SEGRO Plc (SGRO) Earnings Call Transcript & Summary

Hello, everyone, and thank you for joining the SEGRO Half Year 2026 Results Call. My name is Lucy, and I'll be coordinating your call today. [Operator Instructions] It is now my pleasure to hand over to David Sleath, Chief Executive Officer, to begin. Please go ahead when you're ready.

Thank you, Lucy. Good morning, everybody, and thank you for joining us for today's presentation of our half year results. I'm, of course, joined by Susanne Schroeter, our Chief Financial Officer. Now we spoke extensively over the last few weeks about the significant growth and value creation opportunities that we have within our business. And so in the context of the offer period we're now in and in light of the recent announcements, we'll be giving a shorter update today, focusing mainly on our business performance in 2026. We will also only be answering questions on these results today rather than anything to do with the potential offer from Prologis. So let's get into the presentation. We've had a strong first half. The improving occupier market sentiment that we referred to in February and again in April has continued to build. That's fed some good leasing performance and a step-up in development activity. We've made important progress on our data center strategy, adding to our power bank, advancing planning and power infrastructure works and signing a further powered shell pre-let at Slough. The great work of our asset management teams in capturing reversion, combined with tight cost control has enabled us to report a 5.3% increase in like-for-like net rental income and a 6.6% increase in adjusted earnings per share. The reduction in EPRA NTA reflects a small valuation decline in the U.K. portfolio as we reported with our trading update on the 8th of July. That aside, this is a strong financial performance, and we're well positioned for further growth in the future. Let's now get into some more detail. And I'll start by covering the industrial and logistics portfolio. In the first half, we contracted GBP 53 million of new headline rent across the portfolio. That reflects a continuation of the improvement in demand that we reported in the second half of last year, both for existing and new space. The red part of the bars represent rents signed on the existing portfolio, which amounted to GBP 27 million. Development lettings, the pink part of the bar contributed GBP 26 million. We signed GBP 24 million of pre-lets during the period versus just GBP 3 million in the first half of 2025. Again, this shows a continuation of the improvement we witnessed in the second half of last year when we signed GBP 23 million worth of pre-lets. Pre-let deals signed this period included a powered shell data center and transactions with post and parcel companies, third-party logistics operators, a fiber optic cable manufacturer and a number of food and beverage-related businesses, and you can see some of the names on the right-hand side. And in a few moments, I'll talk about the pipeline of future opportunities, which look very encouraging. Expert asset management always remains a key driver of performance for our existing portfolio with a particular focus on supporting our customers' needs whilst also seeking to increase rents and capture reversion. During the period, we were able to secure GBP 11 million of additional rent through indexation, rent reviews and renewals, driven primarily by the U.K. portfolio, which saw a 44% average uplift. Rent review dates are weighted to the second half of the year, so we expect this number to materially increase for the full year. Occupancy decreased very slightly, but remains well within our target range. Within the period, we saw occupancy improvements in the U.K. following the leasing of a speculatively developed big box unit in Coventry. And whilst U.K. vacancy remains elevated, particularly in some of the London submarkets, there has been a noticeable pickup in inquiry levels in recent months. With over 1/3 of the vacant space in the U.K. now under offer or in advanced negotiations, we expect to see good progress in the second half of the year. On the continent, occupancy remains high at 96%. We completed a number of speculative development schemes, which are leasing well, but also have some expected takebacks, which explains the slightly lower than usual customer retention rate of 77%. However, again, the reletting rate looks promising with active negotiations in progress on much of this space. An active approach to asset management continues to translate into attractive like-for-like net rental income growth. This should continue -- which was -- sorry, which was 5.3% in the first half of 2026. This should continue as we have GBP 157 million of current opportunity embedded in the existing portfolio, comprising of GBP 101 million of mark-to-market rental potential and GBP 56 million of ERV from vacant space. Turning to capital allocation. Our approach remains disciplined and is focused on driving performance through proactive asset recycling and redeploying funds into higher-returning opportunities, primarily in the form of development. Back in February 2026, we said that this year will be an active one for disposals as we increasingly look to self-fund our growth. And we've made great progress with that, having completed or