
On the Slough Trading Estate, for example, we have 33 data centres (including
two under construction) which are significant consumers of power. Our data
centre customers source their own electricity to power their buildings and
most have stated publicly that they source through renewable energy contracts.
They, along with several other major data centre operators formed the Climate
Neutral Data Centre Pact in 2020 and SEGRO fully supports the leadership shown
in this self-regulated initiative. During 2021 we signed our first data centre
Green lease, requiring the operator to commit to sourcing their energy on a
renewable tariff.
We are also making improvements to the carbon footprint of our portfolio
through the ongoing maintenance and refurbishment of our warehouses. Due to
our active asset recycling and new development the majority of our portfolio
is modern and built to the highest sustainability standards but there are
still some older assets where we can make improvements. When the opportunity
arises, normally due to a lease expiry, we refurbish our assets and upgrade
their sustainability credentials before letting them to a new customer. This
not only helps with our progress towards our net zero-carbon targets but also
makes the space more attractive to a potential customer and we are starting to
see it make a difference to rental levels achieved.
Changes that we make include installing LED lighting, solar panels, air source
heat pumps and smart metering. We aim to have the entire portfolio at least an
Energy Performance Certificate (EPC) of a B rating or equivalent. At the end
of 2021, 55 per cent of the portfolio now has an EPC rating of B or better and
we expect that proportion to increase.
Asset Management: What to expect in 2022
All of the indicators point to continued strong demand from occupiers in 2022
and with market vacancy rates at record low levels and new supply constrained
by the availability of land, particularly in urban markets we expect rental
growth to continue.
DEVELOPMENT UPDATE - GROWING THROUGH DEVELOPMENT
Development Activity
During 2021, we invested £975 million in our development pipeline which
comprised £649 million (2020: £531 million) in development spend, of which
£99 million was for infrastructure, and a further £326 million to replenish
our land bank to secure future development-led growth opportunities.
Development Projects Completed
We completed 839,200 sq m of new space during the year, with the majority of
our projects completing on time despite wider market issues with the supply of
construction materials and labour. These projects were 82 per cent pre-let
prior to the start of construction and were 93 per cent let as at 31 December
2021, generating £48 million of headline rent, with a potential further £4
million to come when the remainder of the space is let. This translates into a
yield on total development cost (including land, construction and finance
costs) of 6.8 per cent when fully let.
We completed 677,800 sq m of big box warehouse space, including four units at
SLP-EMG. Also within this was 560,800 sq m of big box warehouses across all of
our major European markets, let to third party logistics operators, online
retailers, food retailers and manufacturers among others.
We completed 161,400 sq m of urban warehouses, the majority built on a
speculative basis, of which over three quarters is already let. In the UK this
included the second phase of SEGRO Park Rainham, new units at SEGRO Park
Fairway Drive and two new data centres on the Slough Trading Estate. On the
Continent we completed further phases of urban warehouse parks in the key
markets of Berlin, Cologne, Madrid, Warsaw and Paris, including the first of
our developments on the land that we acquired as part of the Sofibus
Patrimoine acquisition at the start of 2021.
Supply chain issues made development more challenging during 2021 but we
proactively worked with our contractors to secure materials ahead of schedule
and were therefore able to avoid any major delays. We also avoided any
significant increases in construction costs as the majority of our development
projects are on fixed price contracts and development completions were
therefore unaffected.
Current Development Pipeline
At 31 December 2021, we had development projects approved, contracted or under
construction totalling 801,400 sq m, representing £380 million of future
capital expenditure to complete and £62 million of annualised gross rental
income when fully let. 60 per cent of this rent has already been secured and
these projects should yield 7.0 per cent on total development cost when fully
occupied.
* In the UK, we have 195,200 sq m of space approved or under construction.
Within this are urban schemes in West and North London, two new data centres
on the Slough Trading Estate, a pre-let for a global online retailer in the
Thames Valley and big box warehouses in SLP-EMG and our new development,
SmartParc Derby.
* In Continental Europe, we have 521,100 sq m of space approved or under
construction. This includes pre-let big box warehouses for a variety of
different occupiers, from retailers to manufacturers, across all of our
European markets. We are also developing further phases of our successful
urban warehouse parks in Berlin and Paris and a new scheme in Ingolstadt,
close to Munich.
* In addition to the above projects that we are developing ourselves, we also
have 85,100 sq m of space under construction as part forward-funded agreements
with local developers. This is proving to be a very effective way to get
access to opportunities in competitive markets where accessing land is more
difficult.
We continue to focus our speculative developments primarily on urban warehouse
projects, particularly in the UK, France and Germany, where modern space is in
short supply and occupier demand is strong. In the UK, our speculative
projects are focused in London and on the Slough Trading Estate. In
Continental Europe, we continue to build scale in Germany and Paris.
Within our Continental European development programme, approximately £8
million of potential gross rental income is associated with big box warehouses
developed outside our SELP joint venture. Under the terms of the joint
venture, SELP has the option, but not the obligation, to acquire these assets
shortly after completion. Assuming SELP exercises its option, we would retain
a 50 per cent share of the rent after disposal. In 2021, SEGRO sold £231
million of completed assets to SELP, representing a net disposal of £116
million.
We have factored increased construction costs into the development returns for
our current and future development projects. However, increased rental values
are more than offsetting any additional costs and our development returns
therefore remain highly attractive.
FUTURE DEVELOPMENT PIPELINE
Near-Term Development Pipeline
Within the future development pipeline are a number of pre-let projects which
are close to being approved, awaiting either final conditions to be met or
planning approval to be granted. We expect to commence these projects within
the next six to 12 months.
These projects total 334,100 sq m of space, equating to approximately £271
million of additional capital expenditure and £20 million of additional rent.
Land Bank
Our land bank identified for future development (including the near-term
projects detailed above) totalled 683 hectares at 31 December 2021, valued at
£783 million, roughly 4 per cent of our total portfolio value.
This land bank includes £326 million of land acquired during 2021, including
land associated with developments already underway or expected to start in the
short term. Over £90 million was spent on sites in the supply constrained
London market and we also acquired plots suitable for urban development in
Paris, Lyon, Milan, Madrid, Cologne and Warsaw. The remainder of the land was
for big box projects in Italy, Poland, Spain and the UK.
We estimate that our land bank can support 3.1 million sq m of development
over the next five years. The prospective capital expenditure associated with
the future pipeline is approximately £1.9 billion. It could generate £169
million of gross rental income, representing a yield on total development cost
(including land and notional finance costs) of around 6-7 per cent. These
figures are indicative based on our current expectations and are dependent on
our ability to secure pre-let agreements, planning permissions, construction
contracts and on our outlook for occupier conditions in local markets.
Conditional land acquisitions and land held under option agreements
Land acquisitions (contracted but subject to further conditions) and land held
under option agreements are not included in the figures above but together
represent significant further development opportunities. These include sites
for big box warehouses in the UK Midlands as well as in Germany, Italy and
Poland. They also include urban warehouse sites in East and West London.
The options are held on the balance sheet at a value of £24 million
(including joint ventures at share). Those we expect to exercise over the next
two to three years are for land capable of supporting almost 1.6 million sq m
of space and generating almost £160 million of headline rent for a blended
yield of approximately 6 per cent.
Focusing on reducing embodied carbon in our development programme to help us
achieve net zero carbon by 2030
We recognise that our planet is facing a climate emergency and that we need to
play our part in helping to combat the challenge of climate change and natural
resource depletion. As a result, we have joined many of our sector peers in
signing a pledge to be Net Zero carbon by 2050, and last year announced that
we will be going further and faster by reaching that aim by 2030. We have also
joined to Race to Zero, signed the Climate Pledge and took part in a Better
Buildings Partnership panel at COP 26 titled ‘Commercial Buildings: A real
asset in addressing Climate Change’.
It is our responsibility, as a long-term investor, to use the latest
technologies and construction techniques to ensure that our buildings are
efficient to use and stand the test of time.
We continuously monitor and, where appropriate, adopt new approaches,
technologies and techniques to reduce the environmental footprint of our
existing properties and our developments. The Investment Committee considers
the environmental impact of all capital investment decisions to ensure that
they are consistent with our environmental targets and ambitions.
We take a materiality-based approach to our environmental strategy, focusing
on the areas where our footprint is greatest. One of the largest sources of
carbon emissions from our own activities is the embodied carbon from our
development programme. For our existing buildings, we can work to improve
their efficiency in operational terms but it is in our development programme,
where we can make the greatest impact. In many cases, once we hand a building
over to a customer, they control all operational aspects so it is our
responsibility to provide them with an efficient building and the tools to
operate it efficiently.
Our targets, approved by the Science Based Target Initiative (SBTi), include a
goal to reduce the embodied carbon intensity of our development programme by
20 per cent by 2030, compared to a 2020 baseline.
Materials
Our sustainability strategy in development requires that we target the upfront
carbon footprint of our developments, related to the construction materials
and transportation emissions attributed to every new development. This is in
line with the methodology used by the UK Green Buildings Council (UKBGC) in
their Whole Life Carbon roadmap.
During 2021 we worked with two of our largest contractors to discuss how best
to reduce embodied carbon in our buildings and are working towards a
Sustainable Materials Brief for the UK and intend to adapt this for
Continental Europe.
We carry out life cycle assessments on our larger development projects to
identify the potential to reduce a building’s carbon footprint over its full
life cycle both by utilising alternative, more sustainable materials during
construction and by considering the emissions related to the deconstruction at
the end of the building’s useful life. We believe this holistic approach to
embodied carbon is the most impactful. In 2021, we conducted life cycle
assessments on over 440,000 sq m of new developments, covering over half of
the development footprint by area in the year. Going forward, we aim to carry
out life cycle assessments on all projects greater than 5,000 sq m
(representing 98 per cent of complete floorspace in 2021) and apply lessons
learned across the wider development programme as we progress against our
target.
We are increasingly using Building Information Management (BIM) in our
development projects, a technology which facilitates three-dimensional
modelling of the proposed building. It allows us to assess more accurately the
amount of material needed for the construction (reducing waste) and the carbon
emissions from the materials. It also allows us to model the building across
its whole life, making it an important contributor to our target of reducing
the level of whole life-cycle embodied carbon in our developments. In 2021 we
were able to use BIM models to undertake the life cycle assessments, and this
has led to more finishes and components being included in our assessments than
before, giving us better visibility of the carbon within our buildings.
The average embodied carbon intensity in 2021 was 391 kilograms CO2e per sq m
of delivered floor space, representing a 2 per cent reduction from the
recalculated 2020 baseline of 400 kg CO2e per sq m.
We have trialled sustainable concrete specifications across multiple projects
in 2021. This is the most effective way to impact the embodied carbon
emissions, as concrete can comprise up to 50 per cent of the total embodied
carbon in some projects.
We will continue to adopt the latest techniques to reduce embodied carbon
within our developments, including low-carbon concrete and timber or recycled
steel beams which we are already using in our current developments. The
availability of such materials is not yet consistent across our markets and
they are not always suited to the design or us of our buildings., but we are
determined to continue to reduce the embodied carbon within our development
pipeline to achieve our science-based target.
Waste
While waste generated across our own offices (where we have control) is
monitored, tracked and reported, the majority of our waste is created as a
result of our construction and demolition projects. Our target is to send zero
waste to landfill by 2025.
For demolition waste, which makes up the bulk of our total waste, we re-use as
much as possible on-site to avoid the carbon emissions related to
transportation of waste off-site and the import of new materials from
elsewhere.
We undertake pre-demolition audits to identify waste materials taking into
consideration the quantity and quality of waste to be re-used on site as
aggregate. We also re-use on site where materials are non-hazardous and will
not have a detrimental effect on the environment. Hazardous waste is treated
differently and is not included within these figures. Hazardous waste is dealt
with in the appropriate manner, fully in line with relevant regulation. In
2021, 97 per cent of construction, demolition and operational waste controlled
by SEGRO was diverted from landfill.
Biodiversity
We think carefully about the spaces outside our existing and new buildings to
ensure that they are pleasant environments for people to work in, meet the
needs of our local communities and have a positive impact on local
biodiversity.
Where possible we create green spaces within our estates, including woodland
areas with public walking trails around our big box parks or small ‘pocket
parks’ and green walls in our urban estates. We plant indigenous trees and
have even renatured stream beds. On many of our estates we have introduced
beehives and now have 335 of them across our portfolio encouraging pollination
of local plants and crops. We have also added bird boxes, bat boxes and other
locally-appropriate biodiversity features that help contribute to a healthy
ecosystem.
On land that is awaiting development in Italy we pay local farmers to manage
the plots and graze livestock which have yielded risotto rice, buffalo
mozzarella and wool whilst also keeping the grass well maintained.
Building Certifications
The sustainability credentials of a building are increasingly important for
potential customers making a decision on where to locate their businesses. We
target BREEAM ‘Very Good’ (or equivalent) certification for developments
and in 2021 98 per cent of our development completions have either been, or in
the process of being, accredited at that level. From 2022 onwards we have
raised the minimum standard to ‘Excellent’ unless local circumstances
(such as supply chains) prevent it.
Renewable Energy Capacity
Our development and refurbishment activity also allows us to increase our
on-site renewable energy capacity. During 2021 we increased this capacity by
over 30 per cent bringing it to 35.4 MW, and generating enough energy to power
over 2,100 homes for a year
Development: What to expect in 2022
We have 801,400 sq m of development projects under way capable of generating
£62 million of new headline rent, of which 60 per cent has been secured. We
expect to invest £700 million in development capex including approximately
£150 million of infrastructure expenditure.
INVESTMENT UPDATE - £1.5 BILLION OF NET INVESTMENT FOR GROWTH
We invested almost £2 billion in our portfolio during 2021: development
capital expenditure of £649 million, £997 million of assets and £326
million of land. This was partly offset by £515 million of disposals.
Acquisitions focused on building scale in urban warehousing
Despite extremely competitive investment markets we have been able to leverage
our market position, reputation, relationships and expertise to complete some
unique acquisitions in 2021.
We acquired assets totalling £997 million, reflecting a blended topped-up
initial yield of 3.8 per cent. This included:
* the acquisition of an office portfolio in Slough, providing us with additional
space for redevelopment on the Slough Trading Estate;
* an off-market UK asset swap that resulted in us acquiring a significant urban
warehouse park in West London (Matrix Park) that perfectly complements our
existing portfolio in Park Royal and also has a medium-term redevelopment
opportunity;
* urban assets in North, East and South London with redevelopment potential,
helping us to increase our presence in these key strategic markets;
* a former car dealership and car servicing centre with existing underground
access over multiple levels in a unique inner-city Paris location;
* an older urban industrial estate in Madrid with short-term income that helps
us to unlock a larger redevelopment opportunity.
In addition to the asset acquisitions, we also acquired £326 million of land
to create future development opportunities (see page 15 for further
information).
Asset recycling to improve portfolio focus
During 2021, we sold £515 million of land and assets, taking advantage of
strong investor demand to realise profits and release capital to reinvest in
our business.
The asset disposals totalled £474 million, reflecting a blended topped-up
initial yield of 4.0 per cent, and were significantly ahead of 31 December
2020 book values. They included:
* the portfolio of UK assets that we swapped for Matrix Park. All of these were
older, mostly stand-alone assets that had been identified for medium term
disposal through our annual asset recycling process;
* a portfolio of urban warehouses in Italy, in locations that we regard as
non-core, that we had developed for a leading online global retailer to assist
them with their expansion plans;
* a car showroom in Reading;
* stand-alone big box warehouses in Italy and Spain.
As in previous years, we sold a portfolio of Continental European big box
warehouses developed by SEGRO to SELP for which we received £116 million net
proceeds from an effective sale of a 50 per cent interest.
Additionally, we disposed of £41 million of land, primarily comprising plots
in non-core markets.
Investment: What to expect in 2022
We will continue our disciplined approach to capital allocation, focusing the
majority of our investment on the development pipeline (through development
capex, land acquisitions and acquiring assets with future redevelopment
potential) but making strategic asset acquisitions when the opportunity
arises.
While investor demand for industrial properties remains strong, we expect to
continue to recycle assets where we believe we can generate better returns
from deploying our capital in other opportunities. We typically expect to
recycle 1-2 per cent of the portfolio per year.
finance review: AN ACTIVE YEAR OF FINANCING AND STRONG FINANCIAL RESULTS
Financial highlights
31 December 2021 31 December 2020
IFRS(1 )net asset value (NAV) per share (diluted) (p) 1,115 809
Adjusted(1 )NAV per share (diluted) (p) 1,137 814
IFRS profit before tax (£m) 4,355 1,464
Adjusted(2) profit before tax (£m) 356 296
IFRS earnings per share (EPS) (p) 339.0 124.1
Adjusted(2) EPS (p) 29.1 25.4
1 A reconciliation between IFRS NAV and its Adjusted NAV equivalent is shown
in Note 11.
