U.S. Markets closed

Edited Transcript of SGRO.L earnings conference call or presentation 14-Feb-20 8:30am GMT

Full Year 2019 SEGRO PLC Earnings Call

Slough Feb 25, 2020 (Thomson StreetEvents) -- Edited Transcript of SEGRO PLC earnings conference call or presentation Friday, February 14, 2020 at 8:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Andrew S. Gulliford

SEGRO Plc - COO & Executive Director

* Claire Mogford

SEGRO Plc - Head of IR

* David John Rivers Sleath

SEGRO Plc - CEO & Executive Director

* Soumen Das

SEGRO Plc - CFO & Executive Director

================================================================================

Conference Call Participants

================================================================================

* Matthew Saperia

Peel Hunt LLP, Research Division - Analyst

* Paul J. May

Barclays Bank PLC, Research Division - Analyst

* Robert Andrew Duncan

Numis Securities Limited, Research Division - Property Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

David John Rivers Sleath, SEGRO Plc - CEO & Executive Director [1]

--------------------------------------------------------------------------------

Okay. Well, good morning, everybody, and welcome to SEGRO's 2019 Full Year Results Presentation. I'm pleased to say that 2019 was another successful year for SEGRO. We've produced some excellent financial results and some attractive returns for our shareholders. And these are driven by the continued application of our well-established strategy, and in particular, by further disciplined capital allocation, which saw us invest almost GBP 700 million through development-led activities. And we generated GBP 440 million from disposals. But it was also supported by the further operational excellence we've pursued, which generated some very impressive property operating metrics, including like-for-like net rental growth of 4.7% and a vacancy rate of 4%.

Meanwhile, the extensive financing activity we've undertaken during the year has further strengthened the financial platform. Now it probably not have totally escaped notice that 2020, this year, is SEGRO's centenary. While generating attractive financial returns for shareholders is an important part of business, it's also in our DNA to consider the wider interest of our stakeholders and to act in a responsible way. This has been integral, in fact, to much of the success of the company over the last 100 years, and it will be crucial as we position ourselves for the years ahead.

It all stems from having a clear business purpose, which is something that we created some years back through the involvement of everybody in our company. And that purpose is to create the space that enables extraordinary things to happen.

So whether that be for our employees, for the communities and business partners that we work with or by enabling our customers to do extraordinary things in the spaces that we create for them is very much our guiding light, and we'll come back to that in a little while.

But recognizing the importance of financial performance as one of the key ingredients of a sustainable, successful business, let me now share with you the structure of the rest of this morning's presentation, which will follow a rather familiar format.

In a moment, Soumen will take you through the financials. I'll then discuss what lies behind the numbers with a particular focus on the tremendous success we've achieved through our development program and through the gains from our customer focus and asset management activities. I'll briefly then touch on the rationale behind our capital deployment in 2019 and then explain why we're confident of making further progress in 2020 and beyond.

So let me hand you over to Soumen.

--------------------------------------------------------------------------------

Soumen Das, SEGRO Plc - CFO & Executive Director [2]

--------------------------------------------------------------------------------

Thank you, David, and good morning, everyone. So as David has already highlighted, 2019 was a very successful year for SEGRO, and you can see this in the financial results that we reported this morning. The earnings momentum from 2018 has continued into 2019. Adjusted EPS is up 4.3% to 24.4p, although this does understate the underlying growth rate due to the SELP performance fee that we received in 2018 and is payable only every 5 years. If you exclude this, EPS growth was 9.9%.

Adjusted profit was GBP 267.5 million, and I'll expand on that in a moment. NAV growth was up. NAV per share, other was up 8.9% to 708p, and that's driven by the portfolio revaluation of 7.5%. The balance sheet is in great shape with LTV at just 24%. Now we set the final dividend at 14.4p, that's an increase of 8.7%, which makes the total dividend for 2019, 20.7p, that's an increase of 10.1%, in line with that trend growth rate in earnings.

Turning now to Slide 7. This slide shows you the growth in net rental income, which is the key driver of the growth in earnings. Net rent grew by GBP 43 million to GBP 361 million. That's an increase of 14% due to a combination of like-for-like growth and the top line growth. You can see in the first gray column, the rent from standing portfolio grew GBP 13 million in the year and like-for-like growth rate of 4.7%, with a positive performance in both U.K. and in Europe.

The big increase has come from development completions, which added GBP 29 million, which reflects the scale and the success of our development program. This was offset a little bit by our investment activity, a net GBP 2.6 million as we sold slightly more income-producing assets than we bought. Looking ahead, we expect rental income to grow strongly, but the timing of our investment activity, particularly disposals, doesn't mean that the growth rate will vary from year-to-year.

This slide shows you the components of adjusted earnings, which grew 10.8% to GBP 267.5 million. I've just highlighted 3 things on the right-hand side in the boxes. Firstly, JV fee income was lower in '19 than in 2018 because the 2018 figures, I mentioned, includes the SELP performance fee, which is payable only every 5 years.

Finance costs were GBP 9 million lower due to the financing activity, which I'll cover a little bit more in a moment. I mentioned at half year that IFRS 16, which is the new leasing standard, has come into force. Now it's got next to no impact on the bottom line, but it does impact a couple of line items. Slide 43 in the appendix has got more detail on this and on the cost of debt.

Our cost ratio has remained stable at 22.9%, and excluding the share schemes, it is 19.9%. And just a reminder, at the bottom of the table, following the equity issue this time last year, we've got a higher number of shares in issue, which will affect the per-share metrics.

