Investment Case

Our ambition is to be the best owner-manager and developer of 'industrial' properties in Europe and a leading income-focused REIT. We are aiming to deliver attractive returns for shareholders in the form of a low-risk, progressive dividend stream, supported by long-term growth in net asset value per share.

SEGRO is a UK Real Estate Investment Trust ('REIT'), and a leading owner, asset manager and developer of modern warehousing and light industrial property, as well as of higher value uses such as offices and data centres. It owns or manages 5.7 million square metres of space in £6.0 billion of assets (SEGRO share: £4.8 billion), serving 1,200 customers from a wide range of industry sectors. Its properties are located around major conurbations and at key transportation hubs across eight European countries, principally in the UK, Germany, France and Poland.

Our portfolio is concentrated in areas expected to benefit from strong tenant demand with limited supply of competing product. Our buildings are located on the edge of major urban conurbations and around key transport hubs.


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Demand for warehouse and industrial space has always been influenced by economic growth but is now also affected by structural changes in how businesses service their customers, such as through e-commerce.


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We own, develop and manage warehouse and industrial properties for our customers in the UK and Continental Europe. Our aim is to generate attractive risk-adjusted returns for our shareholder by delivering low risk, progressive income returns (EPS growth) and capital appreciation (NAV growth), through applying our strategy.

Business Model 480

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In November 2011, we set out our strategy to address areas of historical underperformance and deliver better future returns to our shareholders.

In order to achieve our goal, we have been creating a portfolio comprising modern warehousing, light industrial and higher value use assets (including data centres, retail assets and offices) which are well located with good sustainability credentials, and which will benefit from a low structural void rate and relatively low-intensity asset management requirements. These assets will be concentrated in the strongest European sub-markets which have attractive property market characteristics, including good growth prospects, limited supply availability, and where we already have or can achieve critical mass.

We believe that such a portfolio should deliver attractive, low-risk income-led returns with above-average rental and capital growth when market conditions are positive, and show resilience in a downturn.

We aim to enhance these returns through development, seeking to ensure that the income 'drag' associated with holding land does not outweigh the potential benefits. This should generate an attractive, income-orientated total property return ('TPR') which, if underpinned by an efficient overhead structure and relatively modest financial leverage through the cycle, should translate into attractive total shareholder returns.


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Our actions are concentrated on delivering against our four strategic priorities:

  1. Reshaping the existing portfolio by divesting assets which do not meet our strategic and financial criteria and reducing non-income producing assets as a proportion of the total portfolio;
  2. Delivering profitable growth and reinvesting in core markets and asset types by taking advantage of attractive development and acquisition opportunities;
  3. Reducing net debt and managing financial leverage over time and introducing further third party capital where appropriate; and
  4. Driving our operational performance across the business through greater customer focus, knowledge sharing, efficiency improvements and cost reductions.

Our objective is to deliver attractive returns to our shareholders through the execution of our strategy.

We have set out the Key Performance Indicators on which we report each year to track the progress we are making. They are based on metrics for the wholly-owned business and our share of joint ventures.


What it is: TPR is the ungeared combined income and capital return from the Group's portfolio during the year (including our share of joint venture assets). It is an important measure of the success of our strategy in terms of asset selection and asset management. IPD prepares this calculation for us, as well as providing benchmark TPR data for similar properties in their wider IPD universe. We aim to outperform the benchmark over the long term. Details on how TPR impacts short and long term incentives are provided on page 85 of the 2014 Annual Report.

Our performance: The TPR of the Group in 2014 was 19.4 per cent (2013: 10.7 per cent). Our UK portfolio generated a very strong TPR of 22.8 per cent, performing in line with an IPD All Industrial benchmark of 22.7 per cent (the most relevant benchmark information at the time of going to print). The TPR of our Continental Europe portfolio was 10.1 per cent, reflecting a strong performance in Poland, offset by weaker performance from our remaining non-core assets and assets in Benelux.
No market IPD benchmark data is yet available for Continental Europe: this will be received later in the year.



What it is: The value of our assets less the book value of our liabilities, calculated in accordance with EPRA guidelines, that is attributable to our shareholders. We aim for sustainable long term asset value growth whilst carefully managing our liabilities to maintain
balance sheet strength.

Our performance: EPRA NAV increased by 72  pence per share over the year to 31 December 2014, most of which was due to a 12.3 per cent increase in the value of the Group's property portfolio. Our completed UK portfolio generated an uplift of 17.1 per cent and our Continental European portfolio increased by 2.2 per cent. Approximately 4 pence of the uplift was due to the agreement of a repayment due from California tax authorities in relation to the sale of Slough Estates USA
in 2007.