2 A reconciliation between IFRS profit before tax and Adjusted profit before
tax is shown in Note 2 and between IFRS EPS and Adjusted EPS is shown in Note
11.
Presentation of financial information
The Group Financial Statements are prepared under IFRS where the Group’s
interests in joint ventures are shown as a single line item on the income
statement and balance sheet and subsidiaries are consolidated at 100 per cent.
The Adjusted profit measure reflects the underlying financial performance of
the Group’s property rental business, which is our core operating activity.
It is based on EPRA earnings as set out in the Best Practices Recommendations
Guidelines of the European Public Real Estate Association (EPRA) which are
widely used alternate metrics to their IFRS equivalents within the European
real estate sector (further details can be found at www.epra.com
(https://cts.businesswire.com/ct/CT?id=smartlink&url=http%3A%2F%2Fwww.epra.com&esheet=52581323&newsitemid=20220217005681&lan=en-US&anchor=www.epra.com&index=6&md5=860e0a7518ee055155e5ce3a7ebd5c76)
). In calculating Adjusted profit, the Directors may also exclude additional
items considered to be non-recurring, unusual, or significant by virtue of
size and nature. In the current and prior periods there have been no such
adjustments and therefore Adjusted profit and EPRA earnings are the same.
A detailed reconciliation between Adjusted profit after tax and IFRS profit
after tax is provided in Note 2 to the condensed financial statements. This is
not on a proportionally consolidated basis.
Reconciliations between SEGRO Adjusted metrics and EPRA metrics are provided
in the Supplementary Notes to the condensed financial statements, which also
include EPRA metrics as well as SEGRO’s Adjusted income statement and
balance sheet presented on a proportionally consolidated basis.
SEGRO monitors these alternative metrics, as well as the EPRA metrics for
vacancy rate, net asset value, capital expenditure and total cost ratio, as
they provide a transparent and consistent basis to enable comparison between
European property companies.
Adjusted profit
Adjusted profit
2021 2020
£m
£m
Gross rental income 447 393
Property operating expenses (100) (88)
Net rental income 347 305
Joint venture fee income 52 22
Administration expenses (59) (52)
Share of joint ventures’ Adjusted profit(1) 56 61
Adjusted operating profit before interest and tax 396 336
Net finance costs (including adjustments) (40) (40)
Adjusted profit before tax 356 296
Tax on Adjusted profit (8) (4)
Adjusted profit after tax 348 292
1. Comprises net property rental income less administration expenses, net
interest expenses and taxation.
Adjusted profit before tax increased by 20.3 per cent to £356 million (2020:
£296 million) during 2021 as a result of the movements described below,
primarily growth in rental income and recognition of a performance fee from
the SELP joint venture (£26 million income) offset by the performance fee
expense recognised in the share of joint ventures profits (£13 million cost)
which has a £13 million net impact on profit. Adjusted profit is detailed
further in Note 2.
Net rental income
Net rental income increased by £42 million to £347 million (or by £38
million to £423 million including joint ventures at share), reflecting the
positive net impact of like-for-like rental growth, development completions
and investment activity during the period, offset by the impact of disposals.
On a like-for-like basis, before other items (primarily corporate centre and
other costs not specifically allocated to a geographic Business Unit), net
rental income increased by £17 million, or 4.9 per cent, compared to 2020.
This is due to strong rental performance across our portfolio. UK: 5.6 per
cent increase, in particular in Greater London; and Continental Europe: 3.6
per cent increase, in particular in Northern Europe.
Like-for-like net rental income (including JVs at share) 2021 2020
£m
£m
Change(3)
%
UK 234 222 5.6
Continental Europe 129 124 3.6
Like-for-like net rental income before other items(1) 363 346 4.9
Other(2) (6) (6) –
Like-for-like net rental income (after other) 357 340 4.8
Development lettings 39 9
Properties taken back for development 1 5
Like-for-like net rental income plus developments 397 354
Properties acquired 24 4
Properties sold 10 15
Net rental income before surrenders, dilapidations and exchange 431 373
Lease surrender premiums and dilapidations income 6 4
Other items and rent lost from lease surrenders 10 14
Impact of exchange rate difference between periods – 4
Net rental income (including joint ventures at share) 447 395
SEGRO share of joint venture management fees (11) (10)
SEGRO share of joint venture performance fees (13) –
Net rental income after SEGRO share of joint venture fees 423 385
1 Like-for like change by Business Unit: Greater London 8.5%, Thames Valley
2.7%, National Logistics 0.4%, Northern Europe 9.1%, Southern Europe 1.2%,
Central Europe 0.7%.
2 Other includes the corporate centre and other costs relating to the
operational business which are not specifically allocated to a geographical
Business Unit.
3 Percentage change has been calculated using the figures presented in the
table above in millions accurate to one decimal place.
Income from joint ventures
Joint venture fee income increased by £30 million to £52 million in 2021.
This increase is primarily due to the recognition of a performance fee of £26
million in respect of the SELP joint venture (as detailed further in Note 6).
SEGRO’s share of joint ventures’ Adjusted profit after tax decreased by
£5 million from £61 million in 2020 to £56 million in 2021. This includes a
performance fee expense (at share) of £13 million. Excluding performance fee
expense, the Adjusted joint venture profit after tax increased by £8 million
compared to 2020 as net rental income in the SELP joint venture has continued
to grow.
Administrative and operating costs
The Group is focused on managing its cost base and uses a Total Cost Ratio
(TCR) as a measure of cost management. The TCR for 2021 has improved to 20.2
per cent compared to 21.1 per cent in 2020. The calculation is set out in
Table 8 of the Supplementary Notes to the condensed financial statements.
Excluding share-based payments, the cost ratio would be 17.6 per cent, an
improvement from 18.8 per cent in 2020.
The cost ratio calculation is detailed in Table 8 in the Supplementary Notes,
which shows that the reduction in the ratio has been primarily caused by the
increase in gross rental income used in the TCR, by £56 million to £504
million reflecting the growth through development and like-for-like income
discussed in the Net Rental Income section above. Total costs in respect of
the TCR of £103 million increased by £8 million compared to 2020.
Administration expenses have increased by £7 million, as a result of
increased staff costs following headcount increases and increased depreciation
and IT costs reflecting our continued investment in technology. Property
operating expenses in the wholly-owned portfolio have increased in 2021 from
£88 million to £100 million, as the portfolio has grown in size.
Total costs (see Note 5) have increased by £36 million to £140 million. This
balance includes trading property cost of sales which have increased by £24
million which do not form part of the TCR calculation.
Net finance costs
Net finance costs (including adjustments) remained flat at £40 million
compared to 2020. Average interest rates during the year are slightly lower
offsetting the impact of higher gross debt during 2021 compared to the prior
year.
Taxation
The tax charge on Adjusted profit of £8 million (2020: £4 million) reflects
an effective tax rate of 2.2 per cent (2020: 1.3 per cent).
The Group’s effective tax rate reflects the fact that over three-quarters of
its assets are located in the UK and France and qualify for REIT and SIIC
status respectively in those countries. This status means that income from
rental profits and gains on disposals of assets in the UK and France are
exempt from corporation tax, provided SEGRO meets a number of conditions
including, but not limited to, distributing 90 per cent of UK taxable profits.
Adjusted earnings per share
Adjusted earnings per share are 29.1 pence compared to 25.4 pence in 2020 due
to the increase in Adjusted profit slightly offset by the 47.9 million
increase in the average number of shares in issue compared to the prior year.
Excluding the impact of the performance fee recognised in the period the
Adjusted earnings per share would be 28.0 pence, a 10 per cent increase
compared to 2020.
IFRS PROFIT
IFRS profit before tax in 2021 was £4,355 million (2020: £1,464 million),
equating to basic post-tax IFRS earnings per share of 339.0 pence compared
with 124.1 pence for 2020, reflecting significant property valuation gains in
the year.
A reconciliation between Adjusted profit before tax and IFRS profit before tax
is provided in Note 2 to the condensed financial statements.
Realised and unrealised gains on wholly-owned investment properties of £3,670
million in 2021 (2020: £976 million) and realised and unrealised gains on
trading and other property interests of £6 million (2020: £14 million) have
been recognised in the Income Statement as the value of our portfolio
increased during the year. These primarily relate to an unrealised valuation
surplus on investment properties of £3,617 million (2020: £971 million)
following a 30.6 per cent growth in valuation of the wholly-owned property
portfolio (28.8 per cent change including joint ventures at share) in the
year, as discussed further in the Portfolio Update above.
SEGRO’s share of realised and unrealised gains on properties held in joint
ventures was £497 million (2020: £216 million) largely in respect of a 19.9
per cent valuation uplift in the SELP portfolio during the year. Further
analysis of the gains are detailed in Note 6. IFRS earnings were also impacted
by a net fair value loss on interest rate swaps and other derivatives of £82
million (2020: gain of £14 million) primarily as a result of adverse
movements on interest rate expectations. There was no cost of closing out debt
during the year (2020: £11 million).
In addition, SEGRO recognised a tax charge in respect of adjustments of £280
million (2020: £31 million) of which £145 million (2020: £nil) relates to
withholding tax in France as detailed further in Note 9, £38 million (2020:
£nil) relates to the SIIC entry charge for Sofibus Patrimoine S.A.
(‘Sofibus’) and detailed further in Note 9 and £97 million (2020: £31
million) arises primarily in relation to property valuation movements.
BALANCE SHEET
Adjusted net asset value
£m Shares million Pence per share
Adjusted NAV attributable to ordinary shareholders at 31 December 2020 9,725 1,194.7 814
Realised and unrealised property gain 4,173 346
Adjusted profit after tax and non-controlling interests 348 29
Dividend net of scrip shares issued (2020 final and 2021 interim) (176) (23)
Tax charge in respect of realised and unrealised property gains (247) (21)
Other including exchange rate movement (119) (8)
Adjusted NAV attributable to ordinary shareholders at 31 December 2021 13,704 1,205.5 1,137
At 31 December 2021, IFRS net assets attributable to ordinary shareholders
were £13,436 million (31 December 2020: £9,659 million), reflecting 1,115
pence per share (31 December 2020: 809 pence) on a diluted basis.
Adjusted NAV per share at 31 December 2021 was 1,137 pence (31 December 2020:
814 pence). The 39.7 per cent increase primarily reflects property gains in
the period. The table above highlights the other principal factors behind the
increase. A reconciliation between IFRS and Adjusted NAV is available in Note
11 to the condensed financial statements.
Cash Flow and Net Debt Reconciliation
Cash flows from operating activities of £347 million are £114 million higher
than the prior year. This is primarily due to increased rental income received
during the year, the impact of trading properties, for which there was an
inflow of £12 million in the current year, following disposals in the period
compared to an outflow of £20 million in the prior year. In addition, there
were tax payments of £17 million primarily in France, as discussed in more
detail above.
The Group made net investments of £1,266 million of investment and
development properties (including other investments and loans to joint
ventures) during the year on a cash flow basis (2020: £1,101 million). This
is principally driven by expenditure of £1,706 million (2020: £1,216
million) to purchase and develop investment properties to deliver further
growth in line with our strategy, the largest of which was the purchase of a
portfolio of offices in the Thames Valley Business Unit in December 2021 as
discussed further in the Investment Update above.
Disposals of investment properties increased by £332 million to £491 million
compared to the prior period (2020: £159 million). Disposals include £231
million to the SELP joint venture and £75 million cash received in respect of
deferred consideration from a prior period disposal. Other significant cash
flows include dividends paid of £180 million (2020: £179 million) where cash
flows are lower than the total dividend due to the level of scrip uptake; an
inflow from settlement of foreign exchange derivatives of £40 million (2020:
outflow £55 million); and £12 million to purchase the remaining
non-controlling interest in Sofibus following the initial acquisition in 2020.
Overall, net debt has increased in the year from £2,325 million to £3,361
million.
Cash flow and net debt reconciliation
2021 2020
£m £m
Opening net debt (2,325) (1,811)
Cash flow from operating activities 347 233
Finance costs (net) (52) (52)
Debt close out costs – (11)
Dividends received (net) 33 34
Tax paid (17) (5)
Net cash received from operating activities 311 199
Dividends paid (180) (179)
Purchase and development of investment properties (1,706) (1,216)
Sale of investment properties 491 159
Acquisition of interests in property and other investments (12) (4)
Net investment in joint ventures (39) (40)
Net settlement of foreign exchange derivatives 40 (55)
Proceeds from issue of ordinary shares 1 672
Purchase of non-controlling interest (12) –
Other items (8) (4)
Net funds flow (1,114) (468)
Non-cash movements (3) (3)
Exchange rate movements 81 (31)
Gross debt acquired – (12)
Closing net debt (3,361) (2,325)
Capital expenditure
The table below sets out analysis of the capital expenditure during the year.
This includes acquisition and development spend, on an accruals basis, in
respect of the Group’s wholly-owned investment and trading property
portfolios, as well as the equivalent amounts for joint ventures, at share.
Total spend for the year was £2,166 million, an increase of £619 million
compared to 2020. More detail on developments and acquisitions can be found in
the Portfolio Update above.
Development capital expenditure of £649 million was spent in the year (2020:
£531 million) across all our Business Units, particularly Southern Europe and
National Logistics, reflecting our development-led growth strategy.
Development spend incorporates interest capitalised of £10 million (2020: £8
million) including joint ventures at share.
Spend on existing completed properties, totalled £45 million (2020: £40
million), of which £30 million (2020: £24 million) was for major
refurbishment, infrastructure and fit-out costs prior to re-letting. The
balance mainly comprises more minor refurbishment and fit-out costs, which
equates to 4 per cent of Adjusted profit before tax and less than 1 per cent
of total spend. Of the total spend on completed properties £5 million (2020:
£3 million) increased lettable space.
EPRA capital expenditure analysis
2021 2020
Wholly owned Joint ventures Total Wholly owned Joint ventures Total
£m £m £m £m £m £m
Acquisitions 1,280(1) 159 1,439(7) 858(1) 82 940
Development(4) 588(2) 61 649 485(2) 46 531
Completed properties(6) 35(3) 10 45 34(3) 6 40
Other(5) 22 11 33 27 9 36
Total 1,925 241 2,166 1,404 143 1,547
1 Being £1,272 million investment property and £8 million trading property
(2020: £824 million and £34 million respectively) see Note 12.
2 Being £571 million investment property and £17 million trading property
(2020: £471 million and £14 million respectively) see Note 12.
3 Being £35 million investment property and £nil trading property (2020:
£34 million and £nil respectively) see Note 12.
4 Includes wholly-owned capitalised interest of £9 million (2020: £7
million) as further analysed in Note 8 and share of joint venture capitalised
interest of £1 million (2020: £1 million).
5 Tenant incentives, letting fees and rental guarantees and other items.
6 Being £40 million expenditure used for enhancing existing space (2020: £37
million) and £5 million used for creation of additional lettable space (2020:
£3 million).
7 Total acquisitions completed in 2021 detailed in the Investment Update
above, of £1,323 million (being asset acquisitions of £997 million and land
acquisitions of £326 million) excludes share of assets acquired by SELP from
SEGRO of £116 million (all of which was completed property).
FINANCING
SEGRO took the opportunity in 2021 to extend the duration of both syndicated
and bilateral revolving credit facilities. Commitments for both syndicated and
bilateral facilities total €1.2 billion and they mature in May 2026. In
September, SEGRO issued a debut green €500 million 10-year unsecured euro
bond with a very attractive coupon of just 0.5 per cent. Proceeds were used to
finance and re-finance eligible green projects in accordance with SEGRO’s
Green Finance Framework. In December, SEGRO entered into an additional €750
million syndicated term loan facility due to mature in December 2023.
SELP combined two separate syndicated revolving credit facilities into a
single facility of €500 million. It also took the opportunity to extend the
maturity to May 2025. SELP also issued its debut green €500 million 8-year
unsecured euro bond. Proceeds of the bond were used to finance and re-finance
eligible green projects outlined in SEGRO’s Green Finance Framework.
Both SEGRO and SELP had positive credit rating changes during the year.
SEGRO’s Fitch senior unsecured debt rating increased by a notch from A- to
A. SEGRO’s issuer default rating also increased by a notch from BBB+ to A-.
SELP’s Fitch senior unsecured debt rating increased by a notch from BBB+ to
A-. In addition, Moody’s affirmed SELP’s long-term issuer rating of Baa2.