Turning now to NAV. EPRA NAV per share rose 58p to 708p. The bar in the middle shows you the valuation gains increased NAV by 64p, 42p of which came from the standing portfolio and 22p from the development program.

Turning to Slide 10 and looking a little bit more closely at the valuation increase. The valuation gain totaled GBP 718 million, a 7.5% gain. The standing portfolio grew 5.8%, as you can see at the bottom left, and development profit added a further 2%. You can see that every part of the business delivered a positive result, with the continental markets performing especially well with returns in the mid-teens.

In Slide 11, the valuation increase is the result of our asset management activities and of rental growth. You can see on the graph, the yields were flat in the U.K., they tightened by about 50 basis points in Europe during the course of the year.

Pleasingly, we've seen ERV growth across the portfolio, 2.7% for the group. Notably, Europe outperformed U.K. for the first time, with growth of 3% versus 2.6%, with particularly strong contributions from France and Germany.

Turning now to our financing activity. 2019 has been another busy year, with GBP 0.5 billion of net financing raised. You'll recall the equity placing this time last year, which raised just over GBP 450 million to provide the capital to continue to invest in the development program.

On the debt side, in SELP, we issued a bond with a coupon of 1.5% and put in place EUR 200 million of additional credit lines. We also bought back one of our last high coupon bonds that we have at the SEGRO level.

So all that activity has bolstered an already strong balance sheet, and that provides us with great flexibility and liquidity to continue to allow us to invest in the development program. Loan-to-value is 24%, and the cost of debt is just 1.7%. The average debt maturity is 10 years, and we've got GBP 1.4 billion of cash in available facilities.

As you'll hear from David shortly, the development pipeline continues to offer very attractive opportunities for further capital investment.

As you'll see in the box at the bottom, we expect to spend over GBP 600 million this year on CapEx and on land purchases. We continue to make selected disposals from the standing portfolio. And as previously guided, we expect to sell around GBP 150 million to GBP 250 million each year, which is around 2% of the asset base.

So to sum up from me on the financial side, I'm very pleased to report strong momentum in earnings driven by rental growth, a low leverage balance sheet with lots of liquidity to support that growth and a full year dividend increase of 10.1%. And with that, I'll hand you back to David.

--------------------------------------------------------------------------------

David John Rivers Sleath, SEGRO Plc - CEO & Executive Director [3]

--------------------------------------------------------------------------------

Thank you, Soumen. So the strong financial performance that Soumen has just taken you through reflects, of course, the strong operational performance that we've delivered across the business. So I'm going to talk about that now in 2 chunks. First of all, I want to cover development, and then I'll move on to asset management.

2019 was another record year for development completions. We created almost 900,000 square meters of space across 40 projects, 30 of them were pre-lets, including our first 4 units at East Midlands Gateway as well as the rail freight terminal, which went live with its first route in January. We also produced buildings for Amazon, Zalando, GEODIS, [Anti and Marato], ALDI and Porsche.

We completed 5 new data centers in Slough, and we delivered our largest ever London pre-let for DO & CO at Heathrow Airport. 20% of the space was developed speculatively, including 10 projects covering Munich, Düsseldorf, Berlin, Frankfurt, 2 in Madrid, 1 in Barcelona and 1 in Slough. Development program remains a profitable source of growth for us. In 2019, it generated GBP 44 million of potential rental income. And as you can see, 92% of it was already leased up by the end of the year.

Moving on now to the second main driver of performance. It was an excellent year for asset management as a result of our strong customer focus and our well-positioned asset base. We signed up GBP 66 million of new annual rent with very strong momentum in the final quarter, taking 2019 to within a whisker of the record we set in 2018.

Within that, there were 37 new pre-lets to feed the development pipeline, equal to GBP 31 million in new rent. We generated GBP 14 million of rent increases on existing assets, largely as a result of uplifts on rent reviews and lease renewals, which were 18% ahead of the previous passing rents.

And despite pushing ahead with our rents, our customer retention rate remains high at 88% and vacancy improved 4%, mainly due to strong performance in letting up recently competed speculative developments in Germany, but also helped by the disposal of 2 vacant big box assets. Soumen mentioned earlier that we've driven like-for-like rents by 4.7%. That's the result of some 300 different property transactions across the business. And obviously, we can't -- we don't have time to go through many of them today, but I would like to just highlight for -- typify what we've been doing.

At the Heathrow Cargo Centre, all but one of the peppercorn leases have now been regeared, securing rental uplift of GBP 5 million in the year, with 1 last sizable negotiation, hopefully, to be concluded in 2020. In Germany, we completed 2 big box lease regears with one of our largest customers. Those negotiations resulted in 10-plus year lease extensions, sizing -- securing a sizable uplift in ERV and a 30% value enhancement

In Italy, we were able to source some much-needed expansion land to enable Amazon to increase their parking areas at 3 different warehouses, as a result of which they agreed to regear all 3 leases, creating 9-year term certain.

Finally, on the Slough Trading Estate, we took back an old 1980s warehouse, split the building into 2, carried out an extensive refurbishment to improve the specification and the layout, and both units were let at rents more than 15% ahead of ERV, which is a reminder that much of the CapEx that we spend on our existing buildings is, in fact, value enhancing, not simply maintenance CapEx. I'll say, these examples typify the hands-on approach that we take in internally managing our portfolio and demonstrate the importance of working really closely with our customers.