exchanged on GBP 308 million of disposals so far this year. This included a portfolio of bespoke Amazon delivery stations in Italy, an older warehouse in Paris and several holdings in and around London, where we identified special purchases and we were able to crystallize gains over book value. During the half, we bought GBP 37 million of land, including a very rare and attractively priced 45-acre site near Heathrow Airport in an off-market transaction. And we also secured some good plots in Italy and the Czech Republic for near-term development. We continue to allocate most of our capital to our very profitable development pipeline in which we invested GBP 176 million during the period. With over 750,000 square meters of space now under construction, development CapEx is increasing. Accordingly, we've narrowed our guidance for the full year to a range of GBP 500 million to GBP 550 million. And with a significant number of further pre-lets at various stages of negotiation, this bodes well for 2027 CapEx and development volumes. We also announced a couple of weeks ago that we've agreed heads of terms on a U.K. big box joint venture to develop out and co-own our completed assets in Coventry, Northampton and Radllet. If this completes as expected in the second half of the year, it will see SEGRO contribute a GBP 1 billion seed portfolio of standing assets and land into the venture with future equity requirements being funded 50-50 with our partner. On development, during the first half, we completed 116,000 (sic) [ 116,200 ] square meters of space, representing GBP 12 million of headline rent once fully leased. This consisted of mainly speculatively built urban schemes across Germany, Barcelona, Warsaw and a small scheme in West London. Leasing momentum on these spec schemes is excellent with 58% of the rent already secured at the period end and good interest in the remaining space. The average expected development yield of 6.5% reflects the weighting of projects to Germany, where yields on standing assets are also lower. All the completions were or expected to be BREEAM Excellent or better, reinforcing the sustainability credentials of the portfolio. And looking ahead to the second half, the increased number of projects now under construction means we anticipate a significant step-up in completions over the balance of the year. So let's bring you right up to date in terms of the ongoing and look forward development program. For the first time with this set of results, we're splitting out the data center opportunities from industrial and logistics. So this is just focused on the industrial and logistics part of the pipeline. And you can see our pipeline of current and near-term projects, which includes those where we've agreed terms but have not yet signed an agreement for lease. They add up to GBP 90 million of new rent, which is a record level. 75% of this rent is associated with pre-lets and the projects are expected to deliver an attractive 7.4% development yield on average. Beyond this, the future pipeline of land already owned by SEGRO represents GBP 223 million of potential rent, and we have options over land which provide GBP 128 million of further potential headline rent opportunity. Overall then, we have GBP 441 million of potential rent from industrial and logistics development. So I'll now move on to data centers, where we've made further important progress. We provided extensive updated details on our data center strategy during our presentation on the 8th of July, and I'm not going to repeat it all today. However, to summarize, we have a significant opportunity to create value in this super attractive sector by virtue of our unique land holdings, our power reservations and our planning positions. In aggregate, our power bank now stands at 3 GVA, one of the largest disclosed opportunities in Europe, with all of it focused on established and emerging availability zones. This includes half of GVA of existing operational capacity. We have 1.4 GVA of near to midterm development opportunities with an associated GBP 460 million of potential rent based on an assumption of 12 sites to be developed in joint ventures as fully fitted projects and 2 wholly owned power shells. On top of this, there's a further 1.1 GVA of additional power, which we haven't included in these numbers as specific plans are still being developed or in some cases, they are longer-dated opportunities. To briefly summarize the progress we made during the first half of 2026 and to summarize, in fact, the headlines from what we shared on the 8th of July, we signed a powered shell data center pre-let on the Slough Trading state with VIRTUS an existing customer. We've obtained planning approval for our first fully fitted project in West London and are engaging with hyperscalers interested in securing all of that capacity. We remain on track to sign a pre-let there by the end of this year or early 2027. And we've continued to advance and expand the power bank. We've added 0.5 GVA of further reservations, and we've continued progressing infrastructure works in Slough in anticipation of the significant confirmed power allocation we have coming from the Uxbridge Moor Substation upgrade in 2029 and '30. So now I'll hand over to Susanne, who will take you through the financial performance and summarize the growth opportunity ahead.