As at 31 December 2021, the gross borrowings of SEGRO Group and its share of
gross borrowings in joint ventures totalled £4,268 million (31 December 2020:
£3,201 million), of which only £8 million (31 December 2020: £17 million)
are secured by way of legal charges over specific assets. The remainder of
gross borrowings are unsecured. Cash and cash equivalent balances were £67
million (31 December 2020: £113 million). Average debt maturity was 8.6 years
(31 December 2020: 9.9 years) and average cost of debt (excluding non-cash
interest and commitment fees) was 1.5 per cent (31 December 2020: 1.6 per
cent).
Funds available to SEGRO Group (including its share of joint venture funds) at
31 December 2021 totalled £1,105 million (31 December 2020: £1,189 million),
comprising £67 million cash and short-term investments and £1,038 million of
undrawn credit facilities of which only £8 million was uncommitted. Cash and
cash equivalent balances, together with the Group’s interest rate and
foreign exchange derivatives portfolio, are spread amongst a strong group of
banks, all of which have a credit rating of A- or better.
Financial Position and Funding
31 December 2021 31 December 2020
SEGRO Group SEGRO Group and JVs at share SEGRO Group SEGRO Group and JVs at share
Net borrowings (£m) 3,361 4,201 2,325 3,088
Available cash and undrawn facilities (£m) 893 1,105 1,061 1,189
Balance sheet gearing (%) 25 N/A 24 N/A
Loan to value ratio (%) 22 23 22 24
Weighted average cost of debt(1) (%) 1.5 1.5 1.7 1.6
Interest cover(2) (times) 7.0 6.9 6.6 6.5
Average duration of debt (years) 9.6 8.6 11.7 9.9
1 Based on gross debt, excluding commitment fees and non-cash interest.
2 Net rental income/Adjusted net finance costs (before capitalisation).
TREASURY POLICIES AND GOVERNANCE
The Group Treasury function operates within a formal policy covering all
aspects of treasury activity, including funding, counterparty exposure and
management of interest rate, currency and liquidity risks. Group Treasury
reports on compliance with these policies on a quarterly basis and policies
are reviewed regularly by the Board
GEARING AND FINANCIAL COVENANTS
We consider the key leverage metric for SEGRO to be proportionally
consolidated (‘look-through’) loan to value ratio (LTV) which incorporates
assets and net debt on SEGRO’s balance sheet and SEGRO’s share of assets
and net debt on the balance sheets of its joint ventures. The LTV at 31
December 2021 on this basis was 23 per cent (31 December 2020: 24 per cent).
SEGRO’s borrowings contain gearing covenants based on Group net debt and net
asset value, excluding debt in joint ventures. The gearing ratio of the Group
at 31 December 2021, as defined within the principal debt funding arrangements
of the Group, was 25 per cent (31 December 2020: 24 per cent). This is
significantly lower than the Group’s tightest financial gearing covenant
within these debt facilities of 160 per cent.
Property valuations would need to fall by around 63 per cent from their 31
December 2021 values to reach the gearing covenant threshold of 160 per cent.
A 63 per cent fall in property values would equate to an LTV ratio of
approximately 62 per cent.
The Group’s other key financial covenant within its principal debt funding
arrangements is interest cover, requiring that net interest before
capitalisation be covered at least 1.25 times by net property rental income.
At 31 December 2021, the Group comfortably met this ratio at seven times. Net
property rental income would need to fall by around 82 per cent from 2021
levels to reach the interest cover covenant threshold of 1.25 times. On a
proportionally consolidated basis, including joint ventures, the interest
cover ratio was seven times.
We mitigate the risk of over-gearing the Company and breaching debt covenants
by carefully monitoring the impact of investment decisions on our LTV and by
stress testing our balance sheet to potential changes in property values.
Our intention for the foreseeable future is to maintain our LTV at around 30
per cent. This provides the flexibility to take advantage of investment
opportunities arising and ensures significant headroom compared against our
tightest gearing covenants should property values decline. The weighted
average maturity of the gross borrowings of the Group (including joint
ventures at share) was 8.6 years.
The Group’s debt has a range of maturities. The nearest of which is
SEGRO’s syndicated term loan facility and that matures in December 2023.
There are no material Group bond maturities until 2024. This long average debt
maturity translates into a favourable, well spread debt funding maturity
profile which reduces future refinancing risk.
INTEREST RATE RISK
The Group’s interest rate risk policy is designed to ensure that we limit
our exposure to volatility in interest rates. The policy states that between
50 and 100 per cent of net borrowings (including the Group’s share of
borrowings in joint ventures) should be at fixed or capped rates, including
the impact of derivative financial instruments.
At 31 December 2021, including the impact of derivative instruments, 65 per
cent (2020: 70 per cent) of the net borrowings of the Group (including the
Group’s share of borrowings within joint ventures) were at fixed or capped
rates.
The fixed only level of debt is 46 per cent at 31 December 2021 (31 December
2020: 44 per cent).
As a result of the fixed rate cover in place, if short-term interest rates had
been 100 basis points higher throughout the year to 31 December 2021, the
adjusted net finance cost of the Group would have increased by approximately
£17 million representing around 5 per cent of Adjusted profit after tax.
The Group elects not to hedge account its interest rate derivatives portfolio.
Therefore, movements in its fair value are taken to the income statement but,
in accordance with EPRA Best Practices Recommendations Guidelines, these gains
and losses are eliminated from Adjusted profit after tax.
FOREIGN CURRENCY TRANSLATION RISK
The Group has minimal transactional foreign currency exposure, but does have a
potentially significant currency translation exposure arising on the
conversion of its substantial foreign currency denominated assets (mainly
euro) and euro denominated earnings into sterling in the Group consolidated
accounts.
The Group seeks to limit its exposure to volatility in foreign exchange rates
by hedging its foreign currency gross assets using either borrowings or
derivative instruments. The Group targets a hedging range of between the last
reported LTV ratio (31 December 2021: 23 per cent) and 100 per cent. At 31
December 2021, the Group was 62 per cent hedged by gross foreign currency
denominated liabilities (31 December 2020: 61 per cent).
Including the impact of forward foreign exchange and currency swap contracts
used to hedge foreign currency denominated net assets, if the value of the
other currencies in which the Group operates at 31 December 2021 weakened by
10 per cent against sterling (to €1.31, in the case of euros), net assets
would have decreased by approximately £183 million and there would have been
a reduction in gearing of approximately 1.5 per cent and in the LTV of 1.1 per
cent.
The average exchange rate used to translate euro denominated earnings
generated during 2021 into sterling within the consolidated income statement
of the Group was €1.16: £1. Based on the hedging position at 31 December
2021, and assuming that this position had applied throughout 2021, if the euro
had been 10 per cent weaker than the average exchange rate (€1.28: £1),
Adjusted profit after tax for the year would have been approximately £12
million (3.4 per cent) lower than reported. If it had been 10 per cent
stronger, Adjusted profit after tax for the year would have been approximately
£15 million (4.3 per cent) higher than reported.
GOING CONCERN
As noted in the Financial Position and Financing section above, the Group has
significant available liquidity to meet its capital commitments, a long-dated
debt maturity profile and substantial headroom against financial covenants.
* In 2021 the Group has extended the term of its €1.2 billion of bank
facilities to 2026 and secured an additional €750 million 2-year bank
facility to finance acquisitions.
* The Group executed its inaugural euro bond, opening a further deep pool of
debt capital.
* Group cash and available committed facilities at 31 December 2021 were £886
million.
* The Group continuously monitors its liquidity position compared to committed
and expected capital and operating expenses on a rolling forward 18-month
basis. The quantum of committed capital expenditure at any point in time is
typically low due to the short timeframe to construct warehouse buildings.
* The Group also regularly stress-tests its financial covenants. As noted above,
at 31 December 2021, property values would need to fall by around 63 per cent
before breaching the gearing covenant. In terms of interest cover, net rental
income would need to fall by 82 per cent before breaching the interest cover
covenant. Both would be significantly in excess of the Group’s experience
during the global financial crisis and its experience in 2021.
Having made enquiries and having considered the principal risks facing the
Group, including liquidity and solvency risks, and material uncertainties, the
Directors have a reasonable expectation that the Company and the Group have
adequate resources to continue in operational existence for the foreseeable
future (a period of at least 12 months from the date of approval of the
financial statements). Accordingly, they continue to adopt the going concern
basis in preparing these financial statements.
DIVIDEND INCREASE REFLECTS A STRONG YEAR AND CONFIDENCE FOR THE FUTURE
Under the UK REIT rules, we are required to pay out 90 per cent of UK-sourced,
tax-exempt rental profits as a ‘Property Income Distribution’ (PID). Since
we also receive income from our properties in Continental Europe, our total
dividend should normally exceed this minimum level and we target a pay-out
ratio of 85 to 95 per cent of Adjusted profit after tax. We aim to deliver a
progressive and sustainable dividend which grows in line with our
profitability in order to achieve our goal of being a leading income-focused
REIT.
The Board has concluded that it is appropriate to recommend an increase in the
final dividend per share by 1.7 pence to 16.9 pence (2020: 15.2 pence) which
will be paid as a PID. The Board’s recommendation is subject to approval by
shareholders at the Annual General Meeting, in which event the final dividend
will be paid on 4 May 2022 to shareholders on the register at the close of
business on 19 March 2022.
In considering the final dividend, the Board took into account:
* the policy of targeting a pay-out ratio of between 85 and 95 per cent of
Adjusted profit after tax;
* the desire to ensure that the dividend is sustainable and progressive
throughout the cycle; and
* the results for 2021 and the outlook for earnings.
The total dividend for the year will, therefore, be 24.3 pence, a rise of 10
per cent versus 2020 (22.1 pence) and represents distribution of 84 per cent
of Adjusted profit after tax.
The Board has decided to retain a scrip dividend option for the 2021 final
dividend, allowing shareholders to choose whether to receive the dividend in
cash or new shares. In 2021, 36 per cent of the 2020 final dividend and 31 per
cent of the 2021 interim dividend was paid in new shares, equating to £94
million of cash retained on the balance sheet.
STATEMENT OF PRINCIPAL RISKS
For SEGRO, effective risk management is a cornerstone of how we operate in
order to deliver our strategy of growth in a sustainable way, both now and in
the long term. Against the backdrop of the continually evolving pandemic,
coupled with fluidity of the geopolitical and macroeconomic environment, the
business has continued to perform strongly, in demanding operating
circumstances. This is due, in no small part, to the underpin provided by our
risk process, which is embedded throughout our business, to enable appropriate
and responsive decision making.
ACTIVITY IN THE YEAR
The Group Risk Committee is made up of members of senior management and has
met three times during the year. The members of the Committee have detailed
knowledge of, and expertise in operational, financial, legal and corporate
aspects of our business ensuring we are well positioned to undertake our
responsibility of overseeing the work of the risk management function on
behalf of the Executive Committee.
The Head of Risk and his team report on updates to the risk register following
a full risk review process which includes meetings with each risk manager and
executive risk owner, consideration of changes to risk policy and appetite
(see below), scrutiny of the external and internal operating environments,
coordination of the risk management process and consequential external
reporting. During the year the team has benefitted from input from the newly
appointed Group Insurance Manager which has enabled a fresh pair of eyes to
provide additional rigour and challenge. We have also taken the opportunity to
review our internal Key Risk Indicators to ensure they are proportionate and
appropriate for the business today. As a consequence, we have deemed it
appropriate to increase our acceptable appetite for appropriate land holdings
in light of the favourable market conditions.
The process has identified risks whose profile is increasing, in particular
environmental sustainability and major event (including cyber) as detailed
further below. In addition, the disruptive Brexit risk was removed as a
Principal Risk following the evolution of events during the year.
Details of particular areas of interest to the Risk Committee are detailed
below:
Major event/business disruption
The impact of the pandemic continues to evolve and influence our risk
landscape. Whilst the risk of virus variants and further restrictions remain,
we have adapted our business both from an employee perspective and
operationally to adjust to a “new normal” and remain agile in our response
to the risks as they arise. Our experiences over the last two years will be
invaluable should there be further challenges due to the pandemic.
During the year, the Group’s Board and relevant committees continued to meet
regularly to identify, consider and discuss Covid-19 related risks and
mitigations as they arose and evolved. Areas of particular concern included
not only on our operations but on our people. This included changes to the
working environment whilst both in the office and working from home which
occurred at various points during the year across our locations.
In addition to the pandemic, we remain vigilant to cyber and other IT related
issues which could result in disruption to our business, loss of data and/or
reputational damage. We use both in-house resources and external specialists
to review and test our controls and processes. Employees are given regular
updates and mandatory training to maintain vigilance and awareness. We also
have in place detailed business continuity and disaster recovery plans which
are regularly tested and reviewed which are enacted should a significant event
occur.
Environmental Sustainability and Climate Change
Environmental sustainability is an increasingly important risk for the
business.
The risk includes the short to medium-term impacts including transitional
changes (for example, legislation and financial) which we closely monitor, as
well as the long-term emerging risk of climate change (for example, physical
changes including the increased likelihood of flooding events) for which we
have undertaken extensive research.
Failure to identify and mitigate risks at this stage could result in a
reduction in the attractiveness of our assets to our current and prospective
tenants; reputational damage and higher obsolescence and a reduction in value
of our portfolio in the future.
The environmental and climate change related risks are overseen by the
Sustainability team and local Business Units, reporting to the Executive
Committee and ultimately the Board. The activity during 2021 and looking ahead
to 2022 and beyond is described in more detail in the Principal Risk section
below.
Technology
The Group remains alert to the risks and opportunities that potentially
disruptive technology could have on the business. We continued to engage with
a number of external organisations – both in the property sector and in the
wider technology realm – to assist us in identifying and assessing
potentially disruptive technologies, none of which currently is currently
believed to present an imminent significant risk to the Group.
We remained committed to investing in our Strategy, Investment and Innovation
function which continues to assess the potential impacts of a wide range of
technologies and evolves our digital and technology strategy.
LOOKING AHEAD
As detailed further below, we have robust processes in place to identify and
review emerging risks. By their nature emerging risks may not be fully
understood or their impacts readily assessable. We remain vigilant as to how
quickly and to what extent they might impact the Group.
A key emerging risk is the impact of climate change (as detailed above);
others include, inter alia, the long-term impacts of the pandemic including on
urbanisation and working practices; identifying and adapting to technological
advances and societal attitudes to air travel and consumerism and how these
impact our business model. Each emerging risk is assigned an owner and is
closely monitored and assessed as it evolves.
Looking forward to 2022, whilst there is still much uncertainty, it is
anticipated that Covid-19 will still be prevalent in society, and its direct
and indirect impacts are still evolving. Therefore, risk management and
controls, and the Group’s continued flexibility in responding to the risks
presented, will be fundamental to our ability to continue to operate
successfully.
OUR RISK APPETITE
The Group recognises that its ability to manage risk effectively throughout
the organisation continues to be central to its success. Risk management
ensures a structured approach to decision making that seeks to reduce
uncertainty over expected outcomes and to bring controllable risks within our
appetite, thereby balancing uncertainty against the objective of creating and
protecting value for our stakeholders, now and in the long term.
The Group’s risk appetite is reviewed annually and approved by the Board in
order to guide the business. As well as qualitative descriptions, the risk
appetite defines tolerances and targets for key metrics. It is equally
applicable to wholly-owned operations and joint ventures.
Our risk appetite is dynamic rather than static, it will vary over time and
during the course of the property cycle. In general, the Group maintains a
reasonably low appetite for risk, appropriate to our strategic objectives of
delivering long-term sustainable value.
Property Risk
We recognise that, in seeking outperformance from our portfolio, the Group
must accept a balanced level of property risk – with diversity in geographic
locations and asset types and an appropriate mixture of stabilised
income-producing and opportunity assets – in order to enhance opportunities
for superior returns. This is balanced against the backdrop of the
macroeconomic climate and its impact on the property cycle.
Our target portfolio should deliver attractive, low risk income returns with
strong rental and capital growth when market conditions are positive and show
relative resilience in a downturn. We aim to enhance these returns through a
development strategy, which requires appropriate levels of land holdings to
support the pipeline.
We seek to balance the risk of holding too much land which might be a drag to
earnings, by acquiring land in appropriate locations with the required
planning or zoning. Additionally, we closely monitor the churn and duration of
our land holdings. We also seek to mitigate the risks – including letting,
construction and contractor covenant risks – that are inherent in
development. Also mindful of our environmental responsibilities, we seek to
also develop buildings which meet and exceed minimum regulatory requirements
and achieve high environmental certification standards, to be attractive to
occupiers both now and in the future.
In line with our income focus, we have a low appetite for risks to income from
customers. Accordingly, we seek a diverse occupier base with strong covenants
and avoid over-exposure to individual occupiers in specialist properties. We
encourage tenants to share energy usage, operate in a low carbon way and
actively encourage the use of green energy where possible in our buildings.
