SEGRO H2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 14, 2025

There are 16 speakers on the call.

Operator

Right. Good morning, everybody. Welcome to our full year twenty twenty four results presentation. Thanks very much for all of you joining us in the room on a Friday morning. Good to see some people still come into the city on a Friday.

Operator

But also thanks to everybody joining us online. As usual, I'm going to make some opening remarks to set the context and then we're going to go through the presentation and do Q and A at the end. As you know, we've been following a consistent strategy for almost fifteen years now founded upon disciplined capital allocation and operational excellence and underpinned by an efficient capital and corporate structure whilst taking account of our the needs of our wider stakeholders through our responsible Seagro commitments. Application of this strategy has continued to deliver for us in 2024 and it's positioned the business to perform well in the future. Our teams have been driving rents.

Operator

We've signed up £91,000,000 of new commitments during the year, which is our third best year on record. And I think that's pretty impressive when you consider the macroeconomic environment we've been operating in. We've continued to invest for growth, both through executing on our profitable development program and leveraging our local knowledge and strong relationships on the ground to buy some very good assets at attractive prices. In parallel, we've crystallized profits and created extra liquidity through selling carefully chosen assets to motivated buyers. And our balance sheet is in great shape with the additional firepower provided by our equity raise in February and the disposal proceeds we've generated in 2024, we're very well positioned to invest at a point in the cycle when we think having access to capital is a competitive advantage.

Operator

The hard work in 2024 added to our strong track record of delivering growth in rents and that's fed through into an 8% average annual growth in earnings and dividends over the past eight years. We've also continued to deliver on our responsible Seagro commitments across three main areas. We made great progress in cutting our carbon footprint, not least through the doubling of our solar capacity in the year and reducing the carbon intensity of our developments. And we've updated our science based net zero targets in line with the latest SBTI methodology. Investing in our local communities also remains in focus.

Operator

We now have 14 community investment plans designed specifically for our larger asset clusters across Europe, supported by our own employees, our suppliers, and our customer base. And our nurturing talent, sorry, remember to click on, and our nurturing talent efforts, which are key to maintaining and improving our operating platform, not least through the continuous development of our bench strength and the improvement of our people policy to be more family friendly, are helping us to achieve high levels of employee engagement and create a diverse pool of existing and new talent in the business. So 2024 has been a year of further strong delivery by our teams in what we know was a challenging environment. And in a moment, Shoman will take you through some of the more detailed financial and operational figures behind that statement. We're also feeling confident about 2025 and the opportunities in front of us.

Operator

Our business is in fantastic shape and we're primed for further growth in earnings and dividends. And we're super excited about the significant additional value creation opportunity that we now have in front of us with regard to data centers and the growing 2.3 gigawatt land bank that we've created. Thank you. It gives a battery issue. We're going to take you through each of these elements in turn.

Operator

So let me hand over now to Schoeman, who will talk about the first chunk.

Speaker 1

Thank you, David. Good morning, everybody. So, let's see if one of these work. Starting here on Slide seven and the usual slide with the key financial metrics. Now, look, the key takeaway, as David said, it's been a really busy, really active year on the leasing front, which has fed earnings, it's fed dividend growth, while asset values have been stable after what was clearly a rollercoaster 2022 and 2023.

Speaker 1

So, we delivered 5.5% growth in earnings and dividends per share. It's just worth noting that the additional rent and income that we earned on the proceeds of the equity raise is the reason the profit before tax is up 15% but EPS is up 5% as that extra income is offset by a higher share count. The equity raise was fairly EPS neutral in the year, but clearly we earnings accretive once it's fully deployed. We're recommending a final dividend of 20.2p, which makes a full year dividend 29.3p. We saw a small increase in the like for like valuation of the portfolio, but due to a higher level of disposals in the year, the total remains at billion.

Speaker 1

And NAV per share is unchanged at $9.00 7p. The balance sheet is in good shape with loan to value down to 28% providing considerable opportunity for growth. Right. So turning now to the income statement on Slide eight. So we saw 8% growth in net rental income in the year, which I'll break down for you on the next slide.

