SEGRO Plc (SGRO) Earnings Call Transcript & Summary

Well, good morning, everybody, and welcome to our full year 2021 results presentation. It's wonderful finally to be back in a room, in the city with other human beings, and great to see a number of you here today. And hopefully, this will become the norm in the future. But welcome, everybody, whether you're here or online. Well, 2021 was a truly remarkable year for SEGRO with some outstanding financial and operating results and many other successes, which less we forget, were delivered in the midst of an ongoing pandemic. Before we get into the detail, I'd like to highlight 3 things that really stand out for me when I reflect back on the last year or so. The first has been the strength, breadth and depth of occupier demand that we've witnessed across our markets. During the year, we signed a record GBP 95 million of incremental new rental commitments. Andy will give you some color on these a bit later on. But it's broad in terms of the types of occupier, with 270 different leasing transactions behind that GBP 95 million. And demand is also deep for many buildings. We're often now receiving strong interest from multiple occupiers who are chasing it and frequently with little alternative competing supply. And that's the reason why we've seen rents grow strongly during the past year. So demand in 2021 undoubtedly outstripped supply, and we expect that to continue in 2022 and beyond. Of course, the attractive fundamentals have not gone unnoticed. Investment volumes across the industrial sector hit record levels in 2021 and brokers report an extraordinary amount of capital still seeking to gain exposure. Whilst that's been good news for valuations, it also means intense competition for both standing assets and increasingly for land. The second standout point for me, therefore, is the fact that despite this competition, we've been able to add some excellent new opportunities, which will drive future growth. Our local teams have been leveraging their networks, thinking outside the box and using the strength of our reputation and balance sheet to source some excellent new opportunities, enabling us to deploy GBP 1.3 billion of capital over and above the development expenditure. Andy will provide some color on these as well later on. And encouragingly, we have plenty more opportunities in the hopper. And then finally, the third highlight from '21 was the progress we've made with Responsible SEGRO. We announced our ambitions this time last year, focusing on 3 main areas: championing low carbon growth, investing in our local communities and environments and nurturing talent. We have a long way to go to reach our ambitions, but we've made encouraging progress already. We've reduced operating emissions across the portfolio. We've made very good progress with gaining visibility of customers' emissions. On development, we're innovating with different materials and we're increasingly undertaking life cycle carbon assessments, which are critical to reducing embodied carbon. On communities and environments, we put the framework in place for the first set of community investment plans and we'll be implementing those during 2022 and beyond. And then finally, with regard to nurturing talent, we were awarded the National Equality Standard in recognition of our commitment to diversity and inclusion. We've strengthened the team and added more diversity through promotions and new hires, and we've taken a variety of other steps to improve staff well-being but also to improve our understanding of DNI issues. This is only the start but it's a good start. And I'd be really encouraged by the way our stakeholders have engaged with us on these initiatives. So those are 3 features that stood out for me in this remarkable year. And I hope you'll gain a sense of these as we go through the rest of the presentation. In a moment, Soumen will set out and explain the financial results. Andy will then provide you with more color on how we're driving value from the portfolio and growth from the development program as well as how we're leveraging our platform to create new opportunities to sustain and grow the business in the future. And then I'll end the presentation by discussing the outlook. SO Soumen, over to you.