Financial Risk
The Group maintains a low to moderate appetite for financial risk in general,
with a very low appetite for risks to solvency and gearing covenant breaches.
As an income-focused REIT we have a low appetite for risks which threaten a
stable progression in earnings and dividends over the long-term. We are,
however, prepared to tolerate fluctuations in dividend cover as a consequence
of capital recycling activity.
We also seek long-term growth in net asset value. Our appetite for risks to
net asset value from the factors within our control is low, albeit
acknowledging that our appetite for moderate leverage across the cycle
amplifies the impact of market driven asset valuation movements on net asset
value.
Corporate Risk
We have a very low appetite for risks to our good reputation with our
customers and wider stakeholders, including investors, regulators, employees,
business partners, suppliers, lenders and the communities in which we operate.
Our responsibilities to these stakeholders include compliance with all
relevant laws; accurate and timely reporting of financial and other regulatory
information; safeguarding the health and safety of employees, suppliers,
customers and other users of our assets; our impact on the environment; to
assess the impact of new and evolving technologies; compliance with codes of
conduct and ethics; ensuring business continuity; and making a positive
contribution to the communities in which we operate.
OUR INTEGRATED AND ROBUST APPROACH TO RISK MANAGEMENT
The Board has overall responsibility for ensuring that risk is effectively and
consistently managed across the Group. The Audit Committee monitors the
effectiveness of the Group’s risk management process on behalf of the Board.
The risk management process is designed to identify, evaluate and respond to
the significant risks (including emerging risks) that the Group faces. The
process aims to understand and mitigate, rather than eliminate, the risk of
failure to achieve business objectives, and therefore can only provide
reasonable and not absolute assurance.
The identification and review of emerging risks are integrated into our risk
review process. Emerging risks are those risks or a combination of risks which
are often rapidly evolving and for which the impact and probability of
occurrence have not yet been fully understood and consequently necessary
mitigations have not yet fully evolved. All risk owners and managers within
the business are challenged to consider emerging risks and this is
supplemented through formal twice-yearly horizon scans with the Executive
Committee.
The Board recognises that it has limited control over many of the external
risks it faces, such as global events as well as the macroeconomic,
geopolitical, and regulatory environment, but it reviews the potential impact
of such risks on the business and consequential decision making.
Internal risks are monitored by the Board to ensures that appropriately
designed controls are in place and operate in order to manage them.
The Board has performed a robust assessment of the principal and emerging
risks facing the Group. It formally reviewed the principal and emerging risks
twice during the year and also completed its annual review and approval of the
Group’s risk appetite, and the Group’s risk management policy. The Audit
Committee reviews the process over how the Group Risk Register has been
compiled, twice a year.
The Group adopts the ‘three lines of defence’ model of risk management.
Operational management, the individual risk manager and executive risk owner
provide the first line of defence. The Executive Committee, other monitoring
committees (such as the Investment Committee and the Technology Committee),
and the risk management function overseen by the Group Risk Committee provide
the second line of defence. Finally, Internal Audit provides the third line of
defence.
Risks are considered within each area of the business to ensure that risk
management is fully embedded within the Group’s operations, culture and
decision-making processes.
We have put risk appetite at the heart of our risk management processes. it is
integral both to our consideration of strategy and to our medium-term planning
process. Risk appetite also defines specific tolerances and targets for key
metrics and the criteria for assessing the potential impact of risks and our
mitigation of them.
The most significant risks and mitigating controls are detailed in the Group
Risk Register. Risks are assessed in both inherent (assuming that no controls
are in place) and residual (with mitigating controls operating normally)
states. As part of the assessment, risk impact is directly measured against
risk appetite so that it is clear whether each risk is comfortably within
appetite, tolerable, intolerable or below appetite. We also formally assess
the velocity of the most significant risks to determine how quickly they might
become intolerable.
A Key Risk Indicator (KRI) dashboard is produced and monitored regularly to
show actual and forecast performance against risk appetite metrics, allowing
informed decision making. KRIs are considered regularly by the relevant
monitoring committees in their decision making as well as being integral to
the Group’s Medium Term Plan.
Mitigations for each risk are documented and monitored in the Group Risk
Register. The Register is used as a key input to determine priorities for the
Group’s internal audit assurance programme. Furthermore, management’s
annual assessment of control effectiveness is driven by the Group’s Risk
Register.
PRINCIPAL RISKS
The principal risks have the potential to affect SEGRO’s business
materially. Risks are classified as ‘principal’ based on their potential
to intolerably exceed our appetite (considering both inherent and residual
impact) and cause material harm to the Group.
Some risks that may be unknown at present, as well as other risks that are
currently regarded as immaterial and therefore not detailed here, could turn
out to be material in the future.
The disruptive Brexit risk previously reported has been removed as a principal
risk as it was at least partially mitigated by the trade agreement between the
UK and EU and subsequently no material impacts on the Group have arisen. The
relevant consequences of Brexit are now being managed within each applicable
risk, such as political and regulatory risk.
Furthermore, our environmental sustainability and climate change risk has
increased during the year for reasons described in more detail below, whilst
the others have remained in line with the prior year.
PRINCIPAL RISK DESCRIPTION MITIGATIONS AND CURRENT YEAR ACTIVITY IMPACT AND CHANGE IN 2021
1. Macroeconomic impact on Market Cycle The property market is cyclical and there is a continuous risk that the Group The Board, Executive Committee and Investment Committee monitor the property Impact on strategy:
could either misread the market or fail to react appropriately to changing market cycle on a continual basis and adapt the Group’s
market and wider geopolitical conditions. This could result in capital being investment/divestment stance in anticipation of changing market conditions. Disciplined Capital Allocation
invested or disposals taking place at the wrong price or time in the cycle. Multiple, diverse investment and occupier market intelligence is regularly
reviewed and considered, both from internal ‘on the ground’ sources and
from independent external sources. Upside and downside scenarios are
incorporated into Investment Committee papers to assess the impact of Change in 2021: Similar risk
differing market conditions and inform our portfolio strategy
Risk is within appetite.
Current year:
During the year, we have continued to regularly monitor and assess the
economic outlook. This includes a wide range of external forces, such as
inflation, which has increased in the period with consequential impact on a
number of areas including rental income, construction costs and interest
rates.
2. Portfolio Strategy and Execution The Group’s Total Property and/or Shareholder Returns could underperform in The Group’s portfolio strategy is subject to regular review by the Board in Impact on strategy:
absolute or relative terms as a result of an inappropriate portfolio strategy. order to consider the desired shape of the portfolio so as to meet the
This could result from: Group’s overall objectives and to determine our response to changing Disciplined Capital Allocation
opportunities and market conditions.
*Holding the wrong balance of prime or secondary assets;
*Holding the wrong amounts or types of land, reducing returns and/or The Group’s disciplined capital allocation is informed by comprehensive
constraining opportunities; asset plans and independent external assessments of market conditions and Change in 2021: Similar risk
*Holding the wrong mix of risk assets (for example between higher risk forecasts.
‘opportunity’ assets and lower risk ‘core’ assets) or too many old or
obsolete assets; Regular portfolio analysis enables the portfolio to be correctly positioned in
*Holding assets in the wrong geographical markets; missing opportunities in new terms of location and asset type and to retain the right mix of core and Risk is within appetite.
markets or lacking critical mass in existing markets; and opportunity assets. The annual asset planning exercise provides a bottom-up
*Overpaying for assets through inadequate due diligence or price pressures from assessment of the performance and potential for all assets so that
competitors. underperforming assets can be identified and considered for sale. Asset plans
are prepared annually for all estates to determine where to invest capital in
existing assets and to identify assets for disposal. Locally based property
investment and operational teams provide market intelligence and networking to
source attractive opportunities. Policies are in place to govern the
evaluation, due diligence process, approval, execution and subsequent review
of investment activity. Investment hurdle rates are regularly reappraised
taking into account estimates of our weighted average cost of capital. Major
capital investment and disposal decisions are subject to Board approval in
line with portfolio strategy.
Current year:
During the year, external impacts discussed in the Macroeconomic Impact on
Market Cycle risk, has influenced our portfolio strategy. Whilst we continue
to closely monitor the situation, we have taken advantage of appropriate
opportunities as they arise.
PRINCIPAL RISK DESCRIPTION MITIGATIONS AND CURRENT YEAR ACTIVITY IMPACT AND CHANGE IN 2021
3. Major event/business disruption Unexpected global, regional or national events result in severe adverse The Group positions itself to withstand a global event and business disruption Impact on strategy:
disruption to SEGRO, such as sustained asset value or revenue impairment, through its financing strategy (see separate principal risk); portfolio
solvency or covenant stress, liquidity or business continuity challenges. A strategy (see separate principal risk) including holding a diverse set of Operational Excellence and Disciplined Capital Allocation
global event or business disruptor may include, but is not limited to a global property assets, staying close to customers to understand their changing
financial crisis, health pandemic, civil unrest, act of terrorism, needs, property insurance and strong customer base; organisational resilience
cyber-attack or other IT disruption. Events may be singular or cumulative, and of the work force; and detailed business continuity and disaster recovery
lead to acute/systemic issues in the business and/or operating environment. plans. Going concern and viability is assessed through a detailed bottom-up Change in 2021: Similar risk
medium-term planning process including a business stress test and downside
scenarios.
We use third parties to supplement internal expertise when testing our Risk is within appetite.
resilience to cyber attack and other business disruption alongside regular
training.
Current year:
The Group has continued to maintain a robust financing and portfolio strategy
to leave it well positioned and provide flexibility given the continued
uncertainty caused by the pandemic. As discussed in more detail above, whilst
we remain vigilant to the continued risk from the pandemic, we seek to operate
with a degree of normality.
4. Health and Safety Health and safety management processes could fail, leading to a loss of life, The Group manages an active health and safety management system, with a Impact on strategy:
litigation, fines and serious reputational damage to the Group. particular focus on managing the quality of and compliance with good Health
and Safety practice of all our suppliers. Operational Excellence
This risk is heightened by the continued scale of the Group’s development
activity. A published health and safety policy is supported by site inspections of
existing assets, as part of proactive management, and development project
inspections in line with SEGRO’s Health and Safety Construction Standard. Change in 2021:
SEGRO seeks to improve health and safety standards on our development sites Similar risk
and continue to work closely with our suppliers and health and safety
consultants to increase understanding and implementation of SEGRO’s
requirements.
Risk is within appetite.
The Health and Safety Working Group is responsible for overseeing the
implementation of, and compliance with, the Health and Safety Policy and
Safety Management System. We undertake continuous monitoring of health and
safety practices, including incidents, inspections and training tracked across
the Group. Legal guidance and further support is provided through local health
and safety consultants who provide regulatory assurance support to the Group
alongside our internal expertise.
Current year:
During the year, the health and safety team have continued to prioritise the
safety of the internal workforce whilst in working away from the office and
the management of available office space to the extent permitted by local
regulations, in the context of the pandemic. Furthermore, the team has also
worked with our contractors to ensure that work on our development sites was
undertaken in a safe and compliant manner.
PRINCIPAL RISK DESCRIPTION MITIGATIONS AND CURRENT YEAR ACTIVITY IMPACT AND CHANGE IN 2021
5. Environmental Sustainability and Climate Change Failure to anticipate and respond to the impact of both physical and The Responsible SEGRO Framework sets out our corporate responsibility Impact on strategy:
transitional risks from climate change on the sustainability of our strategy, as well as medium and long-term commitments. The Responsible SEGRO
environment as both a principal and emerging risk. Laws, regulations, Driving Group is responsible for overseeing the delivery of the strategy and Operational Excellence and Disciplined Capital Allocation
policies, taxation, obligations, customer preferences and social attitudes regularly report to the Executive Committee and Board on implementation of
relating to climate change continue to evolve. Non-compliance with laws and strategy and progress against our stated sustainability targets. Our dedicated
regulations, reporting requirements, increased costs of tax and energy could Sustainability team is in place to support the operations teams in managing
cause loss of value to the Group. Not keeping pace with social attitudes and our day to day response to environmental risks including the Technical Change in 2021: Increased risk
customer behaviours and preferences could additionally cause reputational Implementation Group (who are responsible for developments). Each significant
damage and reduce the attractiveness and value of our assets. A lack of strong investment appraisal includes environmental considerations such as measures
environmental credentials may reduce access to capital or increase cost as taken to increase energy efficiency and reduce carbon emissions. A climate
these are increasingly important criteria to investors and lenders. resilience study has been undertaken to assess the medium and long-term Risk is within appetite.
physical risks to our portfolio. Group and local teams are constantly kept up
to date with new laws and regulations as they become relevant through regular
training and use of a panel of expert advisors.
Current year:
During the year, the Board agreed the new ‘Responsible SEGRO’ framework
including the target to be net-zero by 2030. Furthermore, we reduced the
carbon emissions from our Polish portfolio through a certified sustainable
energy tariff. Both SEGRO and our most significant joint venture, SELP, issued
Green Bonds associated with our environmental credentials.
The Group provide disclosures in line with those required by the Task Force on
Climate-Related Financial Disclosures (TCFD) framework recommendations in its
Annual Report and Accounts.
6. Development Plan execution The Group has an extensive current programme and future pipeline of Our appetite for exposure to non-income producing assets (including land, Impact on strategy:
developments. The Group could suffer significant financial losses from: infrastructure and speculative developments) is monitored closely, for
example, when acquisition decisions are being made by the Investment Operational Excellence and Disciplined Capital Allocation
*Cost over-runs on larger, more complex projects, for example, due to Committee.
contractor default or poor performance and management;.
*Increased construction costs (for example from labour market changes or supply We retain a high level of optionality in our future development programme
chain pressures) leading to reduced or uneconomic development yields; including at the point of land acquisition, commitment to infrastructure and Change in 2021:
*Above-appetite exposure to non-income producing land, infrastructure and commitment to building. Pricing of land acquisitions and the consequential
speculatively developed buildings arising from a sharp deterioration in impact on returns are considered by the Investment Committee when assessing Similar risk
occupier demand and/or inappropriate land acquisition due diligence; and appraisals.
*Market competition reducing access to suitable land bank and/or increasing
acquisition costs. The development programme remains weighted towards pre-let opportunities.
Risk is within appetite.
The risk of cost-overruns is mitigated by using our experienced development
teams and the use of trusted advisors and contractors.
The risk of contractor default is mitigated by using a diversified selection
of companies who have been through a rigorous onboarding process and closely
monitoring their financial strength.
Our short development lead-times enable a quick response to changing market
conditions.
Current year:
During the year, the Group continued to spend a significant amount on our
development programme with each significant project appraisal required to meet
detailed pre-set criteria and subject to approval by the Investment Committee.
We continue to regularly monitor the performance and financial strength of our
contractors as contracts are awarded through the year.
PRINCIPAL RISK DESCRIPTION MITIGATIONS AND CURRENT YEAR ACTIVITY IMPACT AND CHANGE IN 2021
7. Financing Strategy The Group could suffer an acute liquidity or solvency crisis, financial loss The Group’s financing strategy is aligned with our long-term business Impact on strategy:
or financial distress as a result of a failure in the design or execution of strategy, the Medium Term Plan and our risk appetite. The Treasury policy
its financing strategy. defines key policy parameters and controls to support execution of the Disciplined Capital Allocation and Efficient Capital and Corporate Structure
strategy.
Such an event may be caused by a number of factors including a failure to
obtain debt or equity funding (for example, due to market disruption or rating The Group regularly reviews its changing financing requirements in light of
downgrade); having an inappropriate debt structure (including leverage level, opportunities and market conditions and maintains a good long-term Change in 2021:
debt maturity, interest rate or currency exposure); poor forecasting; relationship with a wide range of sources of finance.
defaulting on loan agreements as a result of a breach of financial or other
Similar risk
covenants; or counterparty default. Liquidity remains strong and there is substantial headroom on all our
financial covenants.
Risk is within appetite.
Current year:
During the year, financing activity has maintained a balance sheet, increased
average debt maturity, lowered the average cost of debt, and demonstrated our
ability to access a range of debt capital markets.
8. Political and Regulatory The Group could fail to anticipate significant political, legal, tax or Legal and regulatory risks are reviewed regularly by the Executive Committee. Impact on strategy:
regulatory changes, leading to a significant unforeseen financial or Corporate heads of function consult with external advisers, attend industry
reputational impact. and specialist briefings, and sit on key industry bodies such as EPRA and the Efficient Capital and Corporate Structure
British Property Federation.
In general, regulatory matters present medium- to long-term risks with a
medium likelihood of causing significant harm to the Group. As the economic impact of the pandemic affects global economies, the
likelihood of changes to taxation regulations increases. We continue to Change in 2021:
Political risks could impact business confidence and conditions in the short closely monitor the taxation regulations with our advisors to ensure changes
and longer terms. which may impact the Group or our customers, are identified and addressed Similar risk
accordingly, in a timely fashion.