So let's now move on to capital development -- capital deployment. We continue to be selective about pursuing acquisitions of income-producing properties, given where pricing levels are. However, our local teams have, once again, sourced a number of attractive off-market opportunities to supplement the development-led growth and to help add scale in some of our key target markets.

In the wholly owned portfolio, we added to the urban portfolio in competitive markets such as Lyon and London, while SELP-acquired big-box warehouses in Barcelona, Lyon and Wroclaw in Poland.

As in the last few years, of course, the major focus of our investment activities in 2019 was on continuing to deploy capital into the development program, both CapEx for the current construction program but also to secure new land to provide further development opportunities. We acquired GBP 147 million of land during 2019. And since the year-end, we've also completed the purchase of a fantastic 450-acre site next to Coventry Airport to support our U.K. big-box strategy.

In terms of disposals, we've sold some small noncore assets to third parties, including selling out of Gdansk in Northern Poland, whilst also selling newly developed big boxes in Italy to our SELP joint venture. And finally, we disposed of a number of big-box warehouses in the U.K., including the portfolio sale we announced just before Christmas. These were older, stand-alone big-box warehouses. Although they had performed well since we acquired them, they offered less attractive and less sustainable returns going forward that we can achieve through deploying our capital into the development of larger ring-fenced logistics parks such as East Midlands Gateway, now Coventry. These parks give us the opportunity to invest in greater sustainability features during the development phase but also offer more management flexibility once they are operational.

For example, East Midlands Gateway, we significantly enhanced the power infrastructure whilst we were preparing the site, anticipating, of course, the ever-increasing amounts of automation now happens in warehouses. We've also invested in biodiversity features, a jogging track and a bus terminal to support customers bringing in their labor. These are sort of things you can only do when you've got a large park that's under your control.

Now let's look ahead and explain why we're confident about our prospects for 2020 and beyond. And that confidence comes from 3 familiar sources. Firstly, the structural tailwinds that persist across our markets. Secondly, the high-quality of our existing portfolio base. And thirdly, the development opportunities on our substantial land bank.

As you've heard me say before, the structural drivers of urbanization and the technological revolution are driving change in our markets. Their impacts have been clear to see in the U.K. for quite a while. And in 2019, they also started gaining traction on the continent, too, which experienced both strong occupational and investor demand. In 2019, almost 70% of our new lettings came from retailers, many of whom like Amazon are expanding their distribution networks across Europe. We expect these trends to be sustained for some considerable time to come.

U.K. e-commerce market is still growing strongly, with latest forecast predicting that it could get to 27% by 2023. But France and Germany, amongst others, are also changing fast and approaching the 10% Internet penetration level around which research suggests retailers have to start adapting their supply chains. All this means that warehousing requirements on the continent could significantly increase over the coming years.

But demand is not just coming from retailers and online retailers, in particular. Our urban warehouse portfolio is occupied by many different types of businesses, which provides an extraordinarily wide range of goods and services to growing urban population centers.

Our view is that the populations of the already busy and congested cities we serve are likely to expand materially over the next 15 years. As they do, there will be an increased demand for space to provide goods, services and last-mile distribution needs and there will be limited, and in most cities, diminishing supply of suitable industrial land to meet that demand as much of that land gets taken up to provide the homes for these growing populations. We think this represents a great opportunity for us.

The second source of confidence about the future comes from the high-quality, sustainable portfolio and customer lineup that we've established. Since we launched our restructuring in 2011, it's taken 8 years of hard work to create what we now have. And as I've said before, it's an irreplaceable portfolio. It's a portfolio that is predominantly weighted towards urban, but with -- which is complemented by a meaningful exposure to big-box logistics. It's a portfolio that we will continue to refine and improve through the disciplined approach we've talked about, and it's a portfolio which I'm confident will prove to be a source of sustainable income growth through our expertise in customer and asset management.

Consequently, we expect to be able to deliver further rental growth on our existing portfolio. And this chart sets out our current expectations, which is shown on the far right-hand side. Overall, the picture hasn't changed from the previous guidance we provided, with urban warehouses continuing to outperform big boxes. The actual figures we deliver year-to-year, these are reported in the penultimate column here for '19, can be quite lumpy. But in 2019, we were particularly pleased to see the growth that we've been anticipating for some time starting to come through in Continental Europe, particularly, again, in those urban markets.

And the final piece is around the excellent land bank that we have to support further profitable, development-led growth. On the right, you can see the data in terms of the development capacity on the land that we already own or control through options. In aggregate, we have the potential to generate more than GBP 260 million of further annualized headline rents, producing an attractive development yield, which typically averages around 6% to 7% at today's rental levels.

As of the end of the year, we had just over GBP 450 million of land on the balance sheet, which is just less than 5% of total asset value. Given our high rate of net land utilization and our belief in the fundamentals of our market, we do have appetite to pursue further land purchases to continue feeding the development hopper.

So in addition to the Coventry side I mentioned earlier, we have another GBP 200 million or so of possible land purchases in our sights, which we hope to conclude over the next year or so.

Looking at the more immediate future, we have 826,000 square meters of development under construction, covering 46 different projects. Interestingly, more than half of this pipeline is with existing customers, which is a testament to our strong customer relationships as much as to the quality of our sites. 16 of the projects are in the U.K. and include urban warehouse developments in all parts of the capital, including our largest ever pre-let in London to London -- to Ocado. We're building 2 more data centers in Slough, another pre-let at East Midlands Gateway to Games Workshop this time. And our first pre-let at our park at Kettering to Bunzl.

