Sept 17 - Fitch Ratings has affirmed SEGRO plc’s (SEGRO) senior unsecured rating at ‘A-', Long-term Issuer Default Rating (IDR) at ‘BBB+’ and Short-term IDR at ‘F2’. The Outlook is Stable.
The ratings reflect SEGRO’s improved net interest coverage (NIC), solid tenant profile, measured development expenditure and well controlled interest costs. Despite significant asset disposals in H112, leverage is proving difficult to significantly reduce (Fitch adjusted loan-to-value 54% at H112 versus 55% at end 2011). This is due to valuations on the portfolio beginning to decline (minus 1.0% in H112 for SEGRO UK’s core portfolio) and this constrains the current ratings
SEGRO has recently embarked on an enhanced recycling capital strategy, with the intention of reducing leverage down in the medium term to around 40% (on a loan to value basis) and focusing its portfolio on a core base of properties in the UK and Europe. The long term intention is to have a 50/50 split of assets under management by value between the UK and European property portfolio. Over GBP1.6bn of property assets are scheduled to be sold by 2017, and at H112 SEGRO had completed or announced the disposal of over GBP500m of non-core properties. At the 30 June 2012 valuation, GBP816m of non-core properties remain.
Fitch believes that this leverage reduction target is ambitious in current markets due to the reduced valuations on its investment portfolio (minus 1.0% in H112 for its core portfolio in H112) and the need to dispose of non-core bespoke properties. Fitch will monitor this trend carefully. Fitch’s forecasts show a gentler decline of Fitch-adjusted leverage with loan-to-value projected to be around 50% by 2014/2015. This is still within the guideline maximum leverage for SEGRO for a ‘BBB+’ IDR of around 55% through the property cycle.
Fitch forecasts show EBIT NIC also staying in the ‘BBB+’ IDR category in FY12, with EBIT NIC above 1.8x to FY13. This is due to both stable rental income profiles (average lease length to expiry of over eight years, which is long for an industrial landlord) and low tenant rent arrears in H112. Currently Segro has over 1,400 tenants in 8 different countries, demonstrating the diversity of the rental income profile. SEGRO has been able to make inroads into its vacancy rate, and by June 2012 this had reduced to 9.1% from 12.0% in end 2010.