Thanks, David. Good morning, everybody. Great to see you all here in person. Good morning to everybody on the line. So as David highlighted, it's been a great year for the business, and that's reflected in a very strong set of financial results, which I'll talk you through this morning. So starting on Slide 7. This slide highlights our key financial metrics, which have all grown strongly in the period. Adjusted profit before tax is up 20% to GBP 356 million, and adjusted EPS is up 15% to 29.1p. And excluding the performance fee from SELP, which I'll come on to talk about shortly, EPS was up 10% to 28p. The full year dividend has been set at 24.3p, which is in line with that 10% growth rate in earnings. The portfolio growth has been especially eye-catching with a revaluation of GBP 4 billion during 2021. That's an increase of 29%. And that's led to a very strong growth in NAV per share of just under 40% to 1,137p. And the balance sheet continues to be in great shape. LTV is 23%, with that valuation increase offsetting the impact of funding our capital investment. Now while our metrics grew strongly in 2021, it's important to put that performance in longer-term context. So here on Slide 8, we show you that last year was a continuation of the very positive consistent performance that we delivered now over a number of years. Since 2016, we've grown our rent roll 12% per annum. And as a result, NAV has grown strongly year-on-year, a CAGR of 19%, and earnings and dividends per share have grown by CAGR of 9%. Now this is extremely strong and compounding financial performance to deliver year in and year out, and as Andy and Dave will talk about shortly, we believe there's still a lot more to come. But on Slide 9 and turning back to the 2021 results in some more detail. So this is the usual slide that we show you that looks at net rental income growth, which is a key driver of the growth in earnings. Net rental income grew GBP 52 million to GBP 447 million in the period. That's an increase of more than 13%. There were 3 main contributors to that growth. Rents from a standing portfolio grew GBP 17 million as we capture rental growth in our passing rent. You can see in the box on the top of the slide, the like-for-like growth rate was 4.9%, which we've seen across both the U.K. and across Europe. Moving on to the next bar on the graph. Development completions have again had a big impact, adding GBP 30 billion. And in terms of investment activity, we've been very successful over the past 2 years in executing some very large transactions, particularly in places like London and Paris. Those have added a further GBP 20 million of rent, which is offset by GBP 5 million of disposals. Looking ahead, we'd expect rental income to continue to grow strongly with a similar profile across all 3 elements. Turning now to Slide 10. So you can see here on the rest of the income statement that the top line growth in rental income has fed through to growing profitability. I mentioned earlier that adjusted profit before tax was up 20% to GBP 356 million, and EPS was up 15% to 29.1p. Now the different growth rate between the 2 is due to the higher share count and you can see that on the last line of the table. I should just say a moment on the SELP performance fee, which is something you need to bear in mind over the next couple of years. Now you might recall that in 2018, we were paid a fee at the 5-year anniversary of SELP, which is based on certain IRR hurdles. Half of that fee was subject to clawback, but as we now believe it's unlikely that clawback will bite, we're recognizing that net share 20 -- sorry, GBP 13 million, which increases EPS by 1.1p. Without that, EPS would have been 28p, a growth rate of 10%. We're also due -- potentially due a further fee from SELP at the 10-year anniversary, which is in October 2023. SELP's strong performance in recent years means that on current valuations our net receipt could be in the order of EUR 140 million. And we've not recognized that yet because there's still some way to go. But as we get closer to the date, we won't need to do so. Now I should just note in the last box here on the page, which is FX, which could impact earnings this year. The sterling/euro exchange rate has been fairly stable in recent years. But the last few months, Sterling has been strengthening. And had the year-end if FX rate of 1.19 per prevailed through the whole of 2021, earnings would have been GBP 2 million lower. Slide 45 in the appendix has got some further detail on the impact of FX movements. Turning to Slide 11 and the portfolio valuation. So the portfolio valuation increased GBP 4.1 billion in 2021, a rise of over 29% to GBP 18 billion. The absolute size of that valuation -- the value creation, that's in just a 12-month period reflects the success of our asset and our investment management in what has been a very strong market. This added 346p to NAV accounted for most of the 40% growth of that metric. The U.K., which represents 2/3 of our portfolio was up 32% and outperformed the continent for the first time since 2018, which is up 22%. The main differentiator between the 2 was rental growth, which you'll see in a moment on the next slide. So here on Slide 12, you can see some of the drivers of that portfolio growth in a little bit more detail. We saw yield compression in every market, reflecting the strong investment market conditions. Anecdotally, we understand that over half of all new capital being raised for investment into real estate is targeting the industrial and logistics sector. Now this investor demand is strongest for the modern well-located assets of the type that we own and we create. And that has pushed yields down 70 basis points to 3.8% overall. The big story of the revaluation though is the scale of the ERV movement, 30% up -- 13% up in the period. We've seen that across the portfolio, but the greater shift has been in London where the structural trends are most embedded. London's ERV is up 23.5%. But in some cases, rents have grown by over 30%, with occupiers looking for modern space in a market where availability is at a record low. Just to remind you that our London, our Slough and our Continental European urban estates represent 2/3 of our portfolio, and we remain convinced that our urban exposure will continue to enable us to outperform the wider industrial market. Turning to Slide 13. The extent of the rental growth means that we now have a significant amount of reversion in the portfolio, which you can see in the chart on the left. Having been in the area of -- the order of GBP 20 million to GBP 30 million in recent years, the reversion is now GBP 89 million. It continues to arise mainly in the U.K., although Continental Europe, which is the gray bar, is showing positive reversion for the first time. The graph on the right shows you that about 1/3 of our U.K. portfolio is subject to a review in the next 2 years. And this, when combined with our continental European leases, which are mostly index-linked that gives us a great opportunity to grow our rent roll in the near term and to drive like-for-like rental growth ahead of inflation as we did last year. Moving on now to Slide 14 to cover the balance sheet and financing. We've had another busy and successful year in the capital markets. We issued 2 new bonds, each of EUR 500 million, 1 from SELP and 1 from SEGRO. And the one from SEGRO achieved a coupon of just 0.5%. Note, both bonds were issued under our new Green Finance Framework, which is consistent with our Responsible SEGRO objectives. As a result, you can see our balance sheet continues to be in very strong shape to support our future growth. LTV is 23% and the cost of debt is a very low 1.5%, with an average debt maturity of just under 9 years. Our liquidity remains high at GBP 1.1 billion. We saw the benefit of running our very liquid balance sheet at last year because it allows us to be nimble with our capital investment. For example, we deployed just under GBP 1 billion in November and December alone. Looking forward, as you can see in the box on the bottom right, we expect to spend over GBP 700 million on construction and infrastructure this year to capture the current occupier market opportunity. But on top of that, after 2 years of record capital investment, we are highly focused on adding to our opportunities to enhance future growth as well, which Andy will expand on shortly. As I mentioned earlier, we continue to consider disposals. We've got no noncore assets given the scale of the portfolio restructuring that was undertaken between 2012 and 2017. But it is good investment discipline to edit and to trim the portfolio around the edges. We continue to target around 1% to 2% of our portfolio per annum, which would imply around GBP 200 million to GBP 400 million each year. But it could be a little bit more this year given the strength of the investment market. So on Page 15, to sum up on the financial side, I'm very pleased to report strong earnings growth driven by the capture reversion, a strong leasing performance in our development program, a 29% increase in the valuation of our portfolio and a balance sheet that's well positioned to support future growth. And against a strong and positive backdrop, we've increased the full year dividend by 10%. And with that, I'll hand you over to Andy.