The remaining 30 projects are in Continental Europe, including big box warehouses for a number of existing occupiers such as Amazon, Metro, Leroy Merlin, Alliance Healthcare, GEODIS, Jafco. We also have further phases of urban warehouse development in Frankfurt and Düsseldorf. And in France, we're building 5 new warehouse schemes speculatively in the suburbs of Paris, where we've seen strong rental growth in 2019.

Beyond these current developments, we have another 15 pre-let projects at advanced stages of negotiation, which we expect to start on-site shortly. And it's fair to say, the new year has started well with good levels of new inquiries across the business. All of this adds up to a significant opportunity for further profitable income growth over the coming years. And you can see from this chart that we have the potential to almost double the cash passing rents from the existing asset base through capturing reversion in the existing portfolio and then building out a development pipeline on land that we already control. And that's before taking account of any further rental growth.

Our balance sheet is already well positioned to support this, with a low-cost of debt, appropriate financial gearing and GBP 1.4 billion of cash and credit lines. We also have a fully staffed group of in-house local expertise on the ground in all our key markets to deliver that growth.

Now we're often asked about the time frame for delivering the rents on this chart. And our answer is, it's roughly a 5-year time frame, which I think is quite important. If you go back to when we produced this chart 5 years ago, for example, in our 2014 results, you'll see that the passing rent at the time was GBP 264 million, and that the total potential right -- the potential rent that we're showing on the far right-hand side was GBP 373 million, which is pretty much in line with where we are now in terms of our passing rent today. And that, by the way, is despite having made net disposals of income-producing assets during the period. So we think this is deliverable. And obviously, the size of the opportunity is evolving all the time. In particular, it's increasing as we add more land purchases.

As I mentioned at the start of the presentation, this year is SEGRO's centenary, 19th of May to be precise. This gives us an opportunity to stand back and reflect on the last 100 years, but also think about how we can best position ourselves and what our priorities should be to ensure the continuing success of the company in its second century of existence. Clearly, there's an increasing amount of focus on environmental and social impacts of businesses, but this is not a new concept to us, particularly on the social side.

On the Slough Trading Estate, for example, we introduced a Slough Industrial Health Service in 1947, which was exactly 1 year before the NHS was set up. Our approach to environmental and social sustainability is focused really on where we can take our unique combination of assets, expertise and relationships and make a unique difference to the stakeholders that we serve.

And the key areas for us in terms of our focus really are threefold. Firstly, it's about helping our customers reduce their carbon emissions by introducing the latest technologies to make the buildings energy-efficient to operate, by providing them green energy for them to use in their operations and by providing charging points for electric vehicle usage. Secondly, it's about reducing the amount of embodied carbon generated through our own development program by using innovative materials and design techniques and eliminating any construction waste from being sent to landfill. And thirdly, it's about providing an attractive and healthy working environment for those using our estates and also working with our customers and partners to create employment opportunities for local people and to boost the local economy.

So let me give you just one example to bring that alive. This is SEGRO Park Rainham, part of our East Plus project that we're developing in conjunction with the Greater London Authority and the mayor of London, who selected us as a development partner to regenerate 86 acres of former Branford land in East London. One of the main reasons we were selected as the development partner by the GLA was the work that we've been doing for years with local communities in both Slough and across London.

Once complete, this park will be home to over 30,000 square meters of modern warehousing, with the rent roll in the region of GBP 4 million in what is one of the fastest-growing rental markets in London. But it actually encapsulates many of the features of our approach to broader sustainability. The building design incorporates translucent panels in the walls to provide more natural daylight, reducing the need for artificial lighting. To support the health and well-being of those who work in the buildings, there'll be a green or living wall inside one of the buildings. We're providing biodiversity features such as extensive tree planting and beehives to help combat the declining population and create Rainham honey. If you like to sample some, I'm sure we can get you some.

In the operation of the building, we're incorporating smart building technology to help our customers monitor their energy usage. We're installing solar photovoltaic panels to generate energy. And in the latest phase, we've installed Tesla batteries to store the excess energy that's being generated for later use.

And in terms of working with the local community, we've incorporated an enterprise quarter, providing small units on flexible leases for local startups and small businesses. During the construction, we worked with our contractor to source labor materials locally wherever that's feasible. We've worked with the local employment service to make sure that all the jobs and training opportunities that we produced from the scheme are shared with local people during the construction phase and then during the occupation of the buildings. And we've contributed GBP 165,000 of funding through the SEGRO Community Fund to help disadvantaged and vulnerable people in the area upscale and into the workplace.

The one thing that brings this all together, the heart of it, is innovation. Innovation in the way we design our buildings, innovation in the way that we do business. Our sector is having to adapt to the forces of change, like most others, and we want to make sure that we're pioneer of change and not a victim of it.

We need to anticipate our customers and our other stakeholders' changing requirements, and we need to keep ahead of them. This is one of the reasons why we created the new strategy, innovation and investment team that was announced a couple of weeks ago. We already have some great ideas and innovations coming through the business, or already being implemented. And our aim in creating this new team is to better harness and coordinate our activities to better understand the new opportunities and to better prepare for the challenges that will arise from the ongoing disruption.

But just to be clear, the creation of the new team won't change our core strategy. We'll continue to focus on owning, managing and developing modern sustainable warehouses in our chosen European markets and disciplined capital allocation and operational excellence will continue to be the main pillars of our approach.