Risk is within appetite.
Current year:
The regulatory environment has been somewhat dynamic for a number of reasons
including the UK leaving the EU and the impact of the pandemic. The Group
continues to work closely with advisors to monitor changes in relevant
legislation and regulations to ensure that they are identified and addressed
appropriately.
9. Operational delivery and compliance The Group’s ability to protect its reputation, revenues and shareholder The Group maintains a strong focus on Operational Excellence. The Executive, Impact on strategy:
value could be damaged by operational failures such as: failing to attract, Operations, and Technology Committees regularly monitor the range of risks to
retain and motivate key staff; major customer default; supply chain failure or property management, compliance, organisational effectiveness and customer Operational Excellence
the structural failure of one of our assets. Compliance failures, such as management.
breaches of joint venture shareholders’ agreements, loan agreements or tax
legislation could also damage reputation, revenue and shareholder value. The Group’s tax compliance is managed by an experienced internal tax team.
REIT and SIIC tax regime compliance is demonstrated at least bi-annually. Change in 2021:
Compliance with joint venture shareholder agreements is managed by experienced
property operations, finance and legal employees. The SELP joint venture Similar risk
additionally has comprehensive governance and compliance arrangements in
place, including dedicated management, operating manuals, and specialist third
party compliance support.
Risk is within appetite.
Our HR team is responsible for our organisational resilience ensuring the
correct organisational structure and culture is in place to support the
business and attract, retain and motivate a suitably talented workforce.
Current year:
During the year, the working life of staff has continued to be impacted and we
have continually monitored the organisational resilience to respond to this,
for example, ensuring that staff have the ability and resources to work away
from the office for sustained periods, and that the resilience and the
security of our technology systems is fully maintained.
RESPONSIBILITY STATEMENT
The Statement of Directors’ Responsibilities below has been prepared in
connection with the Company’s full Annual Report and Accounts for the year
ended 31 December 2021. Certain parts of the Annual Report and Accounts have
not been included in this announcement as set out in Note 1 to the condensed
financial information.
The Directors consider that the annual report and accounts, taken as a whole,
is fair, balanced and understandable and provides the information necessary
for shareholders to assess a Company’s position and performance, business
model and strategy.
Each of the Directors, whose names and functions are listed in the Governance
section of the Annual Report confirm that, to the best of their knowledge:
(a) the Group financial statements, which have been prepared in accordance
with UK-adopted international accounting standards and with the requirements
of the Companies Act 2006 as applicable to companies reporting under those
standards and international financial reporting standards adopted pursuant to
Regulation (EC) No 1606/2002 as it applies in the European Union, give a true
and fair view of the assets, liabilities, financial position and profit or
loss of the Group; and
(b) the Strategic Report includes a fair review of the development and
performance of the business and the position of the Group, together with a
description of the principal risks and uncertainties that it faces.
The responsibility statement was approved by the Board of Directors on 17
February 2022 and signed on its behalf by:
David Sleath
Chief Executive
17 February 2022
Soumen Das
Chief Financial Officer
17 February 2022
CONDENSED GROUP INCOME STATEMENT
For the year ended 31 December 2021
Notes 2021 2020
£m
£m
Revenue 4 546 432
Costs 5 (140) (104)
406 328
Administration expenses (59) (52)
Share of profit from joint ventures after tax 6 461 236
Realised and unrealised property gain 7 3,669 989
Operating profit 4,477 1,501
Finance income 8 35 50
Finance costs 8 (157) (87)
Profit before tax 4,355 1,464
Tax 9 (288) (35)
Profit after tax 4,067 1,429
Attributable to equity shareholders 4,060 1,427
Attributable to non-controlling interests 7 2
Earnings per share (pence)
Basic 11 339.0 124.1
Diluted 11 338.1 123.6
CONDENSED GROUP STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2021
2021 2020
£m £m
Profit for the year 4,067 1,429
Items that may be reclassified subsequently to profit or loss
Foreign exchange movement arising on translation of international operations (184) 112
Fair value movements on derivatives and borrowings in effective hedge 74 (52)
relationships
(110) 60
Tax on components of other comprehensive (expense)/income – –
Other comprehensive (expense)/income (110) 60
Total comprehensive income for the year 3,957 1,489
Attributable to equity shareholders 3,949 1,487
Attributable to non-controlling interests 8 2
CONDENSED GROUP BALANCE SHEET
As at 31 December 2021
Notes 2021 2020
£m
£m
Assets
Non-current assets
Intangible assets 9 2
Investment properties 12 15,492 10,671
Other interests in property 24 16
Property, plant and equipment 22 27
Investments in joint ventures 6 1,795 1,423
Other investments 5 2
Other receivables 35 37
Derivative financial instruments 50 63
17,432 12,241
Current assets
Trading properties 12 45 52
Trade and other receivables 247 270
Derivative financial instruments 14 15
Cash and cash equivalents 13 45 89
351 426
Total assets 17,783 12,667
Liabilities
Non-current liabilities
Borrowings 13 3,406 2,413
Deferred tax liabilities 9 274 87
Trade and other payables 75 110
Derivative financial instruments 56 5
Tax liabilities 19 –
3,830 2,615
Current liabilities
Trade and other payables 463 372
Borrowings 13 – 1
Derivative financial instruments – 5
Tax liabilities 54 3
517 381
Total liabilities 4,347 2,996
Net assets 13,436 9,671
Equity
Share capital 120 119
Share premium 3,371 3,277
Capital redemption reserve 114 114
Own shares held (1) (1)
Other reserves 140 253
Retained earnings brought forward 5,897 4,703
Profit for the year attributable to owners of the parent 4,060 1,427
Other movements (265) (233)
Retained earnings 9,692 5,897
Total equity attributable to owners of the parent 13,436 9,659
Non-controlling interests – 12
Total equity 13,436 9,671
Net assets per ordinary share (pence)
Basic 11 1,118 811
Diluted 11 1,115 809
CONDENSED GROUP STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2021
Attributable to owners of the parent
Other reserves
Ordinary share capital £m Share premium £m Capital redemption reserve( )£m Own shares held £m Share based payments reserves £m Translation, hedging and other reserves £m Merger reserve £m Retained earnings £m Total equity attributable to equity shareholders £m Non-controlling interests(1 )£m Total equity £m
Balance at 1 January 2021 119 3,277 114 (1) 22 62 169 5,897 9,659 12 9,671
Profit for the year – – – – – – – 4,060 4,060 7 4,067
Other comprehensive (expense)/income – – – – – (111) – – (111) 1 (110)
Total comprehensive (expense)/income for the year – – – – – (111) – 4,060 3,949 8 3,957
Transactions with owners of the Company
Issue of shares – 1 – – – – – – 1 – 1
Own shares acquired – – – (3) – – – – (3) – (3)
Equity-settled share-based transactions – – – 3 (2) – – 6 7 – 7
Dividends 1 93 – – – – – (270) (176) (4) (180)
Movement in non-controlling interest(1) – – – – – – – (1) (1) (16) (17)
Total transaction with owners of the Company 1 94 – – (2) – – (265) (172) (20) (192)
Balance at 31 December 2021 120 3,371 114 (1) 20 (49) 169 9,692 13,436 – 13,436
1.Non-controlling interests at 31 December 2021 relate to Vailog S.r.l. During
the year non-controlling interests held in Sofibus Patrimoine SA, were
acquired by the Group.
For the year ended 31 December 2020
Attributable to owners of the parent
Other reserves
Ordinary share capital £m Share premium £m Capital redemption reserve( )£m Own shares held £m Share based payments reserves £m Translation, hedging and other reserves £m Merger reserve £m Retained earnings £m Total equity attributable to equity shareholders £m Non-controlling interests(1 )£m Total equity £m
Balance at 1 January 2020 109 2,554 114 (3) 29 2 169 4,703 7,677 – 7,677
Profit for the year – – – – – – – 1,427 1,427 2 1,429
Other comprehensive income – – – – – 60 – – 60 – 60
Total comprehensive income for the year – – – – – 60 – 1,427 1,487 2 1,489
Transactions with owners of the Company
Issue of shares 9 663 – – – – – – 672 – 672
Own shares acquired – – – (2) – – – – (2) – (2)
Equity-settled share-based transactions – – – 4 (7) – – 9 6 – 6
Dividends 1 60 – – – – – (240) (179) – (179)
Movement in non-controlling interest(1) – – – – – – – (2) (2) 10 8
Total transaction with owners of the Company 10 723 – 2 (7) – – (233) 495 10 505
Balance at 31 December 2020 119 3,277 114 (1) 22 62 169 5,897 9,659 12 9,671
1 Non-controlling interests relate to Vailog S.r.l. and Sofibus Patrimoine SA.
During the year non-controlling interests of £12 million were recognised upon
the acquisition of Sofibus Patrimoine SA.
CONDENSED GROUP CASH FLOW STATEMENT
For the year ended 31 December 2021
Notes 2021 2020
£m £m
Cash flows from operating activities 14(i) 347 233
Interest received 48 42
Dividends received 33 34
Interest paid (100) (94)
Cost of new interest rate derivatives transacted – (12)
Proceeds from early close out of interest rate derivatives – 12
Cost of early close out of debt – (11)
Tax paid (17) (5)
Net cash received from operating activities 311 199
Cash flows from investing activities
Purchase and development of investment properties(1) (1,706) (1,216)
Sale of investment properties 491 159
Acquisition of other interests in property (8) (4)
Purchase of plant and equipment and intangibles (7) (5)
Acquisition of other investments (4) –
Investment and loans to joint ventures (74) (40)
Divestment and repayment of loans from joint ventures 35 –
Net cash used in investing activities (1,273) (1,106)
Cash flows from financing activities
Dividends paid(2) (180) (179)
Proceeds from borrowings 1,214 551
Repayment of borrowings (140) (122)
Principal element of lease payments (2) (2)
Settlement of foreign exchange derivatives 40 (55)
Purchase of non-controlling interest (12) -
Proceeds from issue of ordinary shares 1 672
Purchase of ordinary shares (3) (2)
Net cash generated from financing activities 918 863
Net decrease in cash and cash equivalents (44) (44)
Cash and cash equivalents at the beginning of the year 89 133
Effect of foreign exchange rate changes – –
Cash and cash equivalents at the end of the year 13 45 89
1 Cash payment for the purchase and development of investment properties of
£1,706 million (2020: £1,216 million) represents total costs for property
acquisitions and additions to existing investment properties per Note 12(i) of
£1,878 million (2020: £1,329 million) adjusted for the following cash and
non-cash movements: deducts interest capitalised of £9 million (2020: £7
million); deducts net movement in capital accruals and prepayments of £23
million (2020: £30 million); deducts other non-cash movements of £140
million (2020: £76 million) from asset swaps in 2021, in 2020 other non-cash
movements were mainly for transfers from other interests in properties and
investments and the acquisition of Sofibus Patrimoine SA.
2 Dividends paid in 2021 of £180 million (2020: £179 million) includes £176
million (2020: £179 million) paid to ordinary shareholders and £4 million
(2020: £nil) paid to non-controlling interest.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The financial information set out in this announcement does not constitute the
consolidated statutory accounts for the years ended 31 December 2021 and 2020,
but is derived from those accounts. Statutory accounts for 2020 have been
delivered to the Registrar of Companies and those for 2021 (approved by the
Board on 17 February 2022) will be delivered following the Company’s annual
general meeting. The external auditor has reported on the accounts and their
reports did not contain any modifications.
Given due consideration to the nature of the Group’s business and financial
position, including the financial resources available to the Group, the
Directors consider that the Group is a going concern and this financial
information is prepared on that basis.
The financial information set out in this announcement is based on the
consolidated financial statements which are prepared in accordance with
UK-adopted International Accounting Standards (IAS) and with the requirements
of the Companies Act 2006 as applicable to companies reporting under those
standards and International Financial Reporting Standards (IFRS) adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union
and complies with the disclosure requirements of the Listing Rules of the UK
Financial Conduct Authority. On 31 December 2020 EU-adopted IFRS was brought
into UK law and became UK-adopted International Accounting Standards, with
future changes to IFRS being subject to endorsement by the UK Endorsement
Board. The consolidated financial statements transitioned to UK-adopted
international accounting standards for the financial period beginning 1
January 2021. There was no impact or changes in accounting policies from the
transition. UK adopted International Accounting Standards differs in certain
respects from International Financial Reporting Standards as adopted by the
EU. The differences have no material impact on the Financial Statements for
the periods presented, which therefore also comply with International
Reporting Standards as adopted by the EU.
The financial information is in accordance with the accounting policies set
out in the 2020 financial statements.
While the financial information included in these condensed financial
statements has been prepared in accordance with the recognition and
measurement criteria of UK-adopted IAS and with the requirements of the
Companies Act 2006 as applicable to companies reporting under those standards
and IFRS adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the
European Union, this announcement does not itself contain sufficient
information to comply with IASs and IFRSs. The Company expects to publish full
financial statements that comply with IASs and IFRSs by March 2022.
The principal exchange rates used to translate foreign currency denominated
amounts are: Balance sheet: £1 = €1.19 (31 December 2020: £1 = €1.12)
and Income statement: £1 = €1.16 (2020: £1 = €1.13).
New and amended standards adopted by the Group
The new accounting standards and amendments that became applicable for the
current reporting year did not have any impact on the amounts recognised in
prior period and are not expected to significantly affect the current or
future periods.
Critical accounting judgements and key sources of estimation uncertainty
In the application of the Group’s accounting policies, the Directors are
required to make judgements, estimates and assumptions about the carrying
amount of assets and liabilities that are not readily apparent from other
sources. The estimates and associated assumptions are based on historical
experience and other factors that are considered to be relevant. Actual
results may differ from these estimates. The estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to accounting
estimates are recognised in the period in which the estimate is revised if the
revision affects only that period, or in the period of the revisions and
future periods if the revision affects both current and future periods.
Significant areas of estimation uncertainty
Property valuations
Valuation of property is a central component of the business. In estimating
the fair value, the Group engage a third party qualified valuer to perform the
valuation.
Performance fee
As detailed further in Note 6, performance fees are payable from the SELP
joint venture to SEGRO. The fee is based on the joint venture’s performance
over the 10-year performance period since inception and payable subject to
meeting certain criteria and hurdle rates at the end of the period.
Performance fee income is recognised during the performance period to the
extent that the fee can be reliably estimated and that it is highly probable
there will not be a significant future reversal. The internal rate of return
(‘IRR’) calculation to determine whether the hurdle rates will be met, and
if so to what extent, at the end of the performance period in October 2023 is
currently an estimation and sensitive to movements and assumptions in property
valuations over the remaining performance period. As detailed above, property
valuations is an area of significant estimation uncertainty.
Determining whether it is highly probable there will not be a significant
future change in the performance fee is dependent on the probability and
magnitude of future changes in property values over the remaining performance
period. Note 6 provides details of the estimated performance fee due in
October 2023 and sensitivity of this estimation to movements in property
values from 31 December 2021 to the end of the performance period. The
corresponding performance fee expense recognised by SELP is a significant
estimate for the same reasons as detailed above. The SELP performance fee
expense is accounted for under the equity method within share of profit from
joint ventures after tax.
Significant areas of judgements in applying the Group’s accounting policies
Accounting for significant property transactions
Property transactions are complex in nature. Management considers each
material transaction separately, with an assessment carried out to determine
the most appropriate accounting treatment and judgements applied. The
judgements include whether the transaction represents an asset acquisition or
business combination and the cut-off for property transactions on recognition
of property assets and revenue recognition.
In making its judgement over the cut-off for property transactions, management
considers whether the control of ownership of the assets acquired or disposed
of has transferred to or from the Group (this consideration includes the
revenue recognition criteria set out in IFRS 15 for the sale of trading
properties). In making its judgement on whether the acquisition of property
through the purchase of a corporate vehicle represents an asset acquisition or
business combination, management considers whether the integrated set of
assets and activities acquired contain both inputs and processes along with
the ability to create outputs. Management also applies the optional
‘concentration test’ allowed under IFRS 3. When applying the optional
test, management considers if substantially all of the fair value of gross
assets acquired is concentrated in a single asset (or a group of similar
assets). Where management judge that substantially all of the fair value of
the gross assets acquired are concentrated in a single asset (or a group of
similar assets) and the ‘concentration test’ met, the assets acquired
would not represent a business and the purchase would be treated as an asset
acquisition.
REIT Status
The Company has elected for UK REIT and French SIIC status. To continue to
benefit from these tax regimes, the Group is required to comply with certain
conditions as outlined in Note 9. Management intends that the Group should
continue as a UK REIT and a French SIIC for the foreseeable future.
