September 6, 2017 / 1:51 PM / 3 months ago

Fitch Affirms SEGRO at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, September 06 (Fitch) Fitch Ratings has affirmed UK real-estate company SEGRO plc's (Segro) Long-Term Issuer Default Rating (IDR) at 'BBB+', senior unsecured rating at 'A-', and Short-Term IDR at 'F2'. The Outlook is Stable. The ratings reflect Segro's high-quality logistics property portfolio and its stable rental income, its improved leverage and an extensive development pipeline. The portfolio, which has been refocused towards high-quality logistics assets in prime locations, continues to perform well and benefits from low vacancy rates and moderate rental growth. KEY RATING DRIVERS Capital Increases Strengthen Profile: Segro raised equity twice over the last twelve months with a GBP557 million rights issue in March 2017 to purchase APP and GBP325 million equity placing in September 2016. The additional financing strengthens the balance sheet both from an LTV and structure perspective. Indeed, it helped the company to maintain a Fitch-adjusted proportionate LTV of around 33% at end-1H17. The purchase of APP also simplifies the group structure with more assets which are 100% owned and less secured debt at the JV level, as debt is refinanced on an unsecured basis at the Segro level. The remainder of the proceeds are intended to be spent on the development programme. Appetite for Development: Segro's low vacancies illustrate the limited availability of modern well-located warehouse buildings, which the company sees as an opportunity to develop more assets. Segro plans to spend GBP350 million on developments in 2017. Its current development pipeline is roughly two-thirds pre-let and one-third speculative, which appears reasonable given the current environment, even though most of it will be developed in the less dynamic continental Europe. The short development cycle of logistics assets limits the amount of committed capex and Segro can quickly adjust its development appetite. In addition, land options (such as the ones acquired in its deal with Roxhill) help the company keep a light balance sheet. However, a short development cycle also means that the need for logistics space could potentially be quickly met. Fitch has not yet seen any evidence of demand being met. In particular, high-quality land remains scarce and Brexit may reduce the appetite for speculative development in the short term. Strong Operating Performance: Segro's recent performance remains solid both from a rental and valuation perspective. Like-for-like (lfl) net rental income growth was 3.9% during 1H17 with the UK portfolio, and especially London assets, generating most of the growth. Low and stable vacancies, together with the good take-up levels observed in 2016 are underpinning the performance. Valuation was also up 4.6% at end-1H17 (lfl) which compares favourably with other UK REITs. Structural Growth: E-commerce grew from less than 3% of total UK retail sales in 2007 to close to 14% in 2016 and is still growing much faster (low double digits) than overall retail sales (low single digits). This, together with urbanisation, means that more logistics space is needed to deliver in bulk to large stores and to make individual deliveries. A large part of Segro's portfolio is located on the edge of major cities and addresses those needs. Fitch understands that roughly 40% of take-up is currently directly or indirectly linked to e-commerce. US Private Placement: On top of its capital increases, Segro further raised EUR650 million from a US private placement. It helped the company increase its average debt maturity to 7.8 years at end-1H17 pro forma for the placement (6.2 years at end-2016) and reduce its cost of debt to 3.1% (3.4% at end- 2016). Lower LTV Target: Segro has a 40% mid-cycle LTV target but its management acknowledges that it should be somewhat lower in the current part of the cycle and currently targets an LTV of 35%. Yields for prime London logistics and their spread over other prime asset classes have compressed significantly over the past few years. Looking only at published valuation gains from 2010 would be misleading as non-core assets subsequently disposed of significantly underperformed Segro's core assets. DERIVATION SUMMARY The rating of Segro is positioned in line with other major UK REITS such as British Land (BBB+) and Hammerson (BBB+), reflecting its strong industrial portfolio of large "big box" logistics and edge-of-town industrial. Industrial is traditionally seen as a more volatile asset class than asset classes such as residential. However, Segro is supported by a structural shift towards e-commerce and the limited supply of UK industrial land has created positive rental dynamics. Similar to its UK peers, SEGRO is supported by long leases and long debt maturities. Segro's financial profile is strong with a low LTV and strong interest cover in line with highly rated UK peers, several of which have lowered their LTVs post Brexit. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - higher consolidated rents driven by low single-digit like-for-like rental growth in the UK, and the consolidation of APP; - a more moderate rate of portfolio recycling with around GBP150 million of disposals per year; - capex at around GBP300 million per year in line Segro's significant development pipeline; - higher dividends, driven by a higher number of outstanding shares and some growth. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -Material improvement in Segro's sector or geographical diversification -Increase in Fitch-adjusted EBITDA net interest cover above 2.5x -Fitch-adjusted LTV (net debt/investment properties, excluding development property and including proportionally consolidated investment property and net debt in JV) below 30% over the cycle on a sustained basis Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Deterioration in EBITDA net interest cover to below 1.75x on a sustained basis -Fitch-adjusted LTV (net debt/investment properties, excluding development property and including proportionally consolidated investment property and net debt in JV) above 45% over the cycle 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 -Deterioration in unencumbered asset cover to significantly below 2.0x on a sustained basis, which may affect the IDR and the senior unsecured rating uplift LIQUIDITY Comfortable Liquidity: Segro had comfortable liquidity at end-1H17 to cover its upcoming maturities for the next 24 months and its committed capex. Available liquidity amounted to GBP644 million, with GBP63 million in cash and GBP581 million in available credit facilities (with the largest facility maturing in 2022). In 2H17, liquidity was strengthened by the settlement of its EUR650 million US private placement. The proceeds were partly used to refinance secured debt at the APP level and the sterling bond maturing in 2018. Contact: Principal Analyst Bram Cartmell Senior Director +44 20 3530 1874 Supervisory Analyst Fredric Liljestrand Associate Director +44 20 3530 1285 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Paul Lund Senior Director +44 20 3530 1244 Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below