Speaker 1

Before we get there, just a couple of things to note. Firstly, capitalized interest was £69,000,000 in 2024. Similar to the level of '23 and likely to be around these sorts of levels in 2025. And on costs, we saw an increase in the cost ratio due to increases in both our property and our admin costs. Now, the key items were higher vacant property costs, some additional tech related spend, and some one off abortive transaction costs.

Speaker 1

We anticipate the ratio will move back below 20% without those one off costs and as the vacancy is leased up. On Slide nine now and turning into that net rental income growth in some more detail. So, we delivered strong growth in net rentals, up £41,000,000 in the year. Then as in previous years, there are two main contributors to that growth, those first two pink bars. Rent on the standing portfolio grew £29,000,000 with very strong like for like growth of 5.8%.

Speaker 1

That's driven by the capture of reversion in The UK and indexation and leasing activity across the continent. Development completions added £32,000,000 in the period. The investment activity, the buying and the selling, resulted in a net loss of £9,000,000 of income last year. And you should note that due to the timing of that activity, the full year impact is £6,000,000 higher than that. And Slide 38 in the appendix has got some more detail on that.

Speaker 1

The other box at the end is a mix of take backs for developments, FX and some non recurring items. Looking ahead from here, we will continue to drive rental income strongly with like for like growth especially from reversion and new income coming through from our development pipeline. Turning now to the valuation and we're on Slide 10. 20 20 four saw the first positive valuation after two years of declines. And pleasingly, there was a positive or be it modest revaluation in both The UK and on the continent in the second half of twenty twenty four, which suggests we could well be past the inflection point on values.

Speaker 1

The portfolio is still at £17,800,000,000 net of the revaluation, capital recycling and CapEx. Yields were fairly flat, especially in the second half. So, the capital value growth will increasingly link to ERV growth going forward. We saw a healthy 3.2% ERV growth in the year. That was 3.7% in The U.

Speaker 1

K. And 2.3% in the continent. And again, that's weighted more towards the second half. Turning now to the balance sheet, which remains in great shape and provides with significant firepower for growth with over billion of available liquidity. Loan to value is reduced to 28 and our credit rating is stable at A-, which continues to be a differentiator versus the vast majority of the real estate universe, which is rated mostly BBB.

Speaker 1

Our debt metrics are in really good shape. Net debt to EBITDA is down significantly from 10.4 times to 8.6 times as EBITDA has grown and net debt has been reduced by the equity placing and through disposals. Turning to Slide 12, we've got a diversified long duration debt profile with an average maturity of seven years, which as you can see on the graph on the left is debt stretching out till 02/1942. We've got low refinancing requirements in the next few years reduced further because we've tapped the debt capital markets in the past six months out of both Segro and out of SELP with bond issues with a three point five percent and three point seven five percent coupons respectively. But to help you quantify the impact of what's to come in terms of interest costs from refinancings, we've added the graph on the right hand side.

Speaker 1

So, this assumes that each year with as we refinance the debt that comes due that year, using today's indicative rates in both sterling and in euros. And you see the cost overall cost of debt moves up only 10 basis points this year and by 50 basis points through to 2027. But up to a level that's still lower than the level of 2023. And in terms of quantum, we're talking about around £25,000,000. So, look, it's not immaterial but it is much much lower than the reversion that we hope to capture in the period of the next three years.

Speaker 1

So, it's very manageable in terms of the earnings impact. So, moving on now and having provided you the 2024 financial overview, I'm going to take you through the highlights of our operation activity for the last year and how we've created value through both asset management and development. Now, I said earlier that 2024 was a really active year. And on this chart, you can see why. We signed million of new rent during the 2024 and that is our third best year on record.

Speaker 1

Now, asset managers and leasing managers have been super busy finding opportunities to lease space whilst capturing record levels of reversion. Now, you can see on the graph here the contribution of the existing portfolio that's shown in red has grown enormously over the years. There's still a very healthy and strong contribution from development lettings including one of the largest lettings last year at our site at Northampton. But it's fair to say the overall volume of pre lets in the market is lower than in previous years and the big change is simply there are fewer megabox pre lets around. But there are still deals to do and occupiers are still engaging with us in our conversations around expansion.