So let me conclude. We started 2020 in good shape and we're confident about our prospects for the year ahead. We believe the structural drivers of demand in our sector will remain intact for some time to come. This means our portfolio, including our substantial land bank, positions us well to be able to continue driving sustainable earnings and dividend growth. But we're not taking our success for granted. We're looking beyond the immediate horizon to make sure we understand the longer-term trends, the opportunities and the challenges that we and our customers will face, and we will adapt accordingly. We're excited about the prospects for SEGRO as we enter the company's second century of existence.

So thank you all for listening. We're now going to move to questions. And for that, Soumen and I are going to be joined by Andy Gulliford, our Chief Operating Officer.

We'll start with questions in the room. There are a couple of roving -- roaming mics, and so please do put your hand up. Paul?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Paul J. May, Barclays Bank PLC, Research Division - Analyst [1]

--------------------------------------------------------------------------------

Paul May from Barclays. Just three questions for me. The -- on the SELP performance fee, can you just remind us of the hurdles and calculation of that? Because I imagine over the next 5 years, you're probably going to receive another one. So just any idea on that?

--------------------------------------------------------------------------------

David John Rivers Sleath, SEGRO Plc - CEO & Executive Director [2]

--------------------------------------------------------------------------------

Soumen, why don't you respond to that?

--------------------------------------------------------------------------------

Soumen Das, SEGRO Plc - CFO & Executive Director [3]

--------------------------------------------------------------------------------

Of course. So it's -- so the -- it's based on calculations on IRR on a running basis. It's a 10-year IRR, which is from 2013 through 2023. It was calculated at the 5-year level. The hurdle rates are 9% and 10%, and we take a different level of the surplus above each. And it's been captured again at the 10-year period.

Now obviously, you've got a longer time period, which definitely makes it more difficult to hit the same IRR hurdle. But clearly, with the performance we're getting out of Europe, that's an offset as well. So at the moment, we're not providing anything. But obviously, as we get closer to 2023, which is the next date, we will do so.

--------------------------------------------------------------------------------

Paul J. May, Barclays Bank PLC, Research Division - Analyst [4]

--------------------------------------------------------------------------------

The rental income bridge that you provide, Chart 28, obviously, that's on a cash basis rather than an accounting basis. Just wondered, other than the rent-frees, are there any fixed uplifts in the reversion that are already included in the accounting for us? Another way, what would be the potential accounting rental income bridge?

--------------------------------------------------------------------------------

David John Rivers Sleath, SEGRO Plc - CEO & Executive Director [5]

--------------------------------------------------------------------------------

There are some fixed uplifts as well and they're disclosed elsewhere in the property analysis booklet. But I'd have to get a spreadsheet out right now to tell you how you convert that into the accounting rents. Soumen, you want to make a comment on that? You probably got it.

--------------------------------------------------------------------------------

Soumen Das, SEGRO Plc - CFO & Executive Director [6]

--------------------------------------------------------------------------------

Well, not on hand. But the two key things are, in sense of running, at about 6% to 7% pretty constant throughout the piece. I mean that's the kind of -- when you bridge from the gross rent through the accounting income statement bridge, it's a relatively constant translation. So it's instances are not spiking and going down from where we are.

The -- so the -- I'm not sure I've got a simple translation for you, but it's -- the bulk fees -- actually, when I talked about the net rental income bridge at the beginning of my section, we saw GBP 9 million of rent coming through from like-for-like, and you saw a further GBP 29 million coming from the development completions. So if you like, that's the difference between the gross rent and the net rental bridge is kind of those 2 bridges. So it's a knock about sort of 7% to 10% off and you get quite close out of those. The rent-frees burn off within 12 months.

--------------------------------------------------------------------------------

David John Rivers Sleath, SEGRO Plc - CEO & Executive Director [7]

--------------------------------------------------------------------------------

I'm so pleased I don't have to try and answer that type of question.

--------------------------------------------------------------------------------

Paul J. May, Barclays Bank PLC, Research Division - Analyst [8]

--------------------------------------------------------------------------------

And then the final one, more generally, obviously, where your shares are trading, material premium to asset values, further improvement in operational efficiencies coming through and that -- those increases, scale increases, just wondering if there's been any thought for SEGRO to sort of use its position to become a true, in terms of size, peer for like Goodman and Prologis, just given the strong markets that you're operating in, the outlook for the strong markets going forward. I appreciate there's better returns on development, but there's also an offsetting factor in terms of efficiency and scale that will come through.

--------------------------------------------------------------------------------

David John Rivers Sleath, SEGRO Plc - CEO & Executive Director [9]

--------------------------------------------------------------------------------

Yes. I think that's a really -- that's a good question because one of the things that is clear that some of the things we've touched on in the area of technology investment, in some of the other areas of innovation, they're quite big investments. And so scale does matter, which is one of the reasons why we sort of set a target some while ago to make sure that we have critical mass in all of our key markets to be able to properly support a local team. And we've got great scale in most places; one or two markets, we're still trying to build our position. But it is important you have a certain amount of scale.

We feel that we're big enough as a group as a whole. In fact, one of the reasons why we're creating some of these central teams is to make sure that we don't duplicate and try and replicate things in lots of local markets that could all happen in one go. But we do think we have enough scale to be able to make those investments and compete effectively.

And our view has always been, as a business, that it's -- I'd rather be best than the biggest. And so scale for the sake of scale, just trying to be a global player is not something that we necessarily have any aspirations to do. We want to be best. We want to have a growing, successful business. And it's -- I think we're very comfortable with the direction of travel we're on.

