September 25, 2017 / 11:09 AM / 3 years ago

Fitch Rates SEGRO plc's Proposed Unsecured Notes 'A-(EXP)'

(The following statement was released by the rating agency) LONDON, September 25 (Fitch) Fitch Ratings has assigned a 'A-(EXP)' rating to the proposed senior unsecured notes to be issued by SEGRO plc. Proceeds from the notes will be used for general corporate purposes which may include the repurchase of existing debt. Fitch has applied a one-notch uplift to the expected instrument rating from the IDR. This is in line with SEGRO's existing bonds, which the notes are expected to rank pari passu with. Fitch currently rates SEGRO's Long-Term Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook. A full list of ratings follows at the end of this release. 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. More Streamlined Structure: 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 to close to 14% in 2016 of total UK retail sales from less than 3% in 2007 and is still growing much faster (low double digits) than overall retail sales (low single digits). The additional effects of increasing 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. FULL LIST OF RATING ACTIONS Fitch assigns the following rating: SEGRO plc -- Proposed sterling denominated senior unsecured notes at 'A-(EXP) Fitch currently rates SEGRO as follows: SEGRO plc -- Long-Term Issuer Default Rating (IDR) at 'BBB+' -- Senior unsecured rating at 'A-' -- Short-Term IDR at 'F2' The Outlook for the corporate rating is Stable. 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 Date of Relevant Rating Committee: 5 September 2017 Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: Additional information is available on 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 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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