Uncertain tax positions
The Group is subject to periodic challenges by local tax authorities on a
range of tax matters during the normal course of business. The tax impact can
be uncertain until a conclusion is reached with the relevant tax authority or
through a legal process. Management judgement is required in assessing the
likelihood of whether a liability will arise and the most significant
assessment during the year relates to the recognition of withholding tax in
France and is discussed further in Note 9.
2. ADJUSTED PROFIT
Adjusted profit is a non-GAAP measure and is the Group’s measure of
underlying profit, which is used by the Board and senior management to measure
and monitor the Group’s income performance.
It is based on the Best Practices Recommendations Guidelines of European
Public Real Estate Association (EPRA), which calculate profit excluding
investment and development property revaluations and gains or losses on
disposals. Changes in the fair value of financial instruments and associated
close-out costs and their related taxation, as well as other permitted one-off
items, are also excluded. Refer to the Supplementary Notes for all EPRA
adjustments.
The Directors may also exclude from the EPRA profit measure additional items
(gains and losses) which are considered by them to be nonrecurring, unusual or
significant by virtue of size and nature. No non-EPRA adjustments to
underlying profit were made in the current or prior period.
Notes 2021 2020
£m £m
Gross rental income 4 447 393
Property operating expenses 5 (100) (88)
Net rental income 347 305
Joint venture fee income 4 52 22
Administration expenses (59) (52)
Share of joint ventures’ Adjusted profit after tax(1) 6 56 61
Adjusted operating profit before interest and tax 396 336
Net finance costs (including adjustments) 8 (40) (40)
Adjusted profit before tax 356 296
Adjustments to reconcile to IFRS:
Adjustments to the share of profit from joint ventures after tax(1) 6 405 175
Realised and unrealised property gain 7 3,669 989
Profit on sale of trading properties 12 7 1
Cost of early close out of debt 8 – (11)
Net fair value (loss)/gain on interest rate swaps and other derivatives 8 (82) 14
Total adjustments 3,999 1,168
Profit before tax 4,355 1,464
Tax
On Adjusted profit 9 (8) (4)
In respect of adjustments 9 (280) (31)
Total tax adjustments (288) (35)
Profit after tax before non-controlling interests 4,067 1,429
Non-controlling interests:
Less: share of adjusted profit attributable to non-controlling interests – –
: share of adjustments attributable to non-controlling interests (7) (2)
Profit after tax and non-controlling interests 4,060 1,427
Of which:
Adjusted profit after tax and non-controlling interests 348 292
Total adjustments after tax and non-controlling interests 3,712 1,135
Profit attributable to equity shareholders 4,060 1,427
1 A detailed breakdown of the adjustments to the share of profit from joint
ventures is included in Note 6.
3. SEGMENTAL ANALYSIS
The Group’s reportable segments are the geographical Business Units: Greater
London, Thames Valley, National Logistics, Northern Europe (principally
Germany), Southern Europe (principally France and Italy) and Central Europe
(principally Poland), which are managed and reported to the Board as separate
distinct Business Units.
31 December 2021 Gross rental income Net rental Share of joint ventures’ Adjusted profit Adjusted PBIT(2) Total directly owned property assets Investments Capital expenditure(3)
£m income £m £m £m in joint ventures £m
£m £m
Thames Valley 88 81 – 79 3,102 – 454
National Logistics 37 34 – 34 1,717 – 213
Greater London 182 164 – 161 7,325 8 678
Northern Europe 31 19 26 52 928 911 93
Southern Europe 99 58 35 100 2,285 1,178 443
Central Europe 10 4 22 31 180 559 22
Other – (13)(1) (27)(1) (61)(1) – (861)(4) 7
Total 447 347 56 396 15,537 1,795 1,910
31 December 2020 Gross rental income Net rental Share of joint ventures’ Adjusted profit Adjusted PBIT(2) Total directly owned property assets Investments Capital expenditure(3)
£m income £m £m £m in joint ventures £m
£m £m
Thames Valley 84 78 – 76 1,997 – 57
National Logistics 34 34 – 33 1,223 1 267
Greater London 160 140 – 138 4,867 – 454
Northern Europe 29 18 25 48 682 803 29
Southern Europe 75 44 30 79 1,803 914 566
Central Europe 11 4 22 30 151 496 4
Other – (13)(1) (16)(1) (68)(1) – (791)(4) 5
Total 393 305 61 336 10,723 1,423 1,382
1. ‘Other’ category includes the corporate centre, SELP holding companies and
costs relating to the operational business which are not specifically
allocated to a geographical Business Unit. Additionally, in 2021 the impact of
the SELP performance fee (detailed in Note 6) on Share of joint ventures
Adjusted profit (being the performance fee expense recognised by SELP of £13
million) and Adjusted PBIT (being the net profit impact to the Group of £13
million) is shown within Other.
2. A reconciliation of total Adjusted PBIT to the IFRS profit before tax is
provided in Note 2.
3. Capital expenditure includes additions and acquisitions of investment and
trading properties but does not include tenant incentives, letting fees and
rental guarantees. Part of the capital expenditure incurred is in response to
climate change including the reduction of the carbon footprint of the
Group’s existing investment properties and developments. The ‘Other’
category includes non-property related spend, primarily IT.
4. Includes the bonds held by SELP Finance S.à r.l, a Luxembourg entity.
Revenues from the most significant countries within the Group were: UK £374
million (2020: £278 million), France £71 million (2020: £56 million), Italy
£35 million (2020: £39 million), Germany £38 million (2020: £34 million)
and Poland £15 million (2020: £15 million).
4. REVENUE
2021 2020
£m £m
Rental income from investment and trading properties 386 336
Rent averaging 13 18
Service charge income* 42 35
Management fees* 3 3
Surrender premiums and dividend income from property related investments 3 1
Gross rental income(1) 447 393
Joint venture fee income - management fees* 26 22
Joint venture fee income - performance fees* 26 –
Joint venture fee income 52 22
Proceeds from sale of trading properties* 47 17
Total revenue 546 432
* The above income streams reflect revenue recognition under IFRS 15
‘Revenue from Contracts with Customers’ and total £144 million (2020:
£77 million).
1 Net rental income of £347 million (2020: £305 million) is calculated as
gross rental income of £447 million (2020: £393 million) less total property
operating expenses of £100 million (2020: £88 million) shown in Note 5.
5. COSTS
2021 2020
£m £m
Vacant property costs 5 3
Letting, marketing, legal and professional fees 11 10
Loss allowance and impairment of receivables – 4
Service charge expense 42 35
Other expenses 12 9
Property management expenses 70 61
Property administration expenses(1) 39 36
Costs capitalised(2) (9) (9)
Total property operating expenses 100 88
Trading properties cost of sales 40 16
Total costs 140 104
1 Property administration expenses predominantly relate to the employee staff
costs of personnel directly involved in managing the property portfolio.
2 Costs capitalised primarily relate to internal employee staff costs directly
involved in developing the property portfolio.
6. INVESTMENTS IN JOINT VENTURES AND SUBSIDIARIES
6(i) Profit from joint ventures after tax
The table below presents a summary Income Statement of the Group’s largest
joint ventures, all of which are accounted for using the equity method. SEGRO
European Logistics Partnership (SELP) is incorporated in Luxembourg and owns
logistics property assets in Continental Europe. The Group holds 50 per cent
of the share capital and voting rights in the material joint ventures.
SELP Other At 100% At 100% 2020 At 50% 2021 At 50% 2020
£m £m 2021 £m £m £m
£m
Revenue(1) 270 – 270 249 135 125
Gross rental income 270 – 270 242 135 121
Property operating expenses
-underlying property operating expenses (12) – (12) (11) (6) (5)
-vacant property costs (2) – (2) (3) (1) (2)
-property management fees(2) (22) – (22) (20) (11) (10)
-service charge expense (56) – (56) (48) (28) (24)
-performance fees(3) (26) – (26) – (13) –
Net rental income 152 – 152 160 76 80
Administration expenses (3) – (3) (3) (2) (2)
Finance costs (26) – (26) (25) (13) (12)
Adjusted profit before tax 123 – 123 132 61 66
Tax (11) – (11) (10) (5) (5)
Adjusted profit after tax 112 – 112 122 56 61
Adjustments:
Profit on sale of investment properties 19 – 19 2 10 1
Valuation surplus/(deficit) on investment properties 975 (1) 974 424 487 212
Other investment income – – – 5 – 3
Tax in respect of adjustments (183) – (183) (81) (92) (41)
Total adjustments 811 (1) 810 350 405 175
Profit/(loss) after tax 923 (1) 922 472 461 236
Other comprehensive income – – – – – –
Total comprehensive income/(expense) for the year 923 (1) 922 472 461 236
1 Total revenue at 100% of £270 million (2020: £249 million) includes: Gross
rental income £270 million (2020: £242 million) and proceeds from sale of
trading properties £nil (2020: £7 million). Proceeds from sale of trading
properties is presented net of cost of sale and shown within adjustments in
the table above. Profit on sale of trading properties was £nil in 2021 and
2020.
2 Property management fees paid to SEGRO.
3 Performance fees recognised by SEGRO.
6(ii) Summarised Balance Sheet information in respect of the Group’s joint
ventures
SELP Other At 100% At 100% 2020 At 50% 2021 At 50% 2020
£m £m 2021 £m £m £m
£m
Investment properties(1) 5,804 14 5,818 4,695 2,909 2,348
Total non-current assets 5,804 14 5,818 4,695 2,909 2,348
Other receivables 75 3 78 115 39 57
Cash and cash equivalents 43 – 43 48 22 24
Total current assets 118 3 121 163 61 81
Total assets 5,922 17 5,939 4,858 2,970 2,429
Borrowings (1,723) – (1,723) (1,574) (862) (787)
Deferred tax (504) – (504) (346) (252) (173)
Total non-current liabilities (2,227) – (2,227) (1,920) (1,114) (960)
Other liabilities (122) – (122) (92) (61) (46)
Total current liabilities (122) – (122) (92) (61) (46)
Total liabilities (2,349) – (2,349) (2,012) (1,175) (1,006)
Net assets 3,573 17 3,590 2,846 1,795 1,423
1 Investment properties held by SELP include assets held for sale of £97
million (at 100%) at 31 December 2021 (2020: £nil).
Fees
SEGRO provides certain services, including venture advisory and asset
management, to the SELP joint venture and receives fees for doing so.
Performance fees, denominated in euros, are payable from SELP to SEGRO based
on SELP’s internal rate of return (‘IRR’) subject to certain hurdle
rates. The first IRR calculation was conducted in October 2018, the fifth
anniversary of the inception of SELP, and a payment of €59 million (£52
million) was made to SEGRO, of which 50 per cent was subject to clawback based
on performance over the remaining period to October 2023, SELP’s tenth
anniversary. If performance has improved by the tenth anniversary, additional
fees might be triggered. The IRR calculation to determine whether the hurdle
rates will be met when the performance period ends in October 2023 is
currently an estimation and sensitive to movements and assumptions in property
valuations over the remaining performance period.
In 2018 SEGRO recognised a performance fee of £26 million in its Income
Statement (representing the 50 per cent of the performance fee paid in 2018
not subject to clawback) and relates to the five year performance period to
October 2018 (an equivalent performance fee expense of £26 million (£13
million at share) was recognised within the share of profit from joint
ventures).
In 2021 SEGRO has recognised a performance fee of £26 million (€29 million)
in the Income Statement and represents the additional 50 per cent of the
performance fee paid in 2018 subject to future clawback.
Performance fee income is recognised during the performance period to the
extent that it is highly probable there will not be a significant future
reversal and the fee can be reliably estimated. None of the £26 million
performance fee recognised in 2021 will be reversed if property values fall by
17 per cent (the equivalent of 9 per cent per annum) between 31 December 2021
and the end of the performance period in 2023. If property values fall by over
19 per cent (the equivalent of 10 per cent per annum) all of the £26 million
performance fee would be reversed. Based on SEGRO management’s assessment of
market conditions at the year end, market outlook and the track record of
property market trends, management considers a potential decrease in property
values in excess of 17 per cent by October 2023 as highly improbable and so
meets the criteria that there will not be a significant reversal of the
performance fee recognised.
When consolidating the SELP Group financial statements into the SEGRO Group,
an equivalent performance fee expense of £26 million (£13 million at share)
has been recognised within the share of profit from joint ventures and
reflected in table 6(i) above.
Sensitivity
Based on current estimates of the IRR of SELP between inception in October
2013 and 31 December 2021, an additional performance fee due to SEGRO in 2023
could be in the region of €276 million (€138 million at share after
accounting for the corresponding performance fee expense recognised in SELP).
However, this is dependent on future events, in particular property valuation
movements, to the end of the performance period in October 2023. The current
estimates of the IRR is based on property values as at 31 December 2021: a 10
per cent decrease in property values would result in a €160 million decrease
in the estimated fee and a 10 per cent increase in property values would
result in a €160 million increase in the estimated fee. If property values
decreased by 17 per cent no additional performance fee would be due. A further
performance fee above the £26 million recorded during the year has not been
recognised as management has not concluded that it is highly probable that
there will not be a significant reversal.
7. REALISED AND UNREALISED PROPERTY GAIN
2021 2020
£m
£m
Profit on sale of investment properties 53 5
Valuation surplus on investment properties(1) 3,617 971
Increase in provision for impairment of trading properties (1) –
Increase in provision for impairment of other interests in property – (1)
Valuation surplus on other investments – 14
Total realised and unrealised property gain 3,669 989
1 Includes £3,618 million valuation surplus on investment properties (2020:
£972 million) less £1 million valuation loss on head lease ROU asset (2020:
£1 million).
Total valuation surplus on investment and trading properties total £4,103
million (2020: £1,183 million). This comprises £3,617 million surplus from
investment properties (2020: £971 million), £1 million impairment from
trading properties (2020: £nil) and £487 million surplus from joint ventures
at share (2020: £212 million).
Details of profit on sale of trading properties are given in Note 12(ii).
8. NET FINANCE COSTS
Finance income 2021 2020
£m
£m
Interest received on bank deposits and related derivatives 24 27
Fair value gain on interest rate swaps and other derivatives 11 23
Total finance income 35 50
Finance costs 2021 2020
£m
£m
Interest on overdrafts, loans and related derivatives (67) (68)
Cost of early close out of debt – (11)
Amortisation of issue costs (3) (3)
Interest on lease liabilities (3) (3)
Total borrowing costs (73) (85)
Less amount capitalised on the development of properties 9 7
Net borrowing costs (64) (78)
Fair value loss on interest rate swaps and other derivatives (93) (9)
Total finance costs (157) (87)
Net finance costs (122) (37)
Net finance costs (including adjustments) in Adjusted profit (Note 2) are £40
million (2020: £40 million). This excludes net fair value gains and losses on
interest rate swaps and other derivatives of £82 million loss (2020: £14
million gain) and the cost of early close out of debt of £nil (2020: £11
million).
The interest capitalisation rates for 2021 ranged from 1.85 per cent to 2.15
per cent (2020: 1.85 per cent to 2.15 per cent). Interest is capitalised gross
of tax relief.
9. TAX
9(i) Tax on profit
2021 2020
£m
£m
Tax:
On Adjusted profit (8) (4)
In respect of adjustments
- French withholding tax (145) –
- SIIC entry charge (38) –
- Other (primarily in respect of property valuation movements) (97) (31)
Total tax in respect of adjustments (280) (31)
Total tax charge (288) (35)
Current tax
United Kingdom
Current tax credit 4 1
Total UK current tax credit 4 1
Overseas
Current tax charge (40) (8)
Adjustments in respect of earlier years – 4
French withholding tax (16) –
SIIC entry charge (38) –
Total overseas current tax charge (94) (4)
Total current tax charge (90) (3)
Deferred tax
Origination and reversal of temporary differences (34) (3)
Released in respect of property disposals in the year 22 5
On valuation movements (173) (39)
Total deferred tax in respect of investment properties (185) (37)
Other deferred tax (13) 5
Total deferred tax charge (198) (32)
Total tax charge on profit on ordinary activities (288) (35)
9(ii) – REIT and SIIC regimes and other tax judgements
SEGRO is a Real Estate Investment Trust (REIT) and does not pay tax on its UK
property income or gains on property sales, provided that at least 90 per cent
of the Group’s UK property income is distributed as a dividend to
shareholders, which becomes taxable in their hands. In addition, the Group has
to meet certain conditions such as ensuring its worldwide property rental
business represents more than 75 per cent of total profits and assets. Any
potential or proposed changes to the REIT legislation are monitored and
discussed with HMRC. It is management’s intention that the Group will
continue as a REIT for the foreseeable future.