Thank you, Soumen, and good morning, everyone. Soumen has outlined the strong financial results we've produced. I'm going to show you what has made that possible, a combination of current market conditions and our proactive response to deliver a strong operational performance. You may remember this slide from the half year results. It still holds true today. We continue to operate in very favorable market environments. The supply/demand dynamic in our sector, high levels of occupier demand and very low levels of vacancy across main markets has resulted in record levels of rental growth. This looks set to continue with any speculative development being taken up very quickly and our customers finding it extremely difficult to secure the space they need to operate their businesses most efficiently. These market fundamentals have attracted investors to the industrial sector and a record GBP 52 billion was invested across Europe during 2021. Our teams are working hard to respond to the opportunity that these dynamics present and to position our business to benefit fully. As David mentioned earlier, these market conditions have helped us to achieve a new record level of rents signed during 2021, GBP 95 million. This was 20% higher than 2020, which was our previous record. It included existing customers such as Ocado, Hermes and Chronopost, who all took additional standing space in the portfolio. We've continued to see strong demand for our speculatively developed schemes from a very wide variety of customers. Frequently, letting has been prior to practical completion, such as the level of that demand. New pre-let signed contributed GBP 49 million to the total. This included the multilevel data center on the Slough trading estate that we mentioned at half year. Other pre-lets were for major online retailers, several different third-party logistics providers and a number of manufacturers. Our operating metrics continue to be strong through the active management of our portfolio. Our retention rate was lower, as you can see, now 77%. That's because we've been actively taking back space to re-lease it, move rents forward and capture reversionary potential. Similarly, some take-backs have enabled sites to be cleared to allow redevelopment to create more valuable new space. Letting success has meant that our vacancy has also dropped to 3.2%. We've secured a very healthy 13% average uplift on rent reviews and lease renewals in the period, with 19% in the U.K. and just under 2% on the continent. Just a reminder on the continent that the majority of our leases are index-linked and have annual uplifts. We've updated the chart on the right to show that the 2019 and 2020 numbers included the Heathrow Cargo area, peppercorn lease regears. These are all complete now, so you can see that in that context, the uplift captured by our asset management teams during 2021 was the highest level we've seen. And given the reversion that Soumen referred to earlier, we'd expect that to grow. Asset management initiatives during the year not only added to value, but also helped us to progress towards our net zero carbon goal. Our refurbishment activity is increasingly focused on improving the sustainability credentials of our older assets. We're finding this to be very worthwhile. Not only does it future-proof the portfolio, it also helps us attract new customers, retain existing customers and drive rents forward. We've mentioned before, the net zero refurbishment of a unit in one of our prime West London estates, Premier Park. During 2021, we leased the unit to a new customer, RD Content, a global video production agency. They intend to make their studio the most sustainable film production space in London and the works we undertook to the building were a significant factor in their decision. We made significant progress in reducing operating carbon emissions during 2021 by moving Poland and the Czech Republic on to green energy tariffs. This means that all electricity that SEGRO procures for itself or on behalf of customers is now zero carbon. To achieve our net zero carbon goal, we need to reduce the emissions our customers make when using our buildings. To do this, we need visibility of their energy data. We made great progress with this during 2021, particularly in France, which helped to increase our group visibility to 54% from 41% previously. A clearer picture will enable us to engage with our customers to help them become more efficient, reduce their own emissions as well as their energy bills. Ultimately, our goal is to introduce green clauses into as many leases as possible. We actually included 1 on the data center deal on the trading estate. The lease requires a very high user of electricity to ensure that it comes from a renewable source. Moving to Slide 21 and coming to our development program. We completed 839,000 square meters of new space during 2021, a record level with a particularly busy second half of the year. This equated to GBP 52 million of potential headline rent, with 93% of that already leased by year-end. We were able to deliver projects by working closely with our construction partners to ensure materials and labor shortages, coupled with supply chain disruption, did not unduly impact our program. Almost 680,000 square meters of this space was big box warehousing. It included a major new fulfillment center for Amazon, West of Milan and 4 units at SEGRO Logistics Park East Midlands Gateway. Our program underwrite for that scheme was 10 years. And with just 1 plot left, we now expect to complete it in 5. We also completed over 160,000 square meters of urban warehouse space in supply-constrained markets such as London, Paris and Berlin. In South Paris, we completed our first development real estate we acquired with Sofibus at the start of 2021. Within our development program, we're working hard to initially reduce embodied carbon and then make our buildings more efficient for our customers to operate. We regularly carry out life cycle assessments, which have resulted in us trialing alternative techniques. We've used timber beams instead of steel. You can see that result in León. Using low-carbon concrete alternatives that reduce embodied carbon by as much as 50%, Amsterdam is the example on the slide. And we've added photovoltaics to more and more of our projects to reduce carbon emissions from our customers' use. On that, we added 9 megawatts of on-site renewable energy capacity to our portfolio, an increase of almost 1/3. On 1 project in Italy, we added 1 megawatt of capacity with 2,500 photovoltaic panels on the roof. And finally, biodiversity continues to be an important focus for us. In urban schemes, often with restricted space, that means adding green walls, creating pocket parks and including beehives and insect hotels. In our big box developments, such as Northampton Logistics Park, the impact can be that much greater. We're incorporating over 32 hectares of parkland with 18 kilometers of foot pass for local residents to enjoy, and we will be planting more than 60,000 new trees. I'd also like to update you on our community investment plans and the involvement of our teams across the business. We've pledged to set up a CIP in all our key markets by 2025. During 2021, we worked on creating a structure so that we can deliver highly impactful community and environmental programs. We've put the foundations in place for our first 10 plans. Each of which will deliver projects focusing on 3 key areas: helping people benefit from skills training and job brokerage programs, supporting local SMEs to connect to our customers and suppliers to gain business opportunities and delivering projects to improve biodiversity and contribute to the health and well-being of the local community. To maximize their impact and help embed them within the business, we've appointed 41 community champions who will be working with our customers, suppliers and local partners. I'm now going to turn to our investment activity during 2021 and how we leverage the strength and experience of our platform to create new opportunities for growth. 2021 was the second year in a row of record investment in our business. We invested almost GBP 2 billion. GBP 649 million was spent on CapEx in our development program. This included GBP 99 million on infrastructure of our new U.K. big box schemes in Coventry and Northampton, where we already have pre-lets under negotiation at both. The total spend was lower than expected at half year with some projects moving into 2022 due to delays from customer redesign and planning permitting. We've seen quite significant inflation of cost but have been able to pass this through in increased rents, enabling us to maintain our attractive development returns. We also undertook GBP 1.3 billion of acquisitions, which I'll cover more fully on the next slide. This investment was offset by GBP 515 million of disposals taking our net investment in the year to GBP 1.5 billion. The level of disposals was a little higher than normal as we took advantage of the strength of the investment market to take profit on assets, which were on our medium-term disposal list. They included some older stand-alone U.K. big box warehouses and smaller urban estates as part of an asset swap. I'm going to finish my section by looking at the acquisitions in more detail. As we've already mentioned, competition in the industrial sector is ferocious, making it more difficult to acquire both standing assets and land. Our teams have risen to the challenge and leverage their relationships, local knowledge and experience to create some fantastic opportunities during 2021. We invested GBP 997 million on asset acquisitions during the year. Many were urban assets in the supply-constrained markets of London and Paris. Given the strong competition, we've had to be creative about how we source them. I mentioned earlier the asset swap that resulted in us acquiring Matrix Park, a fantastic estate in Park Royal. It was off market with a vendor that we transacted with before, and that relationship and trust built up in the earlier deal stood us in very good stead. A forward funding deal with a developer in Croydon helped increase our presence in this key strategic South London market. And we also acquired a number of older brownfield estates with short-term income, which will be quite complex to redevelop. So not everyone has the skills, experience or appetite to take them on. An example would be a group of neighboring estates in Belvedere, Southeast London from a private company. We'll develop the 20 acres they cover in a number of phases over the next 5 years. We're increasingly looking for opportunities to repurpose assets. A good example was our largest acquisition, I should probably say reacquisition. The office portfolio that borders the Slough Trading Estate. We sold it in 2016 as part of our strategy to dispose of noncore assets. With vacancy on the trading has stated a record low and strong demand for space from data center operators, creative industries, life sciences and other industrial users. This was the perfect opportunity to get hold of 39 acres that we can redevelop and repurpose over the coming years. Another interesting acquisition was a former car dealership in the inner city Paris location, close to the Arc de Triomphe. It has multi-levels of underground space that we plan to refurbish to provide ultra-urban space for last touch customers. Finally, our teams have been able to use their local knowledge and networks to acquire 42 different land plots across our key markets, totaling GBP 326 million. They create lots of future opportunity for the business and replace the GBP 325 million of land that we utilized during 2021. And with that, I'll hand you back to David.