Robbie?

--------------------------------------------------------------------------------

Robert Andrew Duncan, Numis Securities Limited, Research Division - Property Analyst [10]

--------------------------------------------------------------------------------

Robbie at Numis. Just one from me. On the debt side, obviously, 1.7% cost of debt is pretty -- debt, yet.

--------------------------------------------------------------------------------

David John Rivers Sleath, SEGRO Plc - CEO & Executive Director [11]

--------------------------------------------------------------------------------

Debt question. That's one for Andy Gulliford, probably.

--------------------------------------------------------------------------------

Robert Andrew Duncan, Numis Securities Limited, Research Division - Property Analyst [12]

--------------------------------------------------------------------------------

That's what I was aiming at. Now 1.7% cost of debt continue to come down, again. Just two things, one, then, is there any scope for further reductions? I mean question mark, but it would be great to see a little bit more of, Soumen?

And second of all, could you just tell me how long that sort of protects -- its 10-year average maturity on the debt for -- but how long is that kind of a very low level? No one's assuming we're going to see some spike up in rate, but it's just -- is that protected for 2 years, 5 years?

--------------------------------------------------------------------------------

Soumen Das, SEGRO Plc - CFO & Executive Director [13]

--------------------------------------------------------------------------------

Okay. So the -- we've probably done in the order of GBP 5 billion of debt financing over the past 3 years. So we've kind of taken the balance sheet and given the low interest rate environment and given the kind of the credit spreads that we're benefiting from, we've turned the debt out. So we've extended the debt maturity from 5.5, I think it was to now 10, and we've brought the cost of debt down from 3.5% to 1.7%.

The -- so we've got the term risk there. There's been some edited out. The ability for that to come down further will, frankly, be a function of -- as we put on further debt to fund the development, however, where prevailing rates are, I'm not going to make a call on where rates are going. Frankly, they are 1% lower than they were this time last year. Heaven knows where they'll be in 6 or 12 months. But I'm not sure anybody is expecting any major spike in prevailing rates. And so I think that sort of area that we -- that 1.7% cost of debt is very sustainable.

In terms of protection, over half of the debt is fixed, and a further 25% has caps on it. So you'll see in the press release that a 1% move in interest rates has a relatively modest impact in terms of earnings. So there's a great deal of protection in there, with some caps in there to give us some exposure to the floating.

--------------------------------------------------------------------------------

Matthew Saperia, Peel Hunt LLP, Research Division - Analyst [14]

--------------------------------------------------------------------------------

It's Matt Saperia from Peel Hunt. This might be a question for Andy, actually, but you mentioned you're currently developing a number of spec buildings around Paris. I was just wondering what the appetite more generally is across the wider portfolio for spec development now, whether it's changed?

--------------------------------------------------------------------------------

David John Rivers Sleath, SEGRO Plc - CEO & Executive Director [15]

--------------------------------------------------------------------------------

That is a great question for Andy to answer. Thank you, Matt.

--------------------------------------------------------------------------------

Andrew S. Gulliford, SEGRO Plc - COO & Executive Director [16]

--------------------------------------------------------------------------------

We've got a reasonable spec program, as David showed in the presentation, particularly at the urban end and particularly sort of London, Paris, German cities, and that has been leasing up extremely well. I reference Paris particularly with the Grand Prix and the Olympics and the lack of land availability, coupled with the themes of urbanization and digitalization, and you've got an absolute hot bed for spec development in those urban centers. We're not really doing too much on the spec front, big box. We tend to go with pre-lets on that. If we get the sites consented, infrastructure ready, frankly, with the requirements that come forward, we can move those through quickly enough to meet our customers' requirements. And in fact, they quite like that so that they can input into the design and specification of the buildings.

So it's really urban-focused, our speculative scheme, but we'd like to keep that moving because we think there's a real appetite for the space that we're providing in those main centers.

--------------------------------------------------------------------------------

David John Rivers Sleath, SEGRO Plc - CEO & Executive Director [17]

--------------------------------------------------------------------------------

Might be just worth mentioning Spain as being one slightly different market.

--------------------------------------------------------------------------------

Andrew S. Gulliford, SEGRO Plc - COO & Executive Director [18]

--------------------------------------------------------------------------------

Yes. Spain, we have actually gone for some bigger box speculative development in Spain. Spain, interestingly, tends to be a speculative rather than pre-let market. I can't honestly tell you quite why that is, but culturally that seems to be the case. And we have committed to quite a lot of spec development there. And there is a reasonable amount of speculative development in the marketplace. But the actual availability is low, the demand is very high. We're focused exclusively on Barcelona and Madrid, which are the 2 best markets. And while it doesn't show in our stats for the year-end, our 2 biggest vacancies in Madrid, 1 is leased, and the other is about to be leased. So again, very confident on that. We've taken a little bit more speculative risk in Spain to move ourselves forward there.

--------------------------------------------------------------------------------

David John Rivers Sleath, SEGRO Plc - CEO & Executive Director [19]

--------------------------------------------------------------------------------

Any more? You've got any questions on the Web?

--------------------------------------------------------------------------------

Claire Mogford, SEGRO Plc - Head of IR [20]

--------------------------------------------------------------------------------

Yes. We do. We've got a few questions. The first one, has the -- do you see any opportunities for or any potential for market consolidation in the logistics space?