Speaker 1

In the middle of twenty twenty four, converting those opportunities into deals was slower as we found occupiers were taking longer to take decisions. But pleasingly, we saw a very pronounced pickup in activity in activity levels in the final weeks of the year across the business. And the momentum has continued into 2025. So, this chart, page 14, the chart on the left illustrates some of what I've just talked about. So, this chart on the left summarizes literally the hundreds of leasing transactions that we undertook in 2024.

Speaker 1

Every dot represents a single lease event. And you can see it was a really busy year. There were over 400 individual transactions in there. But you can see how the momentum in volumes it grew in the first half of the year, fell away in the summer as you might typically expect, but it stayed there in the early part of the autumn. And then in the last two months of the year, it saw a real pickup.

Speaker 1

As simply you can see from the density of the dots in December that we had a particularly busy month. Now, on the right, you can see how that all that activity has kept the customer retention rate high at 80% and occupancy strong. Now, 94%, it is at the lower end of our target range and it fell 1% during the period as our leasing progress was offset by a couple of specific items. Firstly, we completed on some speculative space for which we're seeing good levels of interest and we've signed some units already since the year end. And secondly, we had an occupier in the global media sector who chose to leave us in North London and that accounts alone for around 50 basis points of group vacancy.

Speaker 1

But for us, it's an opportunity to capture that reversion earlier than we expected and potentially move that rent on ahead of ERV. So, on Slide 15 and diving deeper into the reversion capture, which I've said is a really major driver of that net rental income growth. We capture record level of uplift from rent reviews and renewals in the year. 34% for the group and an extraordinary 43% in The UK. Now, you've got to understand these are really quite remarkable uplifts.

Speaker 1

They're not one offs. We had 170 across the portfolio and 69 of those showed uplifts over 60%. Now, you realize it requires us having the best space available and great customer relationships to achieve that level of uplift without adversely affecting the retention stats I showed you on the page earlier. It also demonstrates that our customers are able to afford these higher rental levels. As we showed you at the investor day in June and particularly within our urban portfolio, businesses are providing high value goods and services and have the pricing power to pass these on.

Speaker 1

And importantly, we are not done. If you look at the chart on the right hand side, it shows you we've still a lot more to go for. There's a £118,000,000 of further potential reversion to capture and £71,000,000 of that comes up over the next three years. So, on this slide, having talked to you through our lots of numbers across the portfolio, we want to highlight a few examples of how we do this on the ground, around our approach to customers and on leasing. So, starting on the top left on with our German portfolio and we've been seeing some really strong demand particularly for our urban space, maybe counters what some of the macro headlines might suggest.

Speaker 1

We set a new record warehouse rental level at Seager Park Dusseldorf. And in Cologne, we set the highest industrial rent in the city at the, estate you see pictured in the top left. Secondly, our leasing activity helps us set evidence for rent reviews and helps to capture the reversion that we've just talked about. On our East London portfolio in the bottom left of the screen, rents are up 100%. There were £9 per square foot five years ago and now close to £20 a square foot.

Speaker 1

Thirdly, we use refurbishment to help reposition assets to drive rents further. We're doing it a lot in London at the moment. One of our most striking examples during 2024 was at our flagship Estate Premier Road. We took back a unit in May 2023 when a customer upsized to a large unit at our recently completed Segarth Park Hays. We carried out a high standard refurbishment on that space and signed a lease to a new customer which was 13% of ERV but is more than double the previous passing rent.

Speaker 1

And finally, an example of the importance of supporting customers and benefiting from their growth. H. G. Water, is a butcher providing high quality meat to some of London's finest restaurants and hotels. It's been a customer of ours at Tudor Park in West London since 2017.

Speaker 1

Not surprising their business was badly hit during the pandemic when we locked down. We offered them financial support, but we also pivoted their businesses to start delivering they pivoted their business to start delivering products to people in their own homes. That helped them not just to survive, but to create a new growth opportunity. So their business is now thriving. So much so, they needed some new space.

Speaker 1

We refurbished the unit at Seagra Park, Rainford Road, which they took occupation last year, taking three times more space. Finally on this section, this slide looks at our development activity during 2024 and looking ahead to 2025. Now we completed space equated GBP 37,000,000 of headline rent. 84% of that is leased and delivering an attractive development yield of 6.9%. Ninety seven % of that was BREEAM excellent rated reflecting our efforts to develop the most sustainable energy efficient space for our customers.