Thanks so much, Andy. Right. So moving on to the final section of the presentation today, if I click on I want to summarize the reasons why we have confidence in our ability to continue growing and to create shareholder value and indeed value for our wider stakeholders. I mentioned at the start of the presentation that we've seen a significant increase in occupier demand over the past 12 months with an amplification of the long-term structural trends that have been benefiting the industrial sector. I'm not going to go through them individually right now, but they're here as a reminder. And Andy showed you how these trends have led to occupier demand outstripping supply, which has been good for our development program and also good for rental growth. And we see no reason why these are going to change anytime soon. So the market is well set. But how will we, at SEGRO, going to benefit and what's our competitive advantage? Well, 2 key overall factors. Firstly, we have a fantastic portfolio of assets in key European cities and major logistics hubs. And secondly, because we have an excellent Pan-European operating platform across 14 different offices in our 8 countries. If I drill into the detail just a little bit more. I would say our particular edge comes from a combination of factors. The quality of our locations, which are always amongst the best, most prime spots in all our markets. The quality of our assets, which are modern, with high sustainability credentials, most of them having been built over the last 20 years. Our scale across multiple markets and our ability to offer big box and urban solutions to our customers, which means we can develop more meaningful strategic relationships. The weighting of our portfolio to urban centers, where the structural themes really come together most strongly to drive rental growth. And finally, it's that experienced and highly capable local presence in 8 different countries. Having these capabilities on the ground gives us a competitive advantage in terms of our relationships with customers and local businesses, our knowledge of local planning regimes and the priorities of the local authorities. And ultimately, it helps us to source new opportunities and secure new pre-lets. I think our local presence has been particularly valuable during the past 2 years during this period of restricted travel because whilst others are being stuck on Zoom, we've been able to get out and about and strengthen and deepen our relationships with these key stakeholders. And I think it's paid some handsome dividends in terms of the deals we've been able to deliver. In terms of rental growth, we present this slide every year to give you a flavor of market conditions and our expectations for the years ahead. Clearly, 2021 massively outperformed the expectations we laid out this time last year, particularly in London, where the supply shortage has been most acute. Despite the jump in rent though that we saw in '21, we believe that the demand and supply dynamics, which are more positive now than at any time I previously experienced, remain supportive of further growth. Whilst we wouldn't necessarily predict a repeat of 2021 in a single year, our midterm expectations of average rental growth have been increased, broadly in line with the historic 5-year averages that we've recorded across our own portfolio. As always, we're predicting that rental growth will continue to be skewed towards the urban markets. And that's an important point of differentiation, of course, because it's where 2/3 of our invested capital is. Beyond the existing portfolio, we have a fabulous land bank, which gives us potential for further profitable development. You can see we expect GBP 62 million of rent from the current on-site program. and another GBP 20 million of rent associated with near-term pre-lets that are awaiting a customer signature or a final planning approval before we start. Then on the third line, we have the future pipeline associated with other land that is already zoned for development and is sitting on the balance sheet with projected rents of over GBP 140 million, almost GBP 150 million, in fact. And then finally, we have option land, which includes land purchases secured by way of conditional contracts, which could generate a further GBP 160 million of rent when it's fully built out. I'm sure the general format of the slide will be familiar to everyone. But I'd like to make just a few observations that may not be immediately obvious. Firstly, as Andy alluded to, we've replenished the on-balance sheet land by acquiring as much land in 2021 as we've utilized. Secondly, the projected rents from the land in the optioned category has jumped by about 60% as a result of agreements signed in 2021, which means that overall, we have materially increased the scale of opportunity ahead. And as I intimated in the earlier part of the presentation, there's more in the hopper. And then thirdly, whilst the forward-looking development yields continue to drift downwards as land prices increase in response to tightening investment yields and increasing rental growth expectations, the overall development yield represents a very healthy premium to the yield on completed up and let assets. So pulling all that data together, here is the usual income bridge chart that we update every 6 months. And you can see that even before allowing for the further rental growth that we expect to come through, we have the potential to more than double our cash passing rents from GBP 518 million currently to over GBP 1 billion per annum upon the successful execution of opportunities, which are largely under our control. That's up 30% from a year ago despite GBP 0.5 billion worth of disposals. And if you look back 5 years ago, we were showing you a similar shaped chart with income potential of just over GBP 500 million. Well, we've delivered that and more, whilst also doubling the scale of future opportunities that we plan to deliver over the next few years. An additional source of growth is referred to in that text box on the right-hand side of the chart. That's our capacity to add further rent from redeveloping and intensifying land use on assets currently classed as part of the investment portfolio. That includes some of the assets that we acquired last year with repositioning in mind and also quite a number of other well-located income-producing assets that we plan to redevelop in the years ahead and which we're managing on that basis. As we demonstrated with 1 or 2 recent examples, these sorts of redevelopments and intensifications can generate a very significant further uplift. And none of that further potential is yet included in these figures. So to summarize this section, the structural trends continue to be supportive. Land availability in many of our key markets is constrained and is unlikely to be sufficient to facilitate enough development to meet demand. The prime quality of our modern sustainable portfolio is ideally placed to capture further rental growth. We have an exceptional land bank that allows us to continue to develop at an attractive yield on cost. We have a great operating platform, which will enable us to capture this growth and no doubt, we'll continue to source further new opportunities. And finally, we have our balance sheet, which gives us significant further capacity for investment. All of these things combined to form a unique competitive advantage, which bodes well for the years ahead, and with the opportunity and the capacity to deliver annual rental income of GBP 1 billion or more. So to recap, 2021 has been a quite remarkable year with some outstanding financial and operating results. We've capitalized on the strong market environment to drive value and growth. We've leveraged our platform to create opportunities for future growth. And we remain confident in the outlook for our business and in our ability to drive further sustainable growth in earnings whilst also delivering value for all of our stakeholders through our wider Responsible SEGRO activities. So thank you for your attention this morning. We're now going to move to questions. We'll take questions firstly from the room and then we will move to the conference lines. So would anybody in the room like to kick us off? And just to remind you, please use the microphone in your seat and push the button so that you can be heard online. Who's first? Marc?