--------------------------------------------------------------------------------

David John Rivers Sleath, SEGRO Plc - CEO & Executive Director [21]

--------------------------------------------------------------------------------

Well, there's an awful lot -- there has been an awful lot of consolidating going on over the last few years, isn't there, and it's something we predicted would happen, which is why we -- when we wanted to get heavily involved in big box logistics in Continental Europe, we created the SELP joint venture with funding from a Canadian pension fund because we could see the benefit of having a sizable capital source alongside us to do that. I think there will, undoubtedly, be -- I think this will be another busy year for portfolio transactions and people doing roll-ups. But going back to one of the earlier questions that we were asked, I mean, we remain open for opportunities. We're looking at all our markets, but just buying big portfolios and buying stuff to take to scale when quite often they don't have the same average quality, should we say, that our portfolio has, it's not something we particularly want to do, but we are certainly open for finding opportunities that are accretive in terms of quality, if we can find them. And let's see what happens.

--------------------------------------------------------------------------------

Claire Mogford, SEGRO Plc - Head of IR [22]

--------------------------------------------------------------------------------

And then a couple of other questions. Can you expand on your relationship with Amazon? And in terms of Brexit, are there any future possible restrictions on movements of goods that could impact your business or clients?

--------------------------------------------------------------------------------

David John Rivers Sleath, SEGRO Plc - CEO & Executive Director [23]

--------------------------------------------------------------------------------

Can we expand on our relationship with Amazon? Probably not in a public forum, but I'll let Andy answer that one.

--------------------------------------------------------------------------------

Andrew S. Gulliford, SEGRO Plc - COO & Executive Director [24]

--------------------------------------------------------------------------------

Well, obviously, a key customer, our second largest customer at the moment, likely to be our first in probably through the course of this year. Just a really strong relationship. So we run a key account management system and I'm actually the key account lead on Amazon. So it's fantastic. But we basically have a European overview and then a national key account setup, which means that we're very, very close to their requirements, but not just the immediate requirements, we've really talking with Amazon, 2, 3, even 5 years out, both for their big fulfillment centers, their middle mile, as they call it, and their last mile fulfillment; their parcel delivery stations. So we think we've got a very, very close relationship with them, not an exclusive relationship but any means, of course, but certainly one that means that we generate a good level of business with them.

--------------------------------------------------------------------------------

David John Rivers Sleath, SEGRO Plc - CEO & Executive Director [25]

--------------------------------------------------------------------------------

I think I made the point in the presentation that a very large, for example, our current development program, a very large chunk of that is with existing customers. And Andy alluded to the key account program. So we found over a number of years now increasing amounts of business with the same occupiers in multiple different markets. And so we're really targeting them, developing our relationships, getting them at the right level and really trying to understand their business plans and their strategies as best we can because, obviously, that helps us to help them. Some are more open than others, but most of them don't like us talking about their plans very publicly. But we do think we get a real advantage. As Andy said, not an exclusive position very often, but we get a real advantage by being that close to them that they're willing to share their insights.

There was a second question, wasn't there, Claire?

--------------------------------------------------------------------------------

Claire Mogford, SEGRO Plc - Head of IR [26]

--------------------------------------------------------------------------------

Yes. It was on Brexit. Any future possible restrictions on movement of goods that could impact your business or your customers?

--------------------------------------------------------------------------------

David John Rivers Sleath, SEGRO Plc - CEO & Executive Director [27]

--------------------------------------------------------------------------------

Andy?

--------------------------------------------------------------------------------

Andrew S. Gulliford, SEGRO Plc - COO & Executive Director [28]

--------------------------------------------------------------------------------

Yes. We don't see that at the moment. Obviously, the trade deal is under negotiation. So until we really know the terms of that, like everybody else, we're waiting to see. But our business is largely a national and local business. So people are serving the local environment. Anything sort of cross-border tends to be on the continents anyway and [Sheffield] is much more important than any kind of boundary to the U.K. In talking with our customers, I think the one thing that we've seen since the election is a surge in business confidence. Anecdotally, more inquiries coming through. It feels better. People know we're going to be leaving, but they now know we're leaving. So the certainty is there, people are moving forward. And a couple of customers that we've spoken to will probably need a little bit more in the U.K. If Brexit leads to an economic slowdown, obviously, we won't be immune to that, and there will be a bit less, but I was talking to one particular customer who felt that was going to kind of even out. If it slowed a little bit, they need a bit more space and it will be pretty level. So we don't see that as a particular issue.

--------------------------------------------------------------------------------

Claire Mogford, SEGRO Plc - Head of IR [29]

--------------------------------------------------------------------------------

And then we have a couple other questions on supply. If you had to single out a couple of continental markets that you're invested in where speculative supply has the potential to pick up surprisingly quickly, which would these be?

--------------------------------------------------------------------------------

David John Rivers Sleath, SEGRO Plc - CEO & Executive Director [30]

--------------------------------------------------------------------------------

Me? Go ahead, Andy.

--------------------------------------------------------------------------------

Andrew S. Gulliford, SEGRO Plc - COO & Executive Director [31]

--------------------------------------------------------------------------------

The one that, I guess, people have spoken about most is the Midland's big box market. And obviously, we're investing heavily with the East Midlands Gateway and now the sort of Coventry site. Actually, while there has been more speculative development in that market, it's -- the rate of creation has slowed and the take-up has been pretty good. And I think you'll see in the first quarter this year, some more significant spec lettings.

