Feb 26 (The following statement was released by the rating agency)
Fitch Ratings has affirmed SEGRO plc's (SEGRO)
Long-term Issuer Default Rating (IDR) at 'BBB+' and senior unsecured rating at
'A-'. The Outlook on the Long-term IDR is Stable. The Short-term IDR has been
affirmed at 'F2'.
SEGRO's performance and de-leverage profile during 2013 outperformed Fitch's
expectations driven by faster than expected non-core divestments, the joint
venture (JV) transfer of its continental European portfolio and a broad
improvement in the industrial asset class, which had previously lagged other
commercial real estate segments. Fitch expects a defensive rental income profile
to provide comfortable EBITDA net interest cover of above 2.0x into 2014 and
2015. Although the pace of net divestments is likely to fall, we expect the
Fitch-adjusted loan-to-value ratio (LTV) to stabilise at around 50%.
KEY RATING DRIVERS
Non-Core Asset Disposals
SEGRO announced a strategy in 2011 to sell GBP1.6bn of non-core properties over
five years. Following the disposal of GBP0.6bn during 2013 only GBP0.4bn of
non-core properties remain ahead of Fitch's expectations. These disposals have
been combined with a rebalancing of the portfolio towards prime London and
Thames Valley logistics and warehouse space. SEGRO has one of the largest and
best located industrial portfolios in the UK and is a key player in Europe.
New Continental Europe JV
The creation of SEGRO European Logistics Partnership (SELP) through the transfer
of its wholly owned continental European logistics portfolio into a 50/50 JV
with the Public Sector Pension Investment Board (PSPIB) of Canada is a strong
rating positive. Although it reduces its wholly owned portfolio by around
GBP0.8bn, the sale proceeds aid deleveraging, improve liquidity and introduce
third-party capital to allow SEGRO to grow in Continental Europe where its
market position is not as strong.
Stable Contractual Rental Income
The weighted average lease length at FY13 of 8.9 years (6.7 years to first
break), modest vacancy rates of 8.5%, low levels of tenant insolvencies, around
70% tenant retention rates and an improvement in the letting market going into
2014 underpin the defensive nature of cash flow generation. Fitch expects
operational performance to improve with a more efficient cost base following
rationalisation of the portfolio.
Asset and Liabilities Matched
With long-term average lease lengths contractually locking in a stream of cash
flow, SEGRO has a conservative approach to matching debt obligations. The
average debt maturity profile is 8.7 years and having issued bonds out to 2035
is on average longer than most peers. This is an important credit positive for
such a capital-intensive industry, as it means that interest coverage can be
protected. The average cost of debt is 4.5% (4.6% at FY12) and 76% of net debt
is fixed rate.
Positive Outlook for Industrial Assets
Fitch forecasts an improved rental and investment market into 2014 and 2015 with
SEGRO's industrial assets having only started a broad base recovery in 2013.
Property valuations on the completed wholly owned portfolio increased 4.1% from
2013. Continental European assets are likely to trail the UK. Industrial assets
are further supported by favourable structural trends such as increased
requirements for warehousing and distribution of internet driven retail and the
continued repositioning of old industrial space into data centres and offices.
Improving Financial Metrics
SEGRO's credit metrics through-the-cycle have lagged other Fitch investment
grade rated REITs. This is largely attributed to a slower recovery in industrial
real estate when compared with other UK REITs focused on office or retail assets
that have benefited from earlier and faster recoveries driven by safe haven
flows into prime London property. SEGRO's Fitch-adjusted LTV (net
debt/investment properties) is expected to stabilise at around 50%.
Achieving Financial Target
SEGRO's long-term target to reduce leverage to 40% look through LTV is likely in
the near term reaching 42% at FY13. Fitch adjusted net debt/EBITDA has fallen
from 8.9x at FY12 to 7.1x at FY13 and expected to remain at similar levels.
Financial metrics are in line with Fitch's investment grade rated EMEA REITs,
averaging a LTV of 40% and net debt/EBITDA of 7.5x.
SEGRO has transferred part of its investment property portfolio into JVs
although the completed wholly owned portfolio still remains at a critical mass
at GBP2.7bn and arguably better quality following the non-core divestment plan.
SEGRO's senior unsecured bondholders remain subordinated to these JV assets.
However, this strategy is compensated by improved credit metrics and liquidity
and provides dividend income of GBP24m at FY13. In aggregate, off balance sheet
(equity accounted) JVs are modestly leveraged with a Fitch adjusted LTV of 39%
at FY13. Fitch-adjusted EBITDA includes only 50% of JV dividends as a
conservative measure as the property assets are funded by (non-recourse) secured
debt, including restrictive covenants.
SEGRO has cautiously expanded its development programme with a total of 18
pre-let developments approved contracted or under construction at FY13. The
total committed development programme is around GBP89m (capital expenditure to
completion) and around 60% pre-let. This is still modest in comparison with
pre-2007 levels and compared with rated peers. Following years of limited
development across the sector, SEGRO is well placed to benefit as one of the few
large players that has the financial headroom and a well-positioned land bank to
Liquidity improvements are driven by debt reduction from sale proceeds with all
bank credit lines now undrawn and entire gross debt of GBP1.7bn now fully bond
funded. Only GBP208m of bond debt matures in the next four years. Cash on
balance sheet of GPB234m and undrawn committed lines available of GPB733m
provide comfortable headroom. Around GPB300m of these committed undrawn lines
mature over the next two years. Furthermore, there is around GPB131m of deferred
consideration within the next two years from PSPIB as part of the SELP
Positive: Future developments that could lead to positive rating action include:
- Material improvement in SEGRO's sector or geographical diversification.
- Increased coverage ratios to Fitch adjusted EBITDA net interest cover above
-Fitch adjusted LTV (net debt/investment properties) below 40% and LTV (net
debt/investment properties and JV share) below 30%.
Negative: Future developments that could lead to negative rating action include:
-Fitch adjusted EBITDA NIC below 1.75x on a sustained basis.
-Fitch adjusted LTV (net debt/investment properties) above 55% and LTV (net
debt/investment properties and JV share) above 45% on a sustained basis.
-Liquidity score below 1.25x (committed undrawn facilities plus cash divided by
debt maturities and committed capex) over 18-24 months.