Marc Mozzi from Bank of America. Well, first of all, congratulations for this record results, amazing. I have 3 questions, if I may. The first one is, can you give us a little bit of color on how we should think about like-for-like rental growth this year because there is plenty of very strong moving parts, CPI on one side, ERV on the other side, reversionary potential, which is now at kind of historical high, if I remember well. So how we should think about it? Is it going to be higher than this year or equivalent? I guess, not lower.

That's a great question. when I was a CFO, I used to enjoy trying to grapple with that one. And the fact that there are so many moving parts. It was always very difficult to give any guidance. But I know a man who probably will give you some guidance, and I suspect Soumen is ready for that.

You're just taking the words out of my mouth, David. Look, the reality is like-for-like is always a slight it's quite a volatile number because it's always based on a relatively small sample size. But really, it's initial of all the different pieces you've seen. You saw Andy's slides showing you that the capture reversion, the reletting spread has been from 11% to 12% to 13%. And I think given the size of the reversion, also given the fact we've got 1/3 of our leases up for review this year and next year, I would hope that, that 13% grew quite nicely in sort of the highest sort of to high teens, potentially 20% area, which should then push the like-for-like, certainly above 5%. I'm not sure I can give you much more specific than that, I'm afraid.

That's largely enough from my perspective. The second one, it would be about ERVs. Sorry, again, it's a tricky one. But ERVs this year have been -- last year, sorry, has been incredibly high in the U.K., in particular. Should we expect more or less the same trend for 2022 according to what you can see in the market right now? And what about Continental Europe, should we now see a strong acceleration towards what we've seen in the U.K. last past couple of years?

Yes, sure. Well, we gave you some indications on that early chart where we thought rents would be. And we said broadly look back at our 5-year averages by the different chunks of our portfolio. And that's what we're sort of thinking about in general for each of the main market segments. I mean it's difficult to predict because it is down to the specific supply to demand dynamics in every situation and every if there are 2 or 3 occupiers going for a particular building in London, and there's nobody else around, then could we see -- we saw rents go from GBP 20 to GBP 30. In some cases, well above that. Could they go to GBP 40 or more? They will in some situations, in fact, already are in some markets. So it's very specific to a particular micro location and where an occupier needs to be. Anecdotally, we're seeing very encouraging signs of ongoing demand from occupiers across all our markets in the early part of 2022. It's just too early to say what can this number turn out to be for this year, which is why we would say, look at it on a 3-, 4-year basis as to what we expect it would average out to and that's why we've given you those numbers. But will we see particular spikes? Could it be more than we've guided in some markets? And equally, could be less in others where there's more supply? Yes. But we've tried to give you a general guidance to where it is, but certainly feels very positive right now in terms of the demand supply fundaments, as I said earlier, never been stronger in my experience, and I'm sure Andy who's been in the industry longer than I have, would echo that as well.

My third question, no worries they're not going to about being where cap rates are going. So no worries. The third question is on the land option you have, how much CapEx you would need to spend to acquire and finalize the acquisition of this land bank?

Well, the number we've given you in that table, the cost to complete includes the land -- the spend on the land as well as the development expenditure. And we've guided to an overall 6% DY including that. So we wouldn't break out the land specifically. But it's in there in that number of GBP 2.7 billion that we've guided to. On the back.

Colm Lauder in Goodbody. Again, I'll echo that comment a remarkable year. Incredible to see that [NAV] coming through. Just 2 questions from me. One, just moving on from Marc's view in terms of looking at the ERV moves and particularly thinking about the lease structures. So one of the comments in the outlook statement was you feel confident by the fact you have a significant chunk of inflation-linked leases, 40% or so of the [indiscernible] has been perhaps ahead of that over the last couple of years. And the first point on that, are you seeing, one, any evolution in the caps and collars within those inflation-linked leases given where inflation is currently running? And also from your own strategic perspective, any change in preference across the portfolio for that mix when you're negotiating with tenants?

Yes. No, that was a good one. Andy, you might want to sort of comment on that in terms of what we're seeing. And that has been evolving a little bit and we've been keen to see it evolve.

Sure. On the -- I take the index-linked query first. Yes, it has evolved. We've been keen for it to evolve. Typically, it's been in the kind of 1 to 3, 2 to 4 camp, and we're trying to push that on. In fact, we're trying not to have caps in that indexation. There is a bit of market culture about caps and collars, but we're trying to come away from that. In terms of lease lengths, it's a bit of a balance because obviously, you want some longevity of good sustainable income. But clearly, that pushes reversion capture out further. So we're constantly looking at the portfolio, actively managing the portfolio to get a nice combination of some shorter stuff even on the same estate some shorter stuff so that we can get in their get rents up, push the reversion forward, take the value forward and having some nice cover on longer leases with quality covenants sitting underneath them. So always a balance.

