Segro Regulatory News (SGRO)

28 June 2013

SEGRO ANNOUNCES JV TO CREATE LEADING CONTINENTAL EUROPEAN LOGISTICS PLATFORM

SEGRO and Public Sector Pension Investment Board ("PSP Investments") to form leading logistics property joint venture in Continental Europe (SEGRO European Logistics Partnership or "SELP")

New Venture seeded with 1.6 million square metres of SEGRO's grade A logistics portfolio, valued at approximately €1 billion

Highlights1

·; An important milestone in SEGRO's previously stated strategic objective to increase the use of third party capital in order to accelerate growth of the Group's Continental European logistics portfolio and leverage its capital and management platform across a wider asset base

·; 50:50 JV between SEGRO and PSP Investments, one of Canada's largest pension investment managers, to create a leading Continental European logistics platform

·; Contribution by SEGRO of substantially all its core Continental European logistics assets for €974 million, equal to valuations at 31 December 2012 together with capital expenditure and development gains since that date

·; Equity commitment by PSP Investments of €303 million at Closing for a 50% share, of which €152 million (£129 million) will be paid at Closing

·; Terms agreed, subject to legal documentation and completion of lender due diligence, for secured medium-term non-recourse debt of up to €390 million, for the initial funding of the Venture, in line with target LTV ratio of c.40%

·; Intention to grow the portfolio to at least €2 billion through developments and acquisitions over the coming years

·; SEGRO to act as asset, property and development manager and earn associated fees and to be entitled to an incentive fee depending upon future performance

·; Net cash proceeds to SEGRO at Closing of £434 million (€508 million), of which £129 million (€152 million) will be paid by PSP Investments. A further £129 million (€152 million) of consideration due from PSP Investments is deferred for up to two years at SEGRO's option

·; Reduction in pro forma look-through LTV from 50% to 46%2

·; No change to SEGRO's dividend policy as a result of the transaction

David Sleath, Chief Executive of SEGRO, commented:

"This joint venture represents a significant strategic milestone for SEGRO and is a strong validation of the quality of our assets and management capability by one of the leading global institutional real estate investors. The transaction is the first step in building what we expect to be a strong long-term relationship with PSP Investments as we seek to take advantage of the growth and consolidation opportunities in the Continental European logistics market. It will further position SEGRO as one of the leading providers of logistics space in the region and strengthen our ability to meet the needs of our multi-national customers."

Neil Cunningham, Senior Vice President, Real Estate Investments of PSP Investments, said:

"Our participation in this joint venture advances our strategy of investing in high-quality logistics properties in Europe. We see this core investment as a unique opportunity for PSP Investments to build a scalable Continental European logistics portfolio and to forge a long-term working partnership with SEGRO, consistent with our objective of working with 'best in class' operators."

Summary and transaction benefits

SEGRO plc ("SEGRO") announces the signing of an agreement with PSP Investments to form a new 50:50 logistics joint venture in Continental Europe (the "Venture" or "Transaction"). SEGRO will contribute to the Venture substantially all of its completed core logistics assets in Western Europe (France, Germany, the Netherlands, Belgium) and Central Europe (Poland and the Czech Republic) ("Target Markets"), together with certain adjacent land plots in Poland, Germany and Belgium that are expected to be developed out over time (collectively, the "Seed Portfolio"). The Venture will form SEGRO's exclusive logistics investment vehicle in the Target Markets. The Seed Portfolio is being contributed to the Venture at a price of €974 million3,4, equal to its valuation as at 31 December 2012 together with subsequent capital expenditure and development gains. The transaction is expected to close during the third quarter of 2013 ("Closing").

PSP Investments has agreed to make an initial equity commitment of €303 million to fund the acquisition of its 50% share in the Seed Portfolio and an additional €62 million binding equity commitment to fund 50% of the cost of investments related to the development of the adjacent development land bank. SEGRO will fund the other 50%. In addition, the parties intend to grow the Venture to at least €2 billion (gross asset value) over the coming years through further acquisitions and developments.

SEGRO will act as venture manager, property manager and development manager of the Venture and will earn management fees from the Venture. SEGRO will also be entitled to receive an incentive fee depending upon the performance of the Venture on the fifth anniversary of the Closing of the Venture and every five years thereafter.

Increasing the use of third party capital is one of SEGRO's key strategic objectives, as set out at the time of the strategy review in November 2011. The 'Big Box' logistics warehouse sector is a large but fragmented market where there are competitive advantages from having scale. Such advantages include market knowledge, the ability to leverage customer and other relationships on a multi-jurisdictional basis and the achievement of operational efficiencies. The partnership with PSP Investments will facilitate the growth of SEGRO's platform, aimed at taking advantage of opportunities to acquire and develop logistics properties in an attractive market which is expected to consolidate in the years ahead. Further, through the generation of fee income from leveraging SEGRO's management skills across a wider portfolio and by reducing customer and asset concentration risk, SEGRO should be able to improve its own risk-adjusted return on capital.