Thank you, David. We delivered a strong financial performance in the first half, driven by the operational performance David has just outlined and our disciplined approach to capital allocation. Adjusted profit before tax increased by 6.3% to GBP 268 million. Adjusted earnings per share increased by 6.6% to 19.3p. The dividend per share increased by 4.5% to 10.14p. This is due to the limit placed by the Prologis best and final offer and not indicative of our full year expectations. EPRA NTA per share was 902p, down 2.5%, reflecting a modest valuation decline driven by yield expansion. This NTA is consistent with the 905p pro forma adjusted NAV we announced in our H1 2026 trading update after adjusting for profits, dividends and currency movements in the period. The LTV remained stable at 31%, comfortably within our target range. Now turning to earnings. Adjusted profit after tax increased by 6.5% and adjusted earnings per share increased from 18.1p to 19.3p, an increase of 6.6%. The bridge on this slide shows the key drivers of that growth. The largest contributor was like-for-like net rental income growth, which added GBP 16 million and reflects a 5.3% growth across the portfolio. The U.K. delivered particularly strong growth at 6.6%, while Continental Europe delivered 3.3%. Completed developments contributed a further GBP 5 million and net investment activity added GBP 2 million. These benefits were partly offset by GBP 11 million of higher finance costs following the refinancing activities completed earlier this year and offset in part by GBP 2 billion of tax savings. We still expect around GBP 70 million of capitalized interest in 2026. Our total cost ratio improved to 17.4%, excluding share-based payments, reflecting cost discipline and improved operational leverage. Overall, this was another period of good earnings growth driven by the quality of the portfolio and supported by active asset management and development completions. Turning now to the portfolio valuation. At the 30th of June, the portfolio was valued at GBP 19 billion at share, a decline of 1.2%. This was mostly driven by the application of higher yields by the group's incoming U.K. valuer. On that basis, the portfolio's net true equivalent yield is 5.6%. U.K. values declined by roughly 10 -- sorry, 2% for the reasons I've just mentioned. In Continental Europe, values were broadly stable, increasing by 0.1% with development gains offsetting the impact of yield expansion. Encouragingly, ERV growth strengthened during the period to 1.8% across the group, including 2.3% in the U.K. and 1.1% in Continental Europe. Our balance sheet remains strong and provides flexibility. LTV was at 31% with net debt-to-EBITDA at 8.3x. The average debt maturity was 6.3 years, and the average cost of debt was 2.8%. We ended the period with GBP 1.5 billion of cash and undrawn committed facilities. Our credit rating with stable outlook continues to support good access to a broad range of capital sources. We are, therefore, well positioned to fund future growth opportunities while maintaining a disciplined approach to leverage. Looking ahead and bringing together the opportunities across our existing portfolio and development pipelines, we see over GBP 1 billion of additional income opportunity embedded within the business. Around GBP 224 million comes from our standing portfolio, including reversion, vacancy reduction and the expiry of rent-free periods. Our industrial and logistics development pipeline represents a further GBP 441 million of potential income. The 1.4 GVA allocated data center pipeline adds approximately GBP 464 million. These figures exclude the impact of future acquisitions and disposals. They also exclude future ERV growth, indexation, selective redevelopment opportunities, and the additional 1.1 GVA of power capacity within the wider data center pipeline. Taken together, this provides a substantial opportunity to continue growing earnings and dividends over the coming years. And with this, I will now hand it back to David.

Thank you, Susanne, and thank you all for listening. So to conclude, the first half has seen a strong financial performance with momentum building in our industrial and logistics occupier markets. We're making further encouraging progress with our data center strategy, and we're well placed to deliver further attractive growth in the months and years ahead. So we'll now move to your questions. And as I noted at the start, we're only going to be answering questions about our half year results that we presented. For anything related to the potential offer from Prologis, feel free to reach out to the Investor Relations team separately. So Lucy, would you please open the line for questions?

[Operator Instructions] The first question today comes from Frederic Renard of Kepler Chevreux.

Okay. Lucy, we can't hear Fred. So maybe go for the next one.

Of course. The next question comes from Suraj Goyal of Green Street.

Just one quick question. Well, given the positive interactions you are experiencing in real time, I know you touched on it a little earlier, but do you expect the occupancy number to increase in the second half? And then on the customer retention ratio, it's significantly lower than last year, and you mentioned that there's sort of higher takebacks during the period. Are you able to share some color on why? Are there maybe some affordability concerns for occupiers?