What it is: The vacancy rate measures our ability to minimise the quantity of non income-producing assets within our portfolio. An improving vacancy rate generally implies additional rental income and lower vacant property costs. Some level of vacancy will always exist within our portfolio in order to support our asset management activities and allow our customers the opportunity to move premises. We target a longer term
vacancy rate of 6-8 per cent.

Our performance: The portfolio vacancy rate improved to 6.3 per cent (31 December 2013: 8.5 per cent) due primarily to letting up vacant space on existing assets, with most of the remainder due to transactional activity.


What it is: The percentage of our customers who rate their experience as occupiers of our buildings as 'good' or 'excellent' as opposed to 'poor' or 'average'. Our customers are at the heart of our business and we strive to ensure that we are providing the best level
of service possible to maximise customer retention.

Our performance: Overall satisfaction (derived from a sample of 213 customers surveyed across five countries) as an occupier of our buildings was rated
as 'good' or 'excellent' by 86 per cent of our customers during 2014 (2013: 76 per cent). This reflects our focus on communication, being responsive and understanding the needs of our customers. Whilst this is an exceptionally high score, we will continue to strive towards reaching similar levels in the future.



What it is: The proportion of our property assets (including investment, owner-occupier and trading properties at carrying value and our share of properties
in joint ventures) that are funded by borrowings. We remain committed to maintaining the LTV ratio at around 40 per cent over the longer term because we believe that REITs with lower leverage offer a lower risk and less volatile investment proposition for shareholders.

Our performance: The Group's LTV ratio (including our share of joint venture assets and liabilities) improved to 40 per cent from 42 per cent year on year, principally as a result of the reduction in net borrowings achieved through asset disposals during the year and the total portfolio valuation increase. Although we are at our longer term target of 40 per cent, the timing of investment decisions and disposals may cause the LTV to fluctuate in the short term.



What it is: TSR measures the change in our share price over the year assuming that dividends paid are reinvested. This KPI reflects our commitment to delivering enhanced returns for our shareholders through the execution of our strategy over the medium term. TSR is a key metric used in setting the Executive Directors' and senior management team's long term incentive plan targets.

Our performance: The TSR of the Group was 15.7 per cent, compared with 24.2 per cent for the FTSE 350 Real Estate sector, after a very strong relative performance in 2013. This performance reflects a combination of the 14.8 pence dividend paid during the year and an increase in the share price from 334.0 pence at 31 December 2013 to 370.3 pence at 31 December 2014.


What it is: The after tax earnings we generate, calculated in accordance with EPRA guidelines, that are attributable to our shareholders. This measures how profitable our operations have been during the year. Earnings are a key element in the annual bonus targets applied to all employees.

Our performance: As expected, EPRA EPS fell by 3 per cent year on year, reflecting the residual effect of disposals in the second half of 2013, as well as the effects of transaction activity during 2014 on gross rental income. This was partly offset by lower property operating and net finance costs.


What it is: The ratio of our total administration and property operating costs expressed as a percentage of gross rental income. This is an indicator of how cost effectively we manage both our property assets and our administrative costs in order to improve profitability. Over the medium term we are targeting a total cost ratio of 20 per cent.

Our performance: The cost ratio improved to 23.7 per cent (2013: 24.3 per cent). Disposal activity in late 2013 and in 2014 was reflected in a 10 per cent reduction in gross rental income, while total costs fell by 12 per cent, reflecting mainly lower vacancy costs and higher joint venture management fee income.


What it is: The headline annualised gross rental income contracted during the year less income lost from takebacks. There are two elements: to grow income from our standing assets by reducing vacancy and increasing rents from lease renewals and rent reviews; and to generate new rent by developing buildings either on a pre-let or speculative basis. This KPI is a variable compensation target for all employees.

Our performance: In total, we generated £15.0 million of net new annualised rent during the year (2013: £6.5 million) including rent from pre-lets agreed based on year-end exchange rates.



EPRA measures
*  EPRA earnings, EPRA NAV and EPRA EPS are alternate metrics to their IFRS equivalents that re calculated in accordance with the Best Practices Recommendations of the European Public Real Estate Association (EPRA). SEGRO uses these alternative metrics, as well as for vacancy rate and total cost ratios, as they provide a transparent and consistent basis to enable opean property companies. See for further details.

†  The 2014 TPR has been calculated independently by IPD in order to provide a consistent comparison with an appropriate IPD benchmark using the methodology to be applied under the rules of the LTIP scheme. It is calculated as the change in capital value, less any capital expenditure incurred, plus net income, expressed as a percentage of capital employed over the period concerned and excluding land.

†† The LTV ratios include our share of joint venture borrowings and property assets. In 2013 and 2014, we treat deferred consideration from our partner in the SELP joint venture as cash within the LTV ratio as it is callable at three months he balance is due to be paid to us in October 2015 at the latest.


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Harry Stokes

Harry Stokes

Head of Investor Relations and Research

+44 207 451 9124

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