Okay. And maybe 1 question, an unrelated question as well. Just thinking about the construction cost dynamics. And I thought it was interesting this morning just looking at one of your providers of [indiscernible] panels saying price up a quarter last year, already seeing prices in the mid-teens year-to-date. What are your thoughts on construction cost inflation this year at technology and you do lock them in early. But given some key component parts of your development pipe pricing quite significant prices continuing into the year already?

Yes, sure. You're right. I mean the first point to make is we lock in prices. So we always lock in against the development proposal be that prelet or speculative. So we always know what the numbers are going to look like, what the development returns are like with that cost baked in. So we're not seeing a sort of inflation move during the course of the project. We've seen probably on average across the group, about 15% overall cost inflation through the course of the year. Some elements substantially more, cladding, steel, concrete, 20%, 25% and some hotspots as well, actually, funny enough, Midlands, U.K., Poland, probably be near 20% and the 15%. What we have managed to do is also move rents forward. So we are not seeing our development margin and our development returns reduced. We've been able to make a pass through. We're having to be agile with that contracts with contractors, prices are not held for long. So we have to keep moving our agreements with customers, with the contracts and keeping them in lockstep, but we managed to make a pass-through. So it's not reducing our margins.

And definitely a premium in this market for planning further ahead as much forward planning and working very closely with our main construction partners to -- so there's a really good dialogue and good visibility both ways. But it's been something we've managed. But yes, I mean, we know we're going to see further cost increases this year. Hopefully, we'll be -- we'll abate somewhat from last year, but...

[indiscernible] we're thinking that supply chain and materials is living a little bit, but the labor rates, labor cost, labor availability could sort of come in. So we still expect some cost inflation going forward.

Anyone in the room? Otherwise, we'll go to the conference call. So operator, could you open up the line for anybody who wants to ask a question, please.

We'll move on to our next question from Paul May from Barclays.

Just got a few questions. Just got a few questions, I suppose, on capital allocation overall, that's the focus within that. Development, obviously, given the very, very strong valuation growth and NAV growth over the year, development is reducing as a proportion of the overall business moving forward. Is this something that you believe will pick up given the strong pipeline that you have in terms of land and option land? Or do you believe it will be something that will be a smaller proportion that's sort of -- is there a natural limit to absolute CapEx that you can put into the market at any given time?

Thanks, Paul. I'm not sure there's a natural limit. I mean we're trying to work really hard on the development program. And as you saw, we've materially increased the development capacity that we have as a result of some of the things we've been acquiring both for straight development and some for redevelopment and repositioning. You've got to remember that development is a very important driver of top line growth. And clearly, it generates some very healthy profits. But we're now managing a portfolio at 100% of GBP 21 billion. So it's also very important that we manage the existing portfolio and drive performance from that, which you hopefully heard some good color on. So I don't think we would say we're trying to change the capital allocation between development and other things. But one thing that you will, I think, see more of going forward is as we look at that GBP 21 billion of existing assets under management, is pulling out opportunities to really drive additional value from the existing portfolio. We talked about the data center opportunity, all the data center deal we did in Slough, I think, at the half year, where we were able to very, very materially increase, well, a multiple of the previous rent by building a multi-story data center. And we're looking, I would say, much more strategically and with great detail. What are the further opportunities and how can we accelerate bringing some of those through that would create not pure development growth the way you might be alluding to, Paul, but would create also significant uplift in value. But I don't know, Soumen, whether you want to add anything in terms of capital allocation, but it's...

No. No, I think you've captured it. I agree. I think there's -- as the portfolio grows, the opportunity within the existing portfolio grows. But do you remember, our development volumes have grown enormously in the past 5 years. We were at GBP 200 million or GBP 300 million a year 5 years ago. We're at GBP 650 million in '21. We're forecasting GBP 700 million [ today ]. We have kept the development program moving and growing. And I think one thing we are really pleased with is, as Andy mentioned, we've had 2 years of record capital investment. And that has really led to the pipeline of future opportunity growing as well as what we're able to capture today. I'm not sure we ever shown you GBP 1 billion plus of future rental potential, and that's not taking into account any future ERV growth.

I don't think we've actually ever showed that chart before where it's more than doubled in terms of what we're predicting. So maybe as a percentage of capital value, Paul, you're right. But as a percentage of rent, I think we've got a high proportion of development in baked in than we've ever had.

I mean, that's great. And then actually, what I'm sort of moving to and the progression of questions is because basically, your balance sheet is in a very strong position. Your like-for-like portfolio, as you say, has got the best potential it's ever had. Your development has the best potential it ever has, why are you bothering to sell? And why not just capture that reversion potential drive the balance sheet probably a little bit stronger, really capture that growth moving forward to offset arguably the inflationary pressures that you may feel on admin costs and other costs and any rate pressures that you may feel if interest rates were to increase, does it not make more sense to keep hold of as much as you can and really capture the growth potential within the business? Because it doesn't seem like you need the capital from what you're saying.

Yes. Soumen, why don't you take that one.

Yes, of course. And you're absolutely right, Paul. We don't need the capital to -- and that's not why we sell. As I mentioned in the presentation, I -- we genuinely think it is a very good capital investment discipline to edit the portfolio. And really, our bottom slicing. We've got a brilliant portfolio. As David said, it's one of the youngest out, the one most modern. But the reality is what we're looking for is to keep driving the performance of the overall portfolio and keeping our total returns high and outperforming the market looking forward as well. And it is just good to always take that bottom 1% or 2% out. It's also important the asset managers and get, frankly, too attached to each of their assets, and they feel they need to be driving performance. But you're right, what we are looking to make sure is that we can either drive rental growth or potentially there is redevelopment or repositioning opportunity within some of those assets. And if there are, then we will hold on to the assets. If they are dry and frankly, there are better owners of that real estate going forward, then we will look to sell. But I'd say we're talking about 1% to 2% at the margin. But it's -- I'm afraid the history of the real estate sector is littered with companies that have held on to assets for too long. I think it's really good to kind of keep our capital working hard because I think what we are ultimately looking to drive is that total return, whether you measure it in terms of property return or accounting return or NAV or ultimately, the share price.

