Segro Regulatory News (SGRO)

28 April 2011

INTERIM MANAGEMENT STATEMENT FOR THE PERIOD FROM 1 JANUARY 2011 TO 28 APRIL 2011

Overview

During the period we have seen a good level of enquiries and demand for lettings in our key markets building on the momentum in the second half of 2010. Occupier markets however remain challenging with the level of takebacks continuing to be relatively high across the portfolio. Staying close to our customers to help manage these remains a key priority. 

Our development pipeline continues to grow with demand being driven by the limited availability of grade A space and the lack of new space coming onto the market given the curtailment of speculative development in the downturn. We have signed an additional six pre-let developments since the end of February representing an aggregate 61,900 sq m including, as announced this morning, a project to develop a 32,300 sq m office campus for Alcatel-Lucent at our Vimercate site in Italy. 

Occupier markets

·; UK occupier demand continues to be resilient in London and the South East with the more challenging economic conditions elsewhere in the country being reflected in weaker demand for space.

·; There has been a continued good level of enquiries and letting activity across our key Continental European markets of Germany, France, Poland and Benelux.

·; Group vacancy rate of 12.1 per cent as at 31 March 2011 versus 12.0 per cent as at 31 December 2010 (benefitting from 1.8 per cent and 1.5 per cent respectively relating to short term lets).

·; £6.3 million of new annualised rental income generated from the take up of space in the first quarter of 2011 with £8.1 million of annualised rental income lost from space returned (including £2.5 million as a result of early surrenders in part to facilitate future developments).

·; Transactional rental levels in the period have been broadly in line with December 2010 ERVs and rent free incentives are, on average, approximately 10 per cent of the committed rent.

·; Signed six new pre-let development projects since announcement of full year results. In total 16 projects now signed or under construction representing in aggregate around £135 million of total capital expenditure and around £14 million of annualised rental income.

Investment markets

·; In the UK there are currently a number of buyers in the market both for prime and increasingly secondary assets with a pool of institutional money looking for industrial property to acquire and demand still primarily focused in the South East.

·; In our Continental European markets, investor demand has continued to be strongest in Germany and Poland with both countries seeing some yield compression in the quarter. Investment volumes in France are up on the prior year with demand predominantly focused on prime assets around Paris. 

Financial position

·; Net debt and gearing remain broadly in line with the position at 31 December 2010.

Commenting, David Sleath, who takes over as Chief Executive at today's AGM, said:

"Occupier market conditions continue to be challenging as issues such as sovereign debt worries, the austerity measures in the UK and rising energy prices impact sentiment with many customers remaining focused on cost control and the consolidation of their space requirements. Against this backdrop we are pleased to have seen good levels of enquiries, healthy demand for existing and new space and an encouraging pick up in our retention rate in the first quarter. Trading remains in line with our expectations and with SEGRO's high quality portfolio and focus on operational delivery, the Group remains very well positioned to benefit as markets recover."

UK

1. Lettings exclude lease renewals, unexpired break options and income from short term license agreements.

2. Annualised rental income, after the expiry of any rent free periods.

3. Includes joint ventures at share.

We have continued to generate good levels of enquiries and lettings in the first three months of 2011. In total, 39 new leases were signed across the UK portfolio generating £3.2 million of annualised rental income. This is lower than the prior year period, in large part due to the £2.8 million of annualised rental income from the take up of pre-let developments which completed in the first quarter of 2010 and the lower amount of space available to let at the start of 2011 compared to the beginning of 2010. 

We completed a number of short term lets in the three months to March in areas where there was customer demand for such arrangements. These lets allow us to maximise the income available from our vacant buildings and mitigate empty property costs while we market the properties for longer term occupation. As at 31 March 2011, these arrangements benefitted the UK vacancy rate by 2.1 per cent (31 December 2010: 1.8 per cent) with a bias towards the former Brixton portfolio.

Market conditions remain in line with those we reported with our full year results on 24 February 2011 with occupier demand continuing to be strongest in London and the South East. Our estates at and around Park Royal continued to see good demand with the vacancy reducing to 13.0 per cent from 16.2 per cent at 31 December 2010. Activity at Heathrow continues to pick up with enquiry levels growing and we signed six leases here in the period (including lettings within the APP joint venture). We continue to see good demand at the Slough Trading Estate and completed seven new lettings on the estate in the three months with the vacancy rate remaining low at 7.2 per cent.

We lost £5.1 million of annualised rental income as a result of space returned in the quarter. This includes £2.5 million of annualised rental income which was lost as a result of early surrenders, in part to facilitate future developments. 