Sure. Yes, Suraj. Thanks for your question. Occupancy in the second half, yes, we do expect it to improve. We've got, as I said during the presentation, quite a lot of, I'd say, more than just active interest, strong interest in quite a few of the vacant assets in London. And the takebacks that I referred to, which fed into the lower retention rate. I mean, it's just -- it does ebb and flow a bit, it doesn't always stay at that kind of high 80s or 90s level. 77% is fine. We have some space that came back principally in Continental Europe in Poland, for example, and in the Netherlands. And actually, we're not too worried about that because it gives us a chance to reset the rents, capture reversion quicker than we might otherwise have done. And I think I'm right in saying that all of the space that came back in the first half or a substantial part of it is either already leased or in pretty advanced discussions. So feeling pretty good, as I said, consistent with what we said earlier around the overall occupier markets. It's clearly very demonstrably there in the pre-lets that we've been signing over the last 12 months. And it's also coming through in terms of the vacant space is also looking like they're moving pretty well now.

The next question comes from John Vuong of Kempen.

Just trying to understand the occupier activity a bit better. Are you seeing any difference in demand for, say, different sizes of assets, so say, smaller units versus mid-boxes versus big boxes?

I'd say probably as a general statement, the bigger logistics units are more in demand right now. There's been -- I think a lot of that demand has been held back over the last few years, and that's really been coming back strongly from a variety of retailers, food and beverage and general retailers, third-party logistics operators, either working for or on behalf of consumer goods companies. There's been, I would say, a resurgence of demand from companies just looking to upgrade best-in-class, more modern, sustainable logistics supply chains, more efficiency. That's a general theme. Plus we've seen quite a lot of e-commerce activity, not just from the established players but also from some of the Asian operators who -- there are several of them, and they're all looking to take space in Europe right now. So that's affected actually big boxes, but also some of the small last mile facilities. But generally, in terms of the leasing activity that's been done, it's been -- on the pre-lets, it's been more of the larger units in logistics. But what I've mentioned on the call is -- we're also now seeing a lot of great interest in some of the London spaces. And on that theme, Germany is where we've delivered a number of spec schemes, urban schemes in the last few months. And again, they've been leasing up really well. So I wouldn't say the numbers are skewed by some of the big pre-lets on logistics, but I would say, generally across the board, we're seeing pretty good demand in most sizes of units.

Okay. That's clear. And based on your conversations with these occupiers, what has driven them to really start making decisions now?

I mean I think it will always be occupier specific, but a number of them will have had plans that they've perhaps put on hold during the last 2 or 3 years of macro and geopolitical uncertainty, and they've kind of just felt they need to get on. But there are many and varied reasons why people will be taking decisions right now, but there's definitely a sense that decision-making has been delayed and demand has been pent-up for a while and all of the structural drivers that we often talk about, they're still there. They've just been a bit more muted by some of the geopolitical and macro headwinds over the last few years, but they're still there, and they look like they're beginning to reassert themselves.

The next question comes from Tom Musson of Berenberg.

Just a question on Ofgem's proposed connection fees to access the grid that was in the U.K. press yesterday. Was that new news to you? I'm just interested in any early thoughts on how that might affect how you think about the economics of your data center pipeline? And I guess, is there a reason we might expect similar proposals in Continental Europe?

Well, I don't know about the rest of Europe, but what's happened in the U.K. is the -- is Ofgem has announced a consultation, which if it follows through as the headlines would say you have to pay a lot of money down upfront if you want to make a grid reservation but you get that credited back to you once you energize your scheme. So what is aimed at doing, I understand, is to try and sift out the, let's say, the more speculative applications for someone who's got a bit of land and hopes they can build a data center, slaps an application in for some power and then clogs up the system for everybody else. It's not really targeted at people like us who are serious established data center operators with a strong track record. So I think it's, overall, Tom, whilst the details have to be worked through, and we don't know quite how it's going to play, always the devil is in the detail. I think overall, it's probably good news for people like us because it will cut away some of the more speculative opportunities and some of our longer-dated sites where we'll be waiting for more grid connections to be established in places like, [ there's more ] for example, if some of those speculative applications are withdrawn because they haven't got the money or they don't -- they're not willing to put the capital down. I think that could be good news for us in terms of accelerating some of our opportunities.

The next question comes from Frederic Renard of Kepler Chevreux.

Can you hear me now? .