SEGRO is also a SIIC in France, and does not pay corporation tax on its French
property income or gains on property sales, provided that at least 95 per cent
of the French subsidiaries’ property income is distributed to their
immediate shareholder. In addition, the Group has to meet certain conditions
such as ensuring the property rental business of each French subsidiary
represents more than 80 per cent of its assets. Any potential or proposed
changes to the SIIC legislation are monitored. It is management’s intention
that the Group will continue as a SIIC for the foreseeable future.
A tax charge on adjustments of £145 million in respect of withholding tax in
France has been recognised in the year, of which £16 million relates to
current tax and £129 million relates to deferred tax (reflected within line
items ‘French withholding tax’ and ‘On valuation movements’
respectively in table 9(i)). The charge relates to probable withholding tax
due on profits distributed from the French business. This has been recognised
in light of an ongoing discussion with the French tax authorities, following
the receipt of formal tax assessments during the second half of 2021.
During April 2021, the Group elected Sofibus Patrimoine S.A. into the SIIC
regime in France. The entry cost to the regime was €45 million (£38
million) and is payable over a period of four years, of which the first
payment of €12 million (£10 million) was made during 2021. The entire entry
cost has been recognised in the Income Statement for the year ended 31
December 2021.
The Group operates in a number of jurisdictions and is subject to periodic
challenges by local tax authorities on a range of tax matters during the
normal course of business. The tax impact can be uncertain until a conclusion
is reached with the relevant tax authority or through a legal process. The
Group uses in-house expertise when assessing uncertain tax positions and seeks
the advice of external professional advisors where appropriate. The Group
believes that its accruals for tax liabilities are adequate for all open tax
years based on its assessment of many factors, including tax laws and prior
experience. The most significant assessment relating to the recognition of
withholding tax in France is discussed above.
9(iii) Deferred tax liabilities
Movement in deferred tax was as follows:
Balance Exchange Acquisitions/ disposals Recognised in income Balance
1 January 2021
movement
£m
£m
31 December 2021
£m
£m
£m
Valuation surpluses and deficits on properties/accelerated tax allowances 84 (10) – 185 259
Others 3 (1) – 13 15
Total deferred tax liabilities 87 (11) – 198 274
10. DIVIDENDS
2021 2020
£m
£m
Ordinary dividends paid
Interim dividend for 2021 @ 7.4 pence per share 89 –
Final dividend for 2020 @ 15.2 pence per share 181 –
Interim dividend for 2020 @ 6.9 pence per share – 82
Final dividend for 2019 @ 14.4 pence per share – 158
Total dividends 270 240
The Board recommends a final dividend for 2021 of 16.9 pence which is
estimated to result in a distribution of up to £203 million. The total
dividend paid and proposed per share in respect of the year ended 31 December
2021 is 24.3 pence (2020: 22.1 pence).
The total dividend in 2021 of £270 million (2020: £240 million) was paid:
£176 million as cash (2020: £179 million) and £94 million in scrip
dividends (2020: £61 million).
11. EARNINGS AND NET ASSETS PER SHARE
The earnings per share calculations use the weighted average number of shares
in issue during the year and the net assets per share calculations use the
number of shares in issue at year end. Earnings per share calculations exclude
0.2 million shares (2020: 0.4 million) being the average number of shares held
on trust for employee share schemes and net assets per share calculations
exclude 0.2 million shares (2020: 0.3 million) being the actual number of
shares held on trust for employee share schemes at year end.
11(i) Earnings per ordinary share (EPS)
2021 2020
Earnings Shares Pence per share Earnings Shares Pence per share
£m
million
£m
million
Basic EPS 4,060 1,197.7 339.0 1,427 1,149.8 124.1
Dilution adjustments:
Share and save as you earn schemes – 3.3 (0.9) – 4.7 (0.5)
Diluted EPS 4,060 1,201.0 338.1 1,427 1,154.5 123.6
Basic EPS 4,060 1,197.7 339.0 1,427 1,149.8 124.1
Adjustments to profit before tax(1) (3,999) (333.9) (1,168) (101.6)
Tax in respect of Adjustments 280 23.4 31 2.7
Non-controlling interest on Adjustments 7 0.6 2 0.2
Adjusted Basic EPS 348 1,197.7 29.1 292 1,149.8 25.4
Adjusted Diluted EPS 348 1,201.0 29.0 292 1,154.5 25.3
1 Details of adjustments are included in Note 2.
11(ii) Net asset value per share (NAV)
The EPRA Net Tangible Assets (NTA) metric is considered to be most consistent
with the nature of SEGRO’s business as a UK REIT providing long-term
progressive and sustainable returns. EPRA NTA acts as the primary measure of
net asset value and is also referred to as Adjusted Net Asset Value (or
Adjusted NAV).
A reconciliation from IFRS NAV to Adjusted NAV is set out in the table below
along with the net asset per share metrics.
Table 5 of the Supplementary Notes provides a reconciliation from IFRS NAV for
each of the three EPRA net asset value metrics.
2021 2020
Equity attributable to ordinary shareholders Shares million Pence per share Equity attributable to ordinary shareholders Shares million Pence per share
£m
£m
Basic NAV 13,436 1,202.3 1,118 9,659 1,191.3 811
Dilution adjustments:
Share and save as you earn schemes – 3.2 (3) – 3.4 (2)
Diluted NAV 13,436 1,205.5 1,115 9,659 1,194.7 809
Fair value adjustment in respect of interest rate derivatives – Group 24 2 (61) (5)
Fair value adjustment in respect of trading properties – Group 1 – 1 –
Deferred tax in respect of depreciation and valuation surpluses – Group(1) 129 11 42 3
Deferred tax in respect of depreciation and valuation surpluses – Joint 123 10 86 7
ventures(1)
Intangible assets (9) (1) (2) –
Adjusted NAV 13,704 1,205.5 1,137 9,725 1,194.7 814
1 50 per cent of deferred tax in respect of depreciation and valuation
surpluses has been excluded in calculating Adjusted NAV in line with option 3
of EPRA Best Practices Recommendations guidelines.
12. PROPERTIES
12(i) Investment properties
Completed Development Total
£m
£m
£m
At 1 January 2021 9,397 1,062 10,459
Exchange movement (145) (25) (170)
Property acquisitions 983 289 1,272
Additions to existing investment properties 35 571 606
Disposals (491) (7) (498)
Transfers on completion of development 926 (926) –
Transfer to trading properties – (11) (11)
Revaluation surplus during the year 3,110 508 3,618
At 31 December 2021 13,815 1,461 15,276
Add tenant lease incentives, letting fees and rental guarantees 146 – 146
Investment properties excluding head lease ROU assets at 31 December 2021 13,961 1,461 15,422
Add head lease liabilities (ROU assets)(1) 70 – 70
Total investment properties at 31 December 2021 14,031 1,461 15,492
1 At 31 December 2021 investment properties included £70 million (2020: £76
million) for the head lease liabilities recognised under IFRS 16.
Investment properties are stated at fair value as at 31 December 2021 based on
external valuations performed by professionally qualified, independent
valuers. The Group’s wholly-owned and joint venture property portfolio is
valued by CBRE Ltd on a half-yearly basis. The valuations conform to
International Valuation Standards and were arrived at by reference to market
evidence of the transaction prices paid for similar properties. In estimating
the fair value of the properties, the valuers consider the highest and best
use of the properties. There has been no change to the valuation technique
during the year.
CBRE Ltd also undertakes some professional and agency work on behalf of the
Group, although this is limited relative to the activities provided by other
advisors to the Group as a whole.
Completed properties include buildings that are occupied or are available for
occupation. Development properties include land available for development
(land bank), land under development and construction in progress.
The carrying value of investment properties situated on land held under
leaseholds is £206 million (excluding head lease ROU assets) (2020: £179
million).
12(ii) Trading properties
2021 2020
£m
£m
At 1 January 52 20
Exchange movement (2) 1
Property acquisitions 8 34
Additions to existing trading properties 17 14
Disposals(1) (40) (16)
Increase in provision for impairment during the year (1) –
Transfer from/(to) investment properties 11 (1)
At 31 December 45 52
1 Profit on sale of trading properties of £7 million in the year (2020: £1
million) have been generated from total proceeds of £47 million (2020: £17
million), see Note 4, less costs of £40 million (2020: £16 million), see
Note 5.
Trading properties were externally valued, as detailed in Note 12(i),
resulting in an increase in the provision for impairment of £1 million (2020:
£nil). Based on the fair value at 31 December 2021, the portfolio has
unrecognised surplus of £1 million (2020: £1 million).
13. NET BORROWINGS AND FINANCIAL INSTRUMENTS
2021 2020
£m
£m
In one year or less – 1
In more than one year but less than two – 1
In more than two years but less than five 877 218
In more than five years but less than ten 1,308 934
In more than ten years 1,221 1,260
In more than one year 3,406 2,413
Total borrowings 3,406 2,414
Cash and cash equivalents (45) (89)
Net borrowings 3,361 2,325
Total borrowings is split between secured and unsecured as follows:
Secured (on land, buildings and other assets) 2 14
Unsecured 3,404 2,400
Total borrowings 3,406 2,414
Currency profile of total borrowings after derivative instruments
Sterling 617 180
Euros 2,789 2,234
Total borrowings 3,406 2,414
Maturity profile of undrawn borrowing facilities
In one year or less 8 19
In more than one year but less than two 630 –
In more than two years 210 953
Total available undrawn facilities 848 972
14. NOTES TO THE CONDENSED GROUP CASH FLOW STATEMENT
14(i) Reconciliation of cash generated from operations
2021 2020
£m
£m
Operating profit 4,477 1,501
Adjustments for:
Depreciation of property, plant and equipment and amortisation of intangibles 5 4
Share of profit from joint ventures after tax (461) (236)
Profit on sale of investment properties (53) (5)
Revaluation surplus on investment properties (3,617) (971)
Valuation gain on other investments – (14)
Other provisions 9 4
360 283
Changes in working capital:
Decrease/(increase) in trading properties 12 (20)
Increase in debtors and tenant incentives (49) (52)
Increase in creditors 24 22
Net cash inflow generated from operations 347 233
14(ii) Analysis of net debt
Cash movements Non-cash adjustments
At 1 January Exchange Other non-cash At 31 December
movement
2021
2021
£m Adjustment(3)
£m
£m
Cash inflow(1) Cash outflow(2) £m
£m £m
Bank loans and loan capital 2,431 1,214 (140) (81) 5 3,429
Capitalised finance costs (17) – (4) – (2) (23)
Total borrowings 2,414 1,214 (144) (81) 3 3,406
Cash in hand and at bank (89) – 44 – – (45)
Net debt 2,325 1,214 (100) (81) 3 3,361
1 Proceeds from borrowings of £1,214 million.
2 Cash outflow of £144 million, comprises the repayment of borrowings of
£140 million and capitalised costs of £4 million.
3 Other non-cash adjustments includes £5 million of issue costs arising from
new borrowings in the year, the cash proceeds received from the borrowings
were received net of the issue costs. The total other non-cash adjustment of
£3 million relates to the amortisation of issue costs. See Note 8.
SUPPLEMENTARY NOTES NOT PART OF CONDENSED FINANCIAL INFORMATION
TABLE 1: EPRA PERFORMANCE MEASURES SUMMARY
2021 2020
£m Pence per share £m Pence per share
Notes
EPRA Earnings Table 4 348 29.1 292 25.4
EPRA NTA Table 5 13,704 1,137 9,725 814
EPRA NRV Table 5 14,986 1,243 10,571 885
EPRA NDV Table 5 13,155 1,091 9,155 766
EPRA net initial yield Table 6 3.0% 3.8%
EPRA ‘topped up’ net initial yield Table 6 3.3% 4.1%
EPRA vacancy rate Table 7 3.2% 3.9%
EPRA cost ratio (including vacant property costs) Table 8 20.2% 21.1%
EPRA cost ratio (excluding vacant property costs) Table 8 19.0% 20.1%
TABLE 2: INCOME STATEMENT, PROPORTIONAL CONSOLIDATION
2021 2020
Notes Group JV Total Group JV Total
£m £m £m £m £m £m
Gross rental income 2,6 447 135 582 393 121 514
Property operating expenses 2,6 (100) (35) (135) (88) (31) (119)
Net rental income 347 100 447 305 90 395
Joint venture fee income(1) 2,6 52 (24) 28 22 (10) 12
Administration expenses 2,6 (59) (2) (61) (52) (2) (54)
Adjusted operating profit before interest and tax 340 74 414 275 78 353
Net finance costs (including adjustments) 2,6 (40) (13) (53) (40) (12) (52)
Adjusted profit before tax 300 61 361 235 66 301
Tax on adjusted profit 2,6 (8) (5) (13) (4) (5) (9)
Adjusted/EPRA earnings before non-controlling interests 292 56 348 231 61 292
Non-controlling interest on adjusted profit 2,6 – – – – – –
Adjusted/EPRA earnings after tax and non-controlling interests 292 56 348 231 61 292
Number of shares, million 11 1,197.7 1,149.8
Adjusted/EPRA EPS, pence per share 29.1 25.4
Number of shares, million 11 1,201.0 1,154.5
Adjusted/EPRA EPS, pence per share – diluted 29.0 25.3
1 Joint venture fee income includes the cost of such fees borne by the joint
ventures which are shown in Note 6 within net rental income.
As discussed in Note 2 there were no non-EPRA adjustments to underlying profit
made in the current or prior period, therefore Adjusted earnings is equal to
EPRA earnings in the table above.
TABLE 3: BALANCE SHEET, PROPORTIONAL CONSOLIDATION
2021 2020
Notes Group JV Total Group JV Total
£m £m £m £m £m £m
Investment properties 12,6 15,492 2,909 18,401 10,671 2,348 13,019
Trading properties 12,6 45 – 45 52 – 52
Total properties 15,537 2,909 18,446 10,723 2,348 13,071
Investment in joint ventures 6 1,795 (1,795) – 1,423 (1,423) –
Other net liabilities (535) (274) (809) (162) (162) (324)
Net borrowings 13,6 (3,361) (840) (4,201) (2,325) (763) (3,088)
Total shareholders’ equity(1) 13,436 – 13,436 9,659 – 9,659
EPRA adjustments 11 268 66
Adjusted NAV 11 13,704 9,725
Number of shares, million 11 1,205.5 1,194.7
Adjusted NAV, pence per share 11 1,137 814
1 After non-controlling interests.
Loan to value of 23 per cent is calculated as net borrowings of £4,201
million divided by total properties (excluding head lease ROU asset of £70
million and includes valuation surplus not recognised on trading properties of
£1 million) of £18,377 million (2020: 24 per cent; £3,088 million net
borrowings; £12,995 million total properties).
The portfolio valuation uplift of 28.8 per cent shown in the Investment Update
section cannot be directly derived from the Financial Statements and is
calculated to be comparable with published MSCI Real Estate indices against
which SEGRO is measured. Based on the Financial Statements there is a
valuation surplus of £4,103 million (see Note 7) and property value of
£18,376 million (paragraph above) giving a valuation uplift of 28.8 per cent.
The primary differences are that the uplift excludes the impact of rent free
incentives (£15 million, +0.1 per cent) and other movements (-£12 million,
-0.1 per cent) primarily due to foreign exchange based on closing rate as
opposed to average used in the Financial Statements.
Total assets under management of £21,286 million (2020: £15,343 million)
includes Group total properties of £15,468 million (which excludes head lease
ROU asset of £70 million and includes valuation surplus not recognised on
trading properties of £1 million) and 100 per cent of total properties owned
by joint ventures of £5,818 million.
TABLE 4: EPRA EARNINGS
Notes 2021 2020
£m
£m
Earnings per IFRS income statement 4,060 1,427
Adjustments to calculate EPRA Earnings, exclude:
Valuation surplus on investment properties 7 (3,617) (971)
Profit on sale of investment properties 7 (53) (5)
Profit on sale trading properties 12 (7) (1)
Increase in provision for impairment of trading properties 7 1 –
Increase in provision for impairment of other interests in property 7 – 1
Valuation surplus on other investments 7 – (14)
Tax on profits on disposals(1) 10 –
Costs of early close out of debt 8 – 11
Net fair value loss/(gain) on interest rate swaps and other derivatives 8 82 (14)
Deferred tax charge in respect of EPRA adjustments(1) 232 31
SIIC entry tax charge(1) 9 38 –
Adjustments to the share of profit from joint ventures after tax 6 (405) (175)
Non-controlling interests in respect of the above 2 7 2
EPRA earnings 348 292
Basic number of shares, million 11 1,197.7 1,149.8
EPRA Earnings per Share (EPS) 29.1 25.4
Company specific adjustments:
Non-EPRA adjustments 2 – –
Adjusted earnings 348 292
Adjusted EPS 11 29.1 25.4
1. Total tax charge in respect of adjustments per Note 2 of £280 million (2020:
£31 million) comprises tax charge on profits on disposals of £10 million
(2020: £nil) and deferred tax charge of £232 million (2020: £31 million)
and SIIC entry charge of £38 million (2020: £nil).