Continental Europe

1. Lettings exclude lease renewals, unexpired break options and income from short term license agreements.

2. Annualised rental income, after the expiry of any rent free periods.

3. Includes joint ventures at share.

In our Continental European business we saw an encouraging level of enquiries across our core markets of Germany, France, Poland and Benelux and we signed 20 new leases across the portfolio. The largest of these was the letting of 21,300 sq m at Bondoufle near Paris (France). We completed construction of the pre-let developments of 8,300 sq m at Gliwice, Poland for HL Displays and 5,300 sq m at Ostrava, Czech Republic for Adler during the three months and these are reflected in our take up in the period.

The Continental European vacancy rate rose slightly in the period, in part as the result of the completion of the speculative elements of the Gliwice and Ostrava developments and the speculative development at Lodz (Poland) and the return of 24,600 sq m from a customer in Italy following a unilateral return of space in advance of the contractual break in 2015. 

Robust pipeline of pre-let developments

With lower levels of grade A space generally available across several markets, demand from occupiers for pre-let developments has been increasing which is reflected in our growing development programme. We now have nine projects under construction across the portfolio. Since the announcement of our full year results we have signed two agreements for pre-let developments at our Vimercate site in Milan (Italy), one to build a 32,300 sq m office campus for Alcatel-Lucent, an existing customer on the site, and the second an 8,000 sq m office development for an IT and consumer electronics company. We have also signed three pre-let developments in Poland representing a total of 19,100 sq m and a project at Rumst (Belgium) to provide office space for Cummins.

In total our 16 signed and under construction projects represent, in aggregate, around £135 million of total capital expenditure and around £14 million of annualised rental income. Beyond these, discussions continue on a number of further potential projects both in the UK and Continental Europe.

Pre-let developments - current projects April 2011

Modest speculative development in Continental Europe and the UK

In March, we completed the construction of a small speculative development of light industrial units in Lodz and have begun the process of letting up these units. We plan to start construction of a small speculative scheme in Dusseldorf (Germany) in the coming quarter and continue to plan similar developments in Berlin (Germany) and Paris (France) during 2011. These are all high quality development sites where there is a shortage of good quality light industrial space, low vacancy and strong market demand for the product.

We signed four pre-let developments on the Slough Trading Estate during 2010 and continue to see good customer demand for unit sizes of 3,000 to 5,000 sq m on the estate. As a result of this demand, coupled with the low vacancy rate and a very limited amount of supply of this product, we expect to restart limited speculative development on the Slough Trading Estate in the coming months.

CONFERENCE CALL FOR INVESTORS AND ANALYSTS

There will be a conference call at 08.45 hours (UK time) today on the following numbers:

UK: +44 (0) 20 7806 1957

US: +1 212 444 0413

Access code: 6034275#

From midday the conference call will be available on a replay basis on the following numbers or weblink:

UK: +44 (0) 20 7111 1244

US: +1 347 366 9565

Access code: 6034275#

http://www.thomson-webcast.net/uk/dispatching/?event_id=b41195884631be907ebc9fcb4d2ed9a2&portal_id=6a92849fc2a79254c939ec0a2f25296b

CONTACT DETAILS FOR INVESTOR / ANALYST AND MEDIA ENQUIRIES RESPECTIVELY:

This IMS, the most recent Annual Report and other information are available on the SEGRO website at http://www.segro.com/segro/Investors/Investors-Home/.

Neither the content of SEGRO's website nor any other website accessible by hyperlinks from SEGRO's websites are incorporated in, or form, part of this announcement.

Forward-looking statements: This announcement may contain 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. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that may occur in the future. There are a number of factors which could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. Certain statements have been made with reference to forecast price changes, economic conditions and the current regulatory environment. Any forward-looking statements made by or on behalf of SEGRO speak only as of the date they are made. SEGRO does not undertake to update forward-looking statements to reflect any changes in SEGRO's expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based. Nothing in this announcement should be construed as a profit forecast. Past share performance cannot be relied on as a guide to future performance.

About SEGRO

SEGRO is Europe's leading provider of flexible business space. The Group is a Real Estate Investment Trust (REIT), listed on the London Stock Exchange. SEGRO's portfolio comprises £5.3 billion of predominantly industrial and warehouse assets concentrated in and around major business centres and transportation hubs such as ports, airports and motorways intersections. The Group serves over 1,700 customers spread across many geographies and different industry sectors. It has 5.5 million sq m of built space and a passing rent roll of £326 million (as at 31 December 2010).