As I said to the question earlier, we're actually staying away from speculative development in that market. We're looking at a pre-let market. We've got some fantastic sites well set up and we're pre-letting well. So we're not concerned about that speculative situation. It doesn't feel like it's a competitive position to what we're trying to do.

Spain, I referenced, there's a bit more spec there. People have reacted to a very low supply market and a very high demand market. And I guess the third one that I would pick out is Poland because there is always the potential for land supply in Poland. As we've consistently said, Poland is a very active market. It's a very good market, but the opportunity to build there is greater, and there could be a speculative response. There has been some, but nothing that's worrying us.

--------------------------------------------------------------------------------

Claire Mogford, SEGRO Plc - Head of IR [32]

--------------------------------------------------------------------------------

And so then the last question is just the follow up to that. In terms of your comments on the U.K. Midlands, would you expect the vacancy rate to come back down to mid-single-digit from the -- I think the JLL data recently said it was 9%. So would you expect that to come down a bit?

--------------------------------------------------------------------------------

Andrew S. Gulliford, SEGRO Plc - COO & Executive Director [33]

--------------------------------------------------------------------------------

Yes. The data varies. Some people are at 6% to 7%. It would be nice if everybody got together and just produced one set of data. I imagine it will stay pretty much in equilibrium is probably the case. It certainly doesn't feel as though it's going to shoot up, which was, if we were talking a year ago, some of the concerns. So that hasn't happened. And I could see some more being created on the back of some very good deals. So I'm anticipating equilibrium.

--------------------------------------------------------------------------------

Claire Mogford, SEGRO Plc - Head of IR [34]

--------------------------------------------------------------------------------

'

No more questions from...

--------------------------------------------------------------------------------

David John Rivers Sleath, SEGRO Plc - CEO & Executive Director [35]

--------------------------------------------------------------------------------

Okay. Any more on the telephone? Thank you very much. Oh, one more in the room. Thanks.

--------------------------------------------------------------------------------

Unidentified Analyst, [36]

--------------------------------------------------------------------------------

Yes. [Albert] from Bank of America. Just one question, dipping on your customers. Over the last 5 years, have you seen any -- what is the productivity gain on how your customers deliver those packages? How the logistics supply chain is evolving that leads to think that in 5 or 10 years, they would require lesser space to do the same.

--------------------------------------------------------------------------------

David John Rivers Sleath, SEGRO Plc - CEO & Executive Director [37]

--------------------------------------------------------------------------------

Well, there's lots of lots of stuff being written about that and lots of data. The general stats I've seen that particularly piqued my interest. One is that for every pound of sales that is done online rather than through a physical store, you need 3x as much distribution space to service it because of all the picking and packing activities that go on inside a warehouse. So that's one trend. And the -- what's the other key one that we picked up, for every billion of...

--------------------------------------------------------------------------------

Andrew S. Gulliford, SEGRO Plc - COO & Executive Director [38]

--------------------------------------------------------------------------------

$1 billion worth of sales.

--------------------------------------------------------------------------------

David John Rivers Sleath, SEGRO Plc - CEO & Executive Director [39]

--------------------------------------------------------------------------------

Every $1 billion dollars of online sales, they reckon 1.25 million square feet of additional warehouse space are required. So if you believe in the trend of online -- growth in online business, that is definitely a very helpful structural tailwind.

What we're really seeing in the market, particularly around the online, it's not just for online retailers, is that the movement is in 2 directions. One is to move to very large, consolidated distribution centers in key central locations. So hence, you get the very big, multi-story, 1.5 million square feet type Internet fulfillment centers where the range of products that they can offer is many multiples of what you might get from any full-service shop in a high street or a shopping center. So big consolidation around there.

And then the other area of push is in the -- in and around the busy population center close to the chimney pots, as Andy likes to talk about it, where you have to do the last-mile delivery because you can't deliver from a very large distribution center to the chimney pots, to people's front doors and houses and offices using juggernauts, so you have to break the loads down. And the best way to do that is close in. That's been the big trend that we've seen, and that's what we've been trying to play in the U.K. and increasingly on the continent.

And then when you factor in other things like vehicle congestion and air quality, the other trend that we're very much working to support is the move towards cleaner delivery vehicles, particularly in the urban population centers. So growth in electric vehicles and alternative fuels, and we're trying to provision for that.

--------------------------------------------------------------------------------

Andrew S. Gulliford, SEGRO Plc - COO & Executive Director [40]

--------------------------------------------------------------------------------

You've been dying over there.

--------------------------------------------------------------------------------

Claire Mogford, SEGRO Plc - Head of IR [41]

--------------------------------------------------------------------------------

We have one more question from the webcast. Do you now consider private equity like have Blackstone who've recently amassed a considerable war chest of logistics assets across Europe as your competitor?

--------------------------------------------------------------------------------

David John Rivers Sleath, SEGRO Plc - CEO & Executive Director [42]

--------------------------------------------------------------------------------

I mean they obviously, have a lot of capital, but we don't tend to see a lot of them in the markets we're playing in. I mean mostly, as you know, we are -- we either own very good, modern, well-located warehouses, particularly in urban markets or we're developing. And they don't tend to be a name we come across in development at all. And they don't seem to be -- I mean we're not that active in buying stuff ourselves anyway. So we don't tend to see a lot of them, but clearly -- they've been very successful with the logical portfolio and now working on their last mile program.

Okay. Well, thank you very much for listening. Hope you have a good day, and happy Valentine's Day.