Speaker 1

Looking forward, we have 46,000,000 of headline rent in our current pipeline, almost all of which will complete this year in 2025. The pre let percentage is 50%, which is a reflection of the lower level of new pre let signings 2024. But also, we've just commenced schemes in some of our urban markets where we always build speculatively in responses where we've seen some really strong demand. As I mentioned earlier, one of the reasons we've seen this is in Germany, where our newly created flexible modern urban space is being snapped up by mostly small and medium sized businesses who are servicing growing populations in nearby cities. Today, we've got schemes underway in Berlin, Cologne and in Dusseldorf.

Speaker 1

Twenty Five Percent of that space is already under offer and a further 15% of that is in negotiation. And that these schemes don't complete until the second half of this year. So, summing up from me, we had a really busy and active 2024 with positive financial and operating metrics, record reversion capture, profitable development completions and 5.5% earnings and dividend growth. Importantly, we saw a pickup in occupier market activity in the last quarter and continued that into 2025. All of which lays the foundations for continued delivery and growth.

Speaker 1

And for that, I'll hand you back to David.

Operator

Okay, thank you Sherman. Now I want to talk about the future and how we are positioned to derive further growth in rents and performance from our portfolio. As you will know, we've positioned our business to benefit from a number of enduring structural trends which continue to support occupier demand and feature in many of the conversations that we have with customers regarding their future plans. All four remain very much intact. E commerce continues to take market share from physical space.

Operator

The digital economy is becoming an ever more critical part of our business and personal lives. Major cities continue to grow at a faster rate than the wider economy. Our logistics customers continue to reconfigure their supply chains to optimize efficiency and reduce carbon emissions. And most of the corporates we talk to know that improving their sustainability credentials are not just good for the planet, but they're also good for their businesses. We expect these tailwinds to continue driving demand for well located and modern industrial and logistics space, especially as and when the macro environment improves.

Operator

Meanwhile, competition for other uses of brownfield land and tight greenbelt planning restrictions will limit the availability of land in most chosen markets, which will keep new competitive supply in check and maintain upward pressure on rents. We have a fantastic portfolio of assets concentrated in Europe's most attractive markets and a market leading operating platform dedicated to making sure that we remain close to our customers, offering them great space and service, while ensuring that our portfolio delivers attractive returns through the cycle. We also have an exceptional land bank to support profitable development. But it's important to remember the unique composition of our portfolio and our 65% weighting to urban markets. We have conviction about the attractions of big box logistics and we believe that we have one of the best, if not the best logistics portfolios in Europe along with some fantastic rare landholdings.

Operator

But as we covered during our Investor and Analyst Day last June, we believe the urban part of our portfolio has some particularly special characteristics. The space we provide is used by an incredibly diverse and dynamic customer base, often providing value added goods and services to businesses and consumers in some of Europe's largest, most congested and densely populated cities. And as those urban populations continue to grow, land supply in these locations is not just limited, it's shrinking, which puts even more upper pressure on rents and underlying land values and opens up opportunities for alternative high value uses such as data centers. This makes our portfolio unique and it would be very hard, if not impossible for anybody to replicate what we have. So we believe we've assembled an irreplaceable portfolio of assets and this chart illustrates the returns we expect our portfolio to deliver.

Operator

We do look at the running or the initial yield on an asset, but we're much more interested in where that yield can get to over time through active asset management. In other words, our primary focus is on total return that we expect to earn typically over a ten year period, and the risks to achieving that return. So I'll just walk you through what that means on this chart. If you start on the left with our existing portfolio of standing assets, you'll see that the you'll know that the initial yield topped up is currently 4.4% and the equivalent yield, which assumes that we cap to the reverse and repotential, averages 5.4%. We've guided to recurring rental growth expectations of 2% to 6% depending on the asset type.