Over two-thirds of the assets in the Seed Portfolio were developed by SEGRO over the last 15 years. The Transaction provides an attractive opportunity to recycle capital out of these assets and accelerate SEGRO's ability to build competitive scale in key target logistics markets, whilst retaining long term management of the portfolio. In time, the Transaction is also expected to reduce the company's cost ratio by providing an attractive source of recurring fee income and an opportunity to leverage its asset management platform over a larger property portfolio.

The proceeds from the transaction will initially reduce SEGRO's pro forma loan to value ratio (LTV) by 4% to 46%, helping to achieve another of SEGRO's key strategic objectives of reducing financial leverage. Over time, SEGRO expects to re-invest capital to meet development expenditure or acquisition related needs both to grow the Venture and SEGRO's other activities, including investments in urban distribution and light industrial warehouses, data centres and UK logistics properties.

Transaction terms

The Venture will be structured as a perpetual life vehicle, with periodical liquidity events starting on the 10th anniversary of the closing of the Venture and subsequently every three years.

The Seed Portfolio comprises 34 stabilised grade A logistics estates from SEGRO's core portfolio, representing substantially all of SEGRO's Continental European logistics assets totalling approximately 1.6 million sqm. The assets are located in France (36%), Poland (38%), Germany (13%), Belgium / Netherlands (9%), and the Czech Republic (4%) and feature a high occupancy ratio of 94%5 and WAULT to expiry of 6.75 years. The Seed Portfolio also includes an adjacent development land bank of 84 ha in Poland, Germany and Belgium providing the potential to build out a further 390,000 sqm of modern logistics space.

As at 31 December 2012 SEGRO's ownership interest in the Seed Portfolio (including its share of certain Belgian joint venture assets) was carried at €907 million. Subsequent to 31 December 2012 SEGRO has incurred capital expenditure on the portfolio and committed capital to acquire the remaining 50% of the Belgian joint venture assets, totalling €58 million. As at 31 December 2012 the completed investment properties in the Seed Portfolio were valued at a net initial yield of 7.9%.

The Venture will invest primarily in income-producing logistics assets in the Target Markets with the aim of delivering stable income-driven returns with potential for capital appreciation. The intention of the partners is to build a diversified portfolio of grade A logistics properties with a total target size of at least €2 billion to be achieved over the coming years. The Venture will be SEGRO's exclusive investment vehicle, with a strategy focused on developing, acquiring and managing larger logistics warehouses in the Target Markets. The Venture will have a right of first refusal on logistics land being retained by SEGRO in the Target Markets, which totals approximately 170 ha, and on new logistics acquisitions in the Venture target geographies.

SEGRO will retain full ownership of its remaining Continental European portfolio, including its urban distribution warehouses and light industrial properties in France, Germany, Poland and Belgium / Netherlands. Within this portfolio, core assets were valued at 31 December 2012 at approximately €340 million. SEGRO intends to continue to grow this portfolio and exploit the long-term asset management opportunities it offers.

The Transaction will not affect SEGRO's successful UK 'big box' logistics portfolio, which has grown from £305 million to £557 million of assets under management during the year ending 31 December 2012, of which £412 million is held in joint ventures including the Logistics Property Partnership (formerly UKLF).

Funding

The acquisition of the Seed Portfolio and associated costs will be funded with up to €390 million of third party, medium-term non-recourse debt with the balance in equity in equal shares from PSP Investments (€303 million) and SEGRO (€303 million).

PSP Investments will pay 50% of its equity commitment for the Seed Portfolio at Closing, amounting to €152 million, and the remainder will be deferred at SEGRO's option for up to two years, earning SEGRO a guaranteed coupon of not less than 7% per annum. SEGRO will have the ability to request the payment of all or part of the deferred consideration at any time up to the second anniversary of the Closing date upon three months' notice.

In addition, SEGRO and PSP Investments have each committed €62 million of additional equity capital, subject to certain conditions, to fund development of the seed land bank.

In order to fund further growth of the Venture to its target size of at least €2 billion, SEGRO and PSP Investments intend to provide additional equity capital to the Venture, subject to certain investment criteria and approval by their respective Boards.

The Venture will target a LTV ratio of approximately 40% over the life of the Venture. Terms for the debt facilities have been agreed with lenders, subject to legal documentation and completion of lender due diligence, at an expected blended initial margin of approximately 185 bps over Euribor.

The Venture will distribute available cash to SEGRO and PSP Investments on a quarterly basis.

Management

SEGRO will act as manager to the Venture providing asset, property, development, financial, and administrative services and advice. SEGRO will be entitled to receive fees for these services which, based on the Seed Portfolio, would amount to approximately €6 million per annum, not including development management fees which will depend on the amount of development capital invested. These fees will rise as the Venture grows in size. In addition, SEGRO will be entitled to receive an incentive fee depending on the performance of the Venture on the fifth anniversary of the Closing of the Venture and on periodical dates thereafter.