Cool. And then last one, probably linked to Slide 30. So slightly different questioning around sort of ERV growth or rental growth. I think Andy sort of clearly mentioned 15 -- I think it's 15% cost inflation in developments, yield on costs broadly flat, which implies that your development rent -- development ERP, whatever you want to call it, is increasing at a faster rate than the overall ERV of the business. Is that fair to say? So on say, Slide 30, the ERV growth expectations kind of -- don't exclude the significantly under cookware probably new rental growth in new properties coming through in each of the markets. Is that a fair way to think about it?

That's one way of looking at it. I mean I think it's -- you need to get it really into the granular detail. What -- I mean, bear in mind, we're seeing a cost increase, which varies by market, varies by material. We're giving a broad guidance on that. Remember, those construction costs are only part of the total -- the value stack that we're looking at. And what we're simply saying is that as a broad guide -- I mean, we look at every single project when it comes to our investment committee and what are the costs that have been baked in, what inflation protection we got in there and what's the deal with the customer. So that by the time we sign it off, we've got pretty good visibility before we put a spade in the ground as to what kind of development yield and what return we're going to make on it. And that's a dynamic situation and it varies by market. But yes, broadly, we're confident we can move those rents on sufficiently to cover the increased costs. And bear in mind, everybody in the sector is facing those same cost increases, everybody in the sector is facing higher land values. So we think we're in a good company, but we're confident that we can maintain those margins.

Just to add. Just to add to that with a bit of color. We're definitely using our development program to rent set. So we're creating new space to take rents forward, which will bring the rest of the portfolio with it. You can see that quite clearly on the trading estate, for example, where we've moved rents from GBP 18.50, GBP 19.50 over GBP 20 with some relatively small scale, but nonetheless, speculative development, which is dragging the rest of the portfolio with it. So we're using our development in that context.

Our next question comes from Marcus Phayre-Mudge BMO Global Asset Management.

Congratulations on a fantastic set of results. Very happy shareholder here. My question is more about Europe and particularly in relation to the difficulties in making further acquisitions, as you've highlighted a very competitive landscape [indiscernible] investment because the competition is hard. There may well be out there in the listed and unlisted space, the opportunity for corporate acquisitions. Is that something which you keep a watching brief on? Is it something you're given the opportunity to deploy a large amount of capital helping out somebody who may be in some sort of distress and effectively getting hold of other 15-year land bank that would be not available in under normal circumstances. Is that something or is that just -- is that too big a stretch to look at that type of opportunity?

Whether you want to -- I mean, do you want to say something, Soumen?

Yes, I certainly want to describe it as too big a stretch. I mean, I think I'd actually say that we at SEGRO have undertaken pretty more public and private M&A than most companies as the past kind of dozen years or so. I mean obviously, you go back to Brixton in 2010. You look at Vialog in 2015, which has kind of propelled our Italian business. The Roxhill joint venture that we entered into in '16 has propelled a big box business in the U.K. And obviously, what, 12 months ago, we bought Sofibus in -- which was listed in Paris. So M&A is absolutely an option. And I'm sure, as you'd expect, we do keep an eye on everything out there. I'd say whether it's quoted or not. The reality is it does take 2 to tango, A lot of these entities are family or founder controlled. Clearly, pricing has moved up strongly all of -- from the we are doing everything in the market is all pretty public. And so finding a situation that we can get involved with, but also that fits our very key criteria about being in the very best locations and owning the very best places in where the land is constrained, that we can deliver those going forward. That's the -- finding opportunities that fit all of our filter is the challenge, but it's not certainly not a stretch. It's finding the ones that do work for us.

I mean we have -- and just building that. We do have our radar screen turned on and are looking and continue to look, Marcus. It's just a question of terms of finding something that is a good enough fit that if there's a lot of repositioning or work to do, we think is deliverable within a reasonable time frame in the locations we want to be in. And if we find that sort of thing, we wouldn't be afraid to have a good go at it, as Soumen said, we've done some. But yes, that's kind of our general view. And we're definitely not -- this may not be your question, but we're definitely not just looking to buy stuff that bulks up scale, lots more big boxes in secondary locations with weaker quality than our average portfolio give us more scale, but less return. Just doesn't really work for us.

No, I guess and absolutely, that's -- yes, you can leave that for other people to do. This is more -- I'm thinking more in terms of strategic land and good -- very high-quality portfolios just occasionally, as you found with your -- with the various deals going way back to Brixton these opportunities pop up, but they're relatively short notice. Things have to be done relatively quickly. And it was just a question of whether you as you say, your radar is turned on. That's great. My other question is unrelated, if I may. And it's about multistory. You think mentioned about the multistory data centers. And I think you started to -- I mean, moving aside the deal with Brixton, whatever it's called, that [indiscernible]. I'm thinking more dense urban situations. Do you see your tenant roster beginning to get their head around being on the second or third floor in particularly in very dense markets? Or is it just -- it just doesn't suit them unless you can provide -- take up so much space with those -- with -- say a good list or whatever that -- it doesn't -- it's not economic. I mean just a general comment on...

Andy will pick up on that one.

Yes, we do see a place for multi-level. And we believe our customers do, too. It does have to be, as you've identified, very sort of dense urban locations where, frankly, the choice isn't there. So I think still, given a choice, probably somebody would take a single level as opposed to multilevel, but our belief is that land supply land price, the need to intensify in urban areas is not going to allow that single level. So you will have to go up. And we've successfully done that already in Paris at the Port of Gennevilliers where we speculatively constructed 650,000 square feet, and we let it all prior to completion. You may have seen we're just doing something in Park Royal, in joint venture with Barclays, which is a significant building as well. Multilevel in that case, 7 stories. So high. We're going to do something on the trading estate as well. So we are looking at it very closely. What you do have to ensure is that operationally, it works. And certainly, you kind of referenced to former multilevel buildings, the design, the approach has hugely moved on. So you do have to have them operationally sound. But we've got IKEA in Gennevilliers. We know that a lot of the parcel companies will take multilevel space. We're very confident of that. So yes, we think customers are there, and we think it will be a good solution in certain situations.