Operator

So let's say in the 3% to 4% range on average, and all else being equal, therefore, it should lead to an 8% or more unlevered return. Clearly, some assets will be high yielding, reflecting lower growth prospects and vice versa. But overall, we're thinking in terms of at least a high single digit unlevered return from standing assets. Our development pipeline throws off a 7% to 8% yield on cost. So depending on the volume of CapEx and the particular specifics of the projects being developed, it should add another 1% to 2% of return at portfolio level on an annual basis.

Operator

That results in a total unlevered return expectation at portfolio level of 9% or more. And if you add the benefits of leverage with our 30% assumed LTV, that translates into an expected levered return over 10. And of course, that's assuming a stable yield environment. So yield compression were to come on the back of future interest rate cuts would be additive to these returns. Plus, as I'll come on to later, we have significant further value upside from data centers.

Operator

Now our job beyond all the asset management leasing and development activity that Shoman referred to, which is needed to actually deliver these returns, is to keep actively managing the portfolio composition so that it continues to deliver. That means adding assets that contribute positively to total returns and being ruthless in divesting assets which are likely to underperform. So let me bring that alive by describing our capital allocation decisions in 2024. Let's start with asset recycling. Every property in our portfolio has an asset plan and we constantly review those plans to identify potential underperformers in terms of future returns or risk profile.

Operator

We factor in location, rental growth, covenant quality, future CapEx requirements, and a bunch of other things to rank them based on risk adjusted returns, and the weakest ones become candidates for disposal. We believe all our assets are good, but it's a very important discipline to continually look to bottom slice the bottom, the weakest 2% of the portfolio each year. On top of that, we always have an eye out for special situations or motivated buyers who may well pay more for an asset than its value to us, which enables us to crystallize gains and generate funds for investment into better returning opportunities. During 2024, we sold £786,000,000 of built assets and £110,000,000 of land. This was higher than in recent years, partly because the softer investment markets in 2022 and 2023 meant that we slowed down our usual disposal program.

Operator

Our 2024 sales included big box assets, urban warehouses, as well as two powered shell data centers adjacent to the Slough Trading Estate, sold to an occupied and attractive premium to book value. And all of this collection of assets that we sold had delivered for us in the past with an average unlevered IRR in excess of 10%. Looking forward, we expected the returns to be weaker. We also sold a powered a plot of powered land with planning in place for a data center development. And we did that because we offered we were offered a very, very attractive price by a hyperscaler that allowed us to record a significant surplus over additive in terms of quality, expected rental growth and total return.

Operator

Again, we were more active in buying standing assets during 2024 than we have been for quite a few years. As we thought pricing was attractive and there was less competition for prime high quality assets in this environment. Less competition doesn't mean no competition, so staying disciplined on pricing and return requirements is key. And the Tri Tax Eurobox potential acquisition, which looks to have ended well was a good example of our discipline in that regard. Beyond that though, we leveraged our strong relationships and local knowledge to create some excellent buying opportunities, which might not have been available to others in the market.

Operator

Acquisitions totaled £431,000,000 and included four prime assets in The Netherlands, all of which have which also then helped us to create a stronger geographical presence in a key target market, which has shown some of the strongest rental growth we've seen in recent years. We also acquired two urban estates in The UK, including what we'd call a crown jewel asset in North London, neighboring our existing estate at Seagrove Park, Enfield. This is also highly reversionary with rent review starting this year, which should enable us to record some early wins. The average forward looking unlevered IRR of around 9% on the that we expect from the assets that we acquired in 2024 compares favorably to the expected returns from the asset disposals and the quality is higher. And then finally, as I've mentioned, development is returning a very attractive 7% to 8% yield on cost and that yield on cost allows for all the costs of obviously the land, rolled up interest during the build period, and of course the construction costs.

Operator

Once the assets are completed and let, they typically be revalued to a stabilized yield of about 5%, which equates therefore to a 20% to 30% profit on cost. And we would expect them to deliver an unlevered IRR above 10% over a ten year hold period, which is typically how we look at it. So development is undoubtedly the most accretive use of our capital. And as you can see, during 2024, we invested £471,000,000 into development, slightly lower than we'd originally planned due to the quieter pre let markets, but we would anticipate the rate of spend picking up as development volumes increase. And then looking forward, we have £51,000,000 of potential rent in our current and near term pipeline, and we expect most of that to become income producing within twelve months or so with just £190,000,000 of capital left to spend on those completed projects.

Operator

On top of that, we have a further £371,000,000 of additional rent in our remaining land bank, which we'll build out over the coming years. And our teams have been working hard during 2024 to get these sites ready to go, progressing some large infrastructure schemes and taking projects through planning. We're expecting to spend about £500,000,000 on development in 2025 with a likely acceleration thereafter. So bringing all of these opportunities together, this is an update of the usual chart which sets out our pathway or our bridge from today's cash passing rents to almost £1,500,000,000 in the coming years. You can see that on a three year view, we have the opportunity to grow our rent by 50% through burning off rent freeze, leasing vacant space, capturing the near term reversion, completing our current and near term development projects along with some others that we expect to become income producing during that period.

Operator

If we look at the longer term opportunity, we can more than double our rent roll over say the next decade, capturing the longer term reversion and building out the rest of the development pipeline. There's additional upside from this in the form of redevelopments of existing assets. The chart doesn't factor in any further ERV growth. It doesn't include the accretive effects of our acquisition and disposal activity, the recycling I was talking about earlier, And it doesn't allow for what I'm about to tell you with regard to data centers. So let's now turn to the significant additional value creation opportunity that we have with data centers, a market where there is very significant growth forecasts for the next several years.

Operator

Firstly, I want to give you a quick update on our existing data center business. As many of you know, we've been operating in this space since 02/2005, which means we have a strong understanding of the market, good relationships with the major data center players, and we had a head start on most others in terms of securing power to expand the opportunity set across Europe. Today, our data center pipeline represents about £55,000,000 of headline rent, which will grow to 61 with projects under construction, so about 8% or 9% of our rent roll. The majority of that capacity sits in Slough, where we are proud owners of Europe's largest data center hub. Most of it has been developed on a powered shell basis, quite a few of the early ones were leases of standard industrial buildings and some were offered as ground leases of powered land.

Operator

Accordingly, the income flowing is not reflective of the underlying value of the associated allocated power, which stands at approximately half a gigawatt. In other words, there's a lot of latent value buried in the ground. During 2024, we progressed our data center development program. We completed another powered shell on the trading estate and we're on-site with a further one which we'll complete later this year. Throughout the year, we've been progressing conversations about other potential pre lets on this date.

Operator

But most importantly, we secured a new and even more favorable simplified planning zone on the Slough Trading Estate, which gives us a blanket approval for the next ten years to construct data centers of up to 36 meters high. As I mentioned, we sold two powered shell data centers as well as a powered land plot to hyperscalers, in both cases crystallizing some attractive profits. But we've also invested a significant amount of time and energy into increasing our data center capabilities and our power bank across all our key markets. And we now have data center specialists in each of our geographies who are well placed to progress land sourcing, power procurement, and planning consents, the three critical ingredients for data center development, which brings me on to the next slide. Our power bank now stands at 2.3 gigawatts on the land positions that we hold in key availability zones across Europe.

Operator

This is split into our existing capacity of 0.5 gigawatt mostly in Slough. And we have a further 0.4 gigawatts of opportunities available to pre let by 2027 and a further 0.3 gigawatts by 02/1930. On top of this, we're working on another 1.1 gigawatt of opportunities, mostly in the form of well advanced grid connection applications. There's a bunch of other earlier stage opportunities which we're working on, which will no doubt see this figure grow in the future. This power bank aligns to our existing urban footprint, and it means that we're really well placed to benefit both from cloud driven data center requirements, but also the inference or if you like user interface aspects of AI based growth.

Operator

For every single one of these opportunities, we also have the land. In many cases, including obviously Slough, we already have the planning permission or at least a high degree of confidence that it will be secured in the foreseeable future. And as I mentioned at the start of the section, we have strong relationships with the world's largest data center players and an excellent track record of delivery over the twenty years that we've not been operating in this sector. Back in June 2024 at our Investor and Analyst Day, we told you about our data center strategy for the first time. We mentioned the 1.2 gigawatts of future opportunity that we had at the time, which of course has grown significantly since then, and we explained the different ways we could approach it, powered on sale, powered shells, or fully fitted.

Operator

And we explained that the powered shell model would likely be our approach to the majority of opportunities, but that we were keeping our options open. So what's changed since then? Well, the growth of the data center market and expectations of future growth have expanded significantly. Whilst there's been much talk about generative AI and whether DeepSeek is a good or bad thing, one aspect that we are clear on is that all of it is good for demand for data centers near to the end users. In other words, inside those core availability zones close to urban centers.

Operator

Secondly, the battle for power and sites in the right locations has intensified and we've come to appreciate what a rare and special opportunity we have in front of us. And thirdly, whilst we believe that the profit margins from building powered shells are not too dissimilar to the returns available from a fully fitted model, the likely magnitude of value creation opportunities on our powered land is just simply too great for us to ignore, bearing in mind that the volume of investment could be eight times the capital involved in a typical powered shell. So putting it another way, we can potentially create the same value out of one fully fitted data center as we can with several powered shells. Accordingly, we are now exploring opportunities to create fully fitted data centers on at least some of our sites. We're aware that such an approach involves more operational complexity, accordingly, it's likely that in the first instance, our foray into the fully fitted model will be done in partnership with others who bring the track record and experience of doing so.

Operator

We've got some very interesting and active conversations going on in this regard, at the moment, and we look forward to updating you in due course, but it's a very exciting opportunity. So to conclude, Seagro has delivered further growth in rents and earnings during 2024 and has made good progress against our responsible Seagro commitments. We're primed for further growth from our existing business in 2025 and beyond, And we're encouraged by the pickup in occupier activity that we've seen of late. And we're incredibly excited about the additional opportunity we have to create value in the data center sector. So thank you for your attention.

Operator

We'll now take questions. I think as usual we'll start in the room and then we'll go to the webcast. But remember, if you're in the room, you need to pull out the microphone and press go.

Speaker 2

All right. Can you hear me? Bart Geist, Morgan Stanley. Big announcement on data centers. Could you please help us understand what that means for CapEx?

Speaker 2

What that means for rent? How much of the 500,000,000 a year do you intend to spend on that? And kind of help us translate a bit kind of these ambitious plans into the financials? And then secondly, as a follow-up, some of your peers in Continental Europe that have embarked on a more fully fitted model seem to suggest this is largely a speculative exercise where you can take bookings, but you don't really sign a pre let and therefore it's a risk here from that perspective as well. Your slide at the end seemed to suggest this is a pre let strategy.

Speaker 2

Can you provide color on that? Thank you.

Operator

Yes. Okay. There's quite a bit in there. We'll try and show now and try and cover that between us. First thing to say on leasing strategy, I think and we said back in June, you can do spec or pre let on for those fully fitted data centers.

Operator

It's very much our intention to be pre let led because of the location of our sites in really high demand core availability zones, so close to the urban centers where there is tremendous demand for that space. We would expect most, if not all of our developments to be very much pre led and there is there's good there are good precedents and examples of that being the case. In terms of the capital, I mean, it's really difficult to give you some very precise numbers. I mean, firstly, because we haven't yet signed up our first fully fitted deal. And frankly, every situation is going to be very different.

Operator

The cost of the land, the cost of getting the power, the nature of the building, what you're trying to get out of it, they do vary enormously. But it just give you a very, very broad guide. If a powered shell, let's say, a 50 megawatt powered shell costs could be anywhere between £50,000,000 and £100,000,000 of construction cost on top of the land, You can multiply that by six, eight, 10 times depending on the particular configuration in terms of the amount of capital for the same data center if we're doing fully fitted. We've indicated the yield on cost is 8% to 12%. Again, it will vary according to the particular situation.

Operator

So, were that to apply if you take that to apply to any one opportunity, it's a significant ramp up in income and CapEx requirements. But time will tell as to the particular characteristics of the first one we set out. So we're typically not giving a lot of specific guidance. When we announced our first project, we will share more details about what that entails. But in terms of your question around CapEx, and Shoman will correct me if I'm wrong, the $500,000,000 guidance we've given for 2025 does not make any allowance for a fully fitted data center.

Operator

That would be incremental over and above that. And look, we haven't done our first one. If you extrapolate and do it over the whole portfolio of opportunities we've got, it's a huge amount of capital. But we'll cross that bridge when we get there. In the meanwhile, we've got plenty of capital and liquidity to do the first one or two, and we'll update you in terms of funding thereafter.

Operator

Thanks. Rob?

Speaker 3

Thanks. Two and a half questions, if that's okay.

Operator

I meant to say you only allowed one, but we'll let you go over the first two.

Speaker 3

We'll go down to two. The pickup in occupier market activity or occupier activity you talk about in the last couple of months of the year, I wonder if you could quantify that. Is that number of leases signed, number of conversations that the leasing teams are logging in CRM system internally? It would be helpful to kind of get some kind of quantitative thought around that.

Speaker 4

Yeah. Is that okay?

Operator

It would. And I'm not sure I can give you the very precise quantitative numbers, but I think the way you characterize it is interesting actually. So what we saw and you saw it on Shoman's chart where he showed all those dots, which what you can take away from that is there were a lot of deals done. A lot of things got pushed over the line in the last part of the year. I would say particularly in urban markets, London Southeast was very active.

Operator

We were quite some of our light industrial schemes in Germany, for example. So there were actual deals done in the last part of the year that gave us quite a well. That's quite interesting that people, you know, having general theme of last year being people sitting on their hands for a long time before taking commitments. People actually put pen to paper in numbers in the last part of the year. And this year, it's more around conversations, anecdotal feedback, general sentiment.

Operator

But it's interesting that we're not just hearing in one or two places, everywhere across the business is seeing a lot more activity in terms of looking at deals, whether they're leasing up existing space or pre It's it would be silly given the macro environment we're in for us to say, therefore, it's onwards only upwards from here because you just don't know what the macro is going to throw at us. But at the start of the year, we're feeling pretty positive about what we're seeing.

Speaker 3

Thanks. And then the second one was, you rightly talk about selling assets that don't meet your forward IRR requirements. I don't know if you could share of the assets that you sold, say, last year, for example, what you thought the forward IRR of those disposals on average would have been just so we can get a flavor of how that compares

Speaker 4

to, say, the 9%?

Operator

Yes. I mean, in broad terms, and I talked about the average portfolio looking for about eight plus percent outstanding assets. We acquired what we think was nine plus. The disposals, they delivered, I forget the number, about 11% on average to date. We thought the forward look was more like 77% to 8%.

Speaker 5

Great. Thank you. It's Marius Passou here from Bernstein. May I ask two questions as well? Yes, sure.

Speaker 6

Maybe we

Speaker 5

start with the data center again. Could you maybe give us a bit of detail in terms of the partnership model you're looking at or thinking of? I appreciate it's probably very early days, but is this a partnership model in the sense that you're using expertise for the fit out? Or is it a partnership model where you could potentially share the CapEx requirement?

Operator

Yes. We will answer that question in more detail when we get there. But broadly, yes to both could be the case with partnering with someone who brings expertise, but also the ability to co fund. So that's most likely the way we'll go, but we haven't haven't absolutely definitively decided that's the only way to go. Definitely, we want the expertise.

Operator

I mean, you can look at you look at what's involved in fitting out a data center, it's not that complex. It's, you know, it's MME and it's, you know, it's it's it's it's pretty there's a very, very good supply chain of people that can do this, but for us to go to, for example, a hyperscaler or a major data center operator and say, we we've hired some people, we can do it, that'll take a while to get people over over that confidence level. So that's why doing it in partnership with someone who's tried and tested, got a track record, we think is a quicker route to the opportunity.

Speaker 5

Okay. Thank you. And then just on following up on Rob's question on kind of occupancy levels and demand. I see your urban portfolio in The UK is now close to a 10% vacancy level. You're mentioning that you've got a bit more demand there and have done some active leasing.

Speaker 5

Can you maybe break that out into kind of what's being done at the start of this year? What's been taken back for refurbishment similar to what the pie chart you gave at the update last year? Thank you.

Operator

Yes. On yes, I mean, so James Crannick, who's our UK MD, is here. Why don't you give a bit of color in terms of what's in that U. K. Urban vacancy?

Speaker 7