TABLE 5: EPRA NET ASSET MEASURES
The European Public Real Estate Association (‘EPRA’) best practice
recommendations (BPR) for financial disclosures by public real estate
companies sets out three net asset value measures: EPRA net tangible assets
(NTA), EPRA net reinstatement value (NRV) and EPRA net disposal value (NDV).
The EPRA Net Tangible Assets (NTA) metric is considered to be most consistent
with the nature of SEGRO’s business as a UK REIT providing long-term
progressive and sustainable returns. EPRA NTA acts as the primary measure of
net asset value and is also referred to as Adjusted Net Asset Value (or
Adjusted NAV).
A reconciliation of the three EPRA NAV metrics from IFRS NAV is shown in the
table below.
EPRA measures
As at 31 December 2021 EPRA NTA EPRA NRV EPRA NDV
£m £m £m
Equity attributable to ordinary shareholders 13,436 13,436 13,436
Fair value adjustment in respect of interest rate derivatives – Group 24 24 -
Fair value adjustment in respect of trading properties – Group 1 1 1
Deferred tax in respect of depreciation and valuation surpluses – Group(1) 129 259 -
Deferred tax in respect of depreciation and valuation surpluses – 123 245 -
Joint ventures(1)
Intangible assets (9) - -
Fair value adjustment in respect of debt – Group - - (260)
Fair value adjustment in respect of debt – Joint ventures - - (22)
Real estate transfer tax(2) - 1,021 -
Net assets 13,704 14,986 13,155
Diluted shares (million) 1,205.5 1,205.5 1,205.5
Diluted net assets per share 1,137 1,243 1,091
1 50 per cent of deferred tax in respect of depreciation and valuation
surpluses has been excluded in calculating EPRA NTA in line with option 3 of
PRA BPR guidelines.
2 EPRA NTA and EPRA NDV reflect IFRS values which are net of purchasers’
costs. Purchasers’ costs are added back when calculating EPRA NRV.
EPRA measures
As at 31 December 2020 EPRA EPRA EPRA
NTA NRV NDV
£m £m £m
Equity attributable to ordinary shareholders 9,659 9,659 9,659
Fair value adjustment in respect of interest rate derivatives – Group (61) (61) -
Fair value adjustment in respect of trading properties – Group 1 1 1
Deferred tax in respect of depreciation and valuation surpluses – Group(1) 42 84 -
Deferred tax in respect of depreciation and valuation surpluses – Joint 86 171 -
ventures(1)
Intangible assets (2) - -
Fair value adjustment in respect of debt – Group - - (467)
Fair value adjustment in respect of debt – Joint ventures - - (38)
Real estate transfer tax(2) - 717 -
Net assets 9,725 10,571 9,155
Diluted shares (million) 1,194.7 1,194.7 1,194.7
Diluted new assets per share 814 885 766
1 50 per cent of deferred tax in respect of depreciation and valuation
surpluses has been excluded in calculating EPRA NTA in line with option 3 of
EPRA BPR guidelines.
2 EPRA NTA and EPRA NDV reflect IFRS values which are net of purchasers’
costs. Purchasers’ costs are added back when calculating EPRA NRV.
TABLE 6: EPRA NET INITIAL YIELD AND TOPPED-UP NET INITIAL YIELD
Combined property portfolio including joint ventures at share – 2021 Notes UK Continental Europe £m Total
£m £m
Total properties per financial statements Table 3 12,151 6,295 18,446
Add valuation surplus not recognised on trading properties(1) 12 – 1 1
Less head lease ROU assets 12 – (70) (70)
Combined property portfolio per external valuers’ report 12,151 6,226 18,377
Less development properties (investment, trading and joint ventures) (1,021) (617) (1,638)
Net valuation of completed properties 11,130 5,609 16,739
Add notional purchasers’ costs 754 267 1,021
Gross valuation of completed properties including notional purchasers’ costs A 11,884 5,876 17,760
Income
Gross passing rents(2) 334 206 540
Less irrecoverable property costs (4) (8) (12)
Net passing rents B 330 198 528
Adjustment for notional rent in respect of rent frees 33 28 61
Topped up net rent C 363 226 589
Including fixed/minimum uplifts(4) 10 – 10
Total topped up net rent 373 226 599
Yields – 2021 % % %
EPRA net initial yield(3) B/A 2.8 3.4 3.0
EPRA topped up net initial yield(3) C/A 3.1 3.8 3.3
Net true equivalent yield 3.7 4.0 3.8
1 Trading properties are recorded in the Financial Statements at the lower of
cost and net realisable value, therefore valuations above cost have not been
recognised.
2 Gross passing rent excludes short-term lettings and licences.
3 In accordance with the Best Practices Recommendations of EPRA.
4 Certain leases contain clauses which guarantee future rental increases,
whereas most leases contain five-yearly, upwards only rent review clauses (UK)
or indexation clauses (Continental Europe).
TABLE 7: EPRA VACANCY RATE
2021 2020
£m
£m
Annualised estimated rental value of vacant premises 22 22
Annualised estimated rental value for the completed property portfolio 693 561
EPRA vacancy rate(1) 3.2% 3.9%
1 Vacancy rate percentages have been calculated using the figures presented in
the table above in millions accurate to one decimal place.
TABLE 8: TOTAL COST RATIO/EPRA COST RATIO
Notes 2021 2020
£m
£m
Costs
Property operating expenses(1) 5 100 88
Administration expenses 59 52
Share of joint venture property operating and administration expenses(2) 6 48 43
Less:
Joint venture property management fee income, service charge income, (104) (88)
management fees and other costs recovered through rents but not separately
invoiced(3)
Total costs (A) 103 95
Gross rental income
Gross rental income 4 447 393
Share of joint venture property gross rental income 6 135 121
Less:
Service charge income, management fees and other costs recovered through rents (78) (66)
but not separately invoiced(3)
Total gross rental income (B) 504 448
Total cost ratio (A)/(B)(4) 20.2% 21.1%
Total costs (A) 103 95
Share based payments (13) (10)
Total costs after share based payments (C) 90 85
Total cost ratio after share based payments (C)/(B)(4) 17.6% 18.8%
EPRA cost ratio
Total costs (A) 103 95
Non-EPRA adjustments 2 – –
EPRA total costs including vacant property costs (D) 103 95
Group vacant property costs 5 (5) (3)
Share of joint venture vacant property costs 6 (1) (2)
EPRA total costs excluding vacant property costs (E) 97 90
Total gross rental income (B) 504 448
Total EPRA cost ratio (including vacant property costs) (D)/(B)(4) 20.2% 21.1%
Total EPRA cost ratio (excluding vacant property costs) (E)/(B)(4) 19.0% 20.1%
1 Property operating expenses are net of costs capitalised in accordance with
IFRS of £9 million (2020: £9 million) (see Note 5 for further detail on the
nature of costs capitalised).
2 Share of joint venture property operating and administration expenses after
deducting costs related to performance fees.
3 Total deduction of £104 million (2020: £88 million) from costs includes:
joint venture management fees income of £26 million (2020: £22 million),
service charge income including joint ventures of £70 million (2020: £59
million) and management fees and other costs recovered through rents but not
separately invoiced, including joint ventures, of £8 million (2020: £7
million). These items have been represented as an offset against costs rather
than a component of income in accordance with EPRA BPR Guidelines as they are
reimbursing the Group for costs incurred. Gross rental income of £447 million
(2020: £393 million) does not include joint venture management fees income of
£26 million (2020: £22 million) and these fees are not required to be
included in the total deduction to income of £78 million (2020: £66
million).
4 Cost ratio percentages have been calculated using the figures presented in
the table above in millions accurate to one decimal place.
Responsible SEGRO Environmental Metrics
In 2021, as part of our Responsible SEGRO Framework commitment, we reviewed
our carbon emissions targets which have been validated by the Science Based
Targets Initiative (SBTi). We have therefore updated our formal carbon
reduction targets to be in line with the science-based carbon emissions
reduction pathway, using our 2020 performance as a benchmark. These targets,
set out in the table below, are considered to be a required minimum for SEGRO
and we will need to act faster to become a net-zero company by 2030.
Baseline 2021 2020
Operational Carbon (SBTI validated target) 312,115 tonnes 280,575 tonnes 312,115 tonnes
We will reduce the absolute CO2e emissions from our portfolio by 42 per cent
by 2030 against a 2020 baseline. The 2020 baseline has been re-stated to
reflect actual recorded fuel use (54 per cent of the portfolio by floorspace)
and an estimation for the portfolio for which we have no visibility (46 per
cent of the portfolio). It includes Scope 1, 2 and Scope 3 Downstream Leased
Assets.
Operational Carbon Intensity 27.9 kgCO(2)e/sq m 37.5kgCO(2)e/sq m
This metric is based on the CO2e emissions of the portfolio for which we have
visibility of the data. This reflects 54 per cent of the portfolio floorspace
under management.
Embodied Carbon (SBTi validated target) 400 kgCO(2)e/sq m 391 kgCO(2)e/sq m 400 kgCO(2)e/sq m
We will reduce the embodied carbon intensity of new developments by 20 per
cent by 2030, against a 2020 baseline. The 2020 baseline and the embodied
carbon intensity figure has been recalculated to encompass more of the carbon
embodied within our development pipeline. In 2021, SEGRO undertook an embodied
carbon assessment of 53 per cent of completed developments by floorspace. We
are working to have embodied carbon data for all developments containing over
5,000 sq m of floorspace
Energy Efficiency
We are conscious of demands by our customers and by governments to provide
energy-efficient buildings to reduce both carbon emissions and operating
costs. We monitor these by use of Energy Performance Certificates (EPC). We
are aiming for every building to have an EPC rating of B1 or better
Group floorspace rated B or better 54.6% 49.3%
Group floorspace rated E or lower 1.1% 0.5%
Group floorspace not rated 17.2% 21.2%
On-site Renewable Energy Generation Capacity Generated 35.4 MW 26.8 MW
With significant roof space, our portfolio is capable of supporting on-site 24,781 MWh 20,976 MWh
renewable energy capacity through the use of photovoltaic (solar) panels. We
intend to increase this by installing solar panels on our new developments and
on appropriate existing assets
Off-site Renewable Energy Procurement 53% 11%
Where on-site renewable energy is either unavailable or insufficient, we are
working towards ensuring that all off-site electricity supplies are sourced
from 100 per cent certified renewables. This data reflects the portfolio over
which we have visibility of electricity supply.
1 Germany and Poland express EPC ratings as numerical primary energy demand
figures and are therefore inconsistent with SEGRO’s other markets. For the
purpose of creating a group EPC metric a B rating is equivalent to a primary
energy demand of 150 kWh/m2 or less for Germany and Poland.
GLOSSARY OF TERMS
BREEAM: BREEAM provides sustainability assessment and certification for real
estate assets.
Completed portfolio: The completed investment properties and the Group’s
share of joint ventures’ completed investment properties. Includes
properties held throughout the period, completed developments and properties
acquired during the period.
Development pipeline: The Group’s current programme of developments
authorised or in the course of construction at the Balance Sheet date (Current
Pipeline), together with potential schemes not yet commenced on land owned or
controlled by the Group (Future Pipeline).
EPRA: The European Public Real Estate Association, a real estate industry
body, which has issued Best Practices Recommendations in order to provide
consistency and transparency in real estate reporting across Europe.
ESG: Environmental, Social and Governance issues.
Estimated cost to completion: Costs still to be expended on a development or
redevelopment to practical completion, including attributable interest.
Estimated rental value (ERV): The estimated annual market rental value of
lettable space as determined biannually by the Group’s valuers. This will
normally be different from the rent being paid.
Gearing: Net borrowings divided by total shareholders’ equity excluding
intangible assets and deferred tax provisions.
GRESB: An organisation which provides independent benchmarking of ESG metrics
for the property industry.
Gross rental income: Contracted rental income recognised in the period in the
Income Statement, including surrender premiums. Lease incentives, initial
costs and any contracted future rental increases are amortised on a
straight-line basis over the lease term.
Headline rent: The annual rental income currently receivable on a property as
at the Balance Sheet date (which may be more or less than the ERV) ignoring
any rent-free period.
Hectares (Ha): The area of land measurement used in this analysis. The
conversion factor used, where appropriate, is 1 hectare = 2.471 acres.
IAS: International Accounting Standards, the standards under which SEGRO
reports its financial statements.
IFRS: International Financial Reporting Standards, the standards under which
SEGRO reports its financial accounts.
Investment property: Completed land and buildings held for rental income
return and/or capital appreciation.
Joint venture: An entity in which the Group holds an interest and which is
jointly controlled by the Group and one or more partners under a contractual
arrangement whereby decisions on financial and operating policies essential to
the operation, performance and financial position of the venture require each
partner’s consent.
Life cycle assessments: Life cycle assessment (LCA) is a methodology for
assessing the environmental impacts associated with all the stages of the life
cycle of a building.
Loan to value (LTV): Net borrowings divided by the carrying value of total
property assets (investment, owner occupied, trading properties and, if
appropriate, assets held for sale on the balance sheet) and excludes head
lease ROU asset. This is reported on a ‘look-through’ basis (including
joint ventures at share).
MSCI: MSCI Real Estate calculates indices of real estate performance around
the world.
Net initial yield: Passing rent less non-recoverable property expenses such as
empty rates, divided by the property valuation plus notional purchasers’
costs. This is in accordance with EPRA’s Best Practices Recommendations.
Net rental income: Gross rental income less ground rents paid, net service
charge expenses and property operating expenses.
Net true equivalent yield: The internal rate of return from an investment
property, based on the value of the property assuming the current passing rent
reverts to ERV and assuming the property becomes fully occupied over time. It
assumes that rent is received quarterly in advance.
Passing rent: The annual rental income currently receivable on a property as
at the Balance Sheet date (which may be more or less than the ERV). Excludes
rental income where a rent free period is in operation. Excludes service
charge income (which is netted off against service charge expenses).
Pre-let: A lease signed with an occupier prior to commencing construction of a
building.
REIT: A qualifying entity which has elected to be treated as a Real Estate
Investment Trust for tax purposes. In the UK, such entities must be listed on
a recognised stock exchange, must be predominantly engaged in property
investment activities and must meet certain ongoing qualifications. SEGRO plc
and its UK subsidiaries achieved REIT status with effect from 1 January 2007.
Rent-free period: An incentive provided usually at commencement of a lease
during which a customer pays no rent. The amount of rent free is the
difference between passing rent and headline rent.
Rent roll: See Passing Rent.
SELP: SEGRO European Logistics Partnership, a 50-50 joint venture between
SEGRO and the Public Sector Pension Investment Board (PSP Investments)
established in 2013 to own big box warehouses in Continental Europe.
SIIC: Sociétés d’investissements Immobiliers Cotées are the French
equivalent of UK Real Estate Investment Trusts (see REIT).
Speculative development: Where a development has commenced prior to a lease
agreement being signed in relation to that development.
SPPICAV: Société de Placement à Prépondérance Immobilière à Capital
Variable is a French equivalent of UK Real Estate Investment Trusts (see
REIT).
Square metres (sq m): The area of buildings measurements used in this
analysis. The conversion factor used, where appropriate, is one square metre =
10.7639 square feet.
Takeback: Rental income lost due to lease expiry, exercise of break option,
surrender or insolvency.
Topped up net initial yield: Net initial yield adjusted to include notional
rent in respect of let properties which are subject to a rent free period at
the valuation date. This is in accordance with EPRA’s Best Practices
Recommendations.
Total accounting return (TAR): A measure of the Group’s return, calculated
as the change in adjusted NAV per share during the period adding back
dividends paid during the period expressed as a percentage of adjusted NAV per
share at the beginning of the period.
Total property return (TPR): A measure of the ungeared return for the
portfolio and is calculated as the change in capital value, less any capital
expenditure incurred, plus net income, expressed as a percentage of capital
employed over the period concerned, as calculated by MSCI Real Estate and
excluding land.
Total shareholder return (TSR): A measure of return based upon share price
movement over the period and assuming reinvestment of dividends.
Trading property: Property being developed for sale or one which is being held
for sale after development is complete.
Yield on cost: The expected gross yield based on the estimated current market
rental value (ERV) of the developments when fully let, divided by the book
value of the developments at the earlier of commencement of the development or
the balance sheet date plus future development costs and estimated finance
costs to completion.
Yield on new money: The yield on cost excluding the book value of land if the
land is owned by the Group in the reporting period prior to commencement of
the development.
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