Maybe just one more question coming through.

Our next question is from Max Nimmo from Numis.

I think, Marcus, pretty much just asked the question I was going to ask. If you look across London, and I'm not necessarily just talking about multistory, what kind of percentage of the portfolio do you feel you can densify in that respect? And as I say, not just multistory, are there other ways that you can do that?

Yes. I mean I'm not sure we give you a lot detail on that right now. But we're still doing some analysis and thinking through time scales and how we sequence some of these things. We're probably across that kind of Slough and London portfolio. 10% or more of the portfolio could, over the coming years, be subject to some kind of intensification. But it's something that we'll try and give a bit more -- shed a bit more light on in future presentations. And I think there's one more question in the room if we can. Yes, go ahead. There's a microphone in your seat. And then we'll do this one and then we'll go to the web. Some questions from the webcast or on the line.

Sophie Park from Green Street. Given that your balance sheet is showing a pretty stable LTV, how do you think about that in the context that there is potential for your debt EBITDA to perhaps increase from here?

Yes. Soumen, this one for you, I think.

Yes, of course. Look, we set our debt target in the context of LTV, and we've been very consistent. We felt that 30% is where we would like to operate. And the answer you've seen in the last few years, that every time we've approached 30% and as we said, frankly, the tier opportunity has expanded. We've come to the market to fund with some equity. The reality is we've been in the low 20% area now for some time. So we've got a lot of capacity against that target. And so I think you should expect the next slug of funding that really to fund the next things we do will come out of debt, not equity. I believe there's no good measure of leverage debt to equity or debt to EBITDA -- net debt-to-EBITDA has its issues, mainly because of more primary portfolio, the worse your ratio, which makes no sense to me at all. So I'm afraid we monitor a variety of them, including the debt-to-EBITDA, LTV and others, and it's really a mix. And obviously, with our development program as large as ours as well. You will also have a bit of a lag between us taking the debt on and obviously the income coming through. So again, this is slightly solving for a number of things looking out 2 to 3 years.

Claire has some questions that have been sent in via the web link.

Yes. First question is with regards to the self performance fee. So a question of how much that could be and what the recognition of that would be in terms of whether there would be further clawbacks on the amount due next year?

Sure. So as mentioned, the -- there is a fee potentially payable at year 10, which is October 2023. It's calculated against some IRR hurdles. At the current valuation or the December valuation, the fee would work out to be in the order of EUR 140 million, which is our net share. That fee would not be subject to any clawback at all.

Next question on photovoltaics. Have you made an assessment of how many panels you could add to the roof of your assets in your portfolio? And what could be the incremental revenues from those?

We have. Always, we have an assessment going on, and Andy might like to just give you a bit of color on that.

Yes. We've got a pilot project going on in a number of schemes to just see how much we can essentially pack on the roofs. And we would sell to the customer through a PPA, what the customer wants, and we're seeing the requirements of those customers increasing. So they would get a pricing that was a little better for them. Obviously, the energy would be green. So fantastic from all respects. And any surplus power we could create. We're going to try and export to the grid. I have to say that is quite a complicated, more complicated bluntly than it should be to export to the grid with complexities and bureaucracies that need to be freed up. So we've got an assessment ongoing. We've got a pilot ongoing and we're going to see what we can do with it. And that pilot, hopefully, we'll be able to update a little bit later in the year.

Most -- I mean, many of you will know, the national grid and equivalents in most European countries were set up to distribute power from generally coal-fired power stations to businesses and consumers, they weren't set up to have people plug in renewable energy all around the country on the individual sites. And then there are, as Andy said, all kinds of regulatory issues that get in the way across Europe as well. So we've got this study. We think there's a huge capacity. We know there's a lot of opportunity but we're doing this pilot study just to make sure we can work through some of those individual difficulties and come up with a model that works in each country. But the opportunity is fantastic. And clearly, as Andy said, I mean, customers love it. It will be a fantastic step forward in terms of our carbon reduction targets, if we can make some progress there.

Another question from Osmaan at UBS. On new leases, with them setting the new higher rental tones for the estate, how representative are they for the typical occupier? Can you reassure us that unaffordable and sustainable rental levels are not being forced on existing tenants?

Andy?

We don't feel so, Osmaan. The affordability sort of question does come up. I think we said before, actually, the rental pace of the sort of occupational cost and business cost of most of our occupiers is relatively small. And we haven't seen any difficulties with affordability. The other query we would get at times is, is it just a very small and narrow band of people that will take that space at that rent and that also doesn't seem to be the case. There seems to be a plethora of business different business types that are prepared to pay those rentals. So we think it's pretty stable. The truth is some people will not pay or not be able to pay. It's a small minority, and we usually work with those customers, and so far successfully have worked with those customers to find them some cheaper accommodation on other estates or close by space. So we're working with customers on that. We haven't had much of a reaction, I have to say. So I think the rents that you're seeing aren't just a swallow -- one swallow for summer. We think they're sustainable and affordable and can move forward.

And then a final question from the webcast from Alvaro at Exane. Just asking, you showed GBP 4 million of rental income loss from assets move back to redevelopment, which is about 1% of income. Where do you think that rate of redevelopments and space update should stabilize?

It really ties back into what David was mentioning earlier, which is as, frankly, as the rental levels across our markets, across our portfolios increase, actually, the redevelopment opportunity, the opportunity to reposition and potentially intensify grow as well. So David mentioned, we think in the order of 10% potential of our portfolio could be -- give us the opportunity to create new assets over the coming years. So I think that 1% maybe 1% to 2% per annum feels about right, frankly.

Okay. That's all we have. Thank you, everybody, especially those who are here in person, but thank you, everybody else for joining us, and look forward to seeing you next time, hopefully, again, in a room together. But thanks a lot. Have a great day and a great weekend, and avoid the worst of the storms.