Financial Effects and Use of Proceeds

The Transaction is expected to result in net cash proceeds to SEGRO at Closing of £434 million (€508 million) of which £129 million (€152 million) will be paid by PSP Investments. A further £129 million (€152 million) of consideration due from PSP Investments is deferred for up to two years at SEGRO's option.

At 31 May 2013, Group net debt on balance sheet amounted to £2.1 billion, of which approximately £420 million was bank debt drawn under revolving credit facilities. Initially, net proceeds arising from the Transaction will be applied to repay bank borrowings to the extent possible, with any balance held in cash. The Transaction would result in SEGRO's look-through LTV as at 31 December 2012 reducing on a pro forma basis by 4% from 50% to 46%.

SEGRO remains committed to continue reducing its LTV ratio over the longer term. However, this de-leveraging objective will be balanced against opportunities for further, profitable capital deployment, including meeting development capital expenditure or acquisition related needs both inside the Venture and in SEGRO's other core operations. The Transaction will not affect SEGRO's previously announced disposal programme and the Company continues to target total disposals in the current year of £300 to £500 million, of which £152 million have been announced to date.

As a result of the Transaction, SEGRO is expected to incur net costs of approximately £17 million in respect of transaction costs and transfer taxes. Assuming constant exchange rate as at 31 December 2012, the Group's pro forma EPRA net asset value per share as at 31 December 2012 will decrease from 294 pence to 292 pence7, including these net costs.

On a full year pro forma basis and assuming no expansion of the Venture, the Transaction would result in a reduction in EPRA profit after tax of approximately £10.8 million. This is as a result of the deleveraging effects of the Transaction, with the loss of rent from the 50% share in the portfolio sold to PSP Investments being greater than the interest savings on the debt repaid from the proceeds, partially offset by the fees received from the Venture and the coupon on the deferred consideration.

SEGRO's dividend policy is unchanged as a result of the Transaction. The Board expects to at least maintain the dividend throughout the period of the strategic portfolio reshaping and is committed to a progressive dividend policy in the longer term.

Closing

The Transaction is expected to complete towards the end of the third quarter of 2013 subject to satisfaction of a number of conditions, including merger control clearances, implementing an internal reorganisation, finalising third party debt financing as well as obtaining waivers of certain statutory and local authority pre-emption rights.

Notes:

1. Sterling equivalent values translated using £/€ exchange rate of 1.23 as at 31 December 2012 and £/€ exchange rate of 1.17 as of 27 June 2013

2. Deferred consideration treated as cash for the calculation of the look-through LTV on a pro forma basis at 31 December 2012;  LTV adjusted for pro forma impact of previously announced £152 million of disposals post year-end

3. Assumes the inclusion of five built assets totalling 92,154 sqm and 8.1 hectares of development land at Rumst and Bornem, in Belgium, held in a joint venture. SEGRO has exchanged contracts to acquire its partner's 50% interest in the joint venture, with completion expected shortly before Closing

4. Including 5 buildings under construction valued at €53 million and a land plot with a secured pre-let agreement representing 1.7 ha which was valued by CBRE at €1.3 million as at 1 May 2013

5. As of 1 May 2013

6. Including real estate transfer taxes / stamp duties, and set-up costs at 50% SEGRO share

7. On a pro forma basis as at 31 December 2012 (using £/€ of 1.23 as at 31 December 2012)

Conference Call for Investors and Analysts

There will be a conference call at 12:00pm (BST) today on the following numbers:

UK Access Number: +44 (0)20 3139 4830

UK Toll Free: 0808 237 0030

Participant PIN Code: 57781953#

The call will also be available for replay shortly afterwards via the following numbers:

Playback number: +44 (0)20 3426 2807

Playback Toll Free: 0808 237 0026

Playback Pin Code: 640326#

If you wish to download the presentation slides ahead of the call, they are now available on SEGRO's website: www.segro.com/investors

Investor / Analyst and Media Enquiries

About SEGRO

SEGRO is a leading owner, asset manager and developer of modern warehousing, light industrial and data centre properties, with £4.7 billion of assets (as at 31 December 2012, including SEGRO's share of joint venture assets) principally concentrated in London's Western Corridor (including the Thames Valley) and in key conurbations in France, Germany and Poland, as well as suburban office buildings in the Thames Valley, Brussels and Milan.

The Group serves over 1,300 customers spread across a diverse range of industry sectors. It has 5.3 million sqm of built space and a passing rent roll of £318 million (as at 31 December 2012).

For further information, please visit www.segro.com 

Morgan Stanley & Co. Limited is acting as exclusive financial adviser to SEGRO plc and no one else in connection with the matters described in this announcement. In connection with such matters, Morgan Stanley & Co. Limited, its affiliates and their respective directors, officers, employees and agents will not regard any other person as their client, nor will they be responsible to any other person for providing the protections afforded to their clients or for providing advice in relation to the Transaction, the contents of this announcement or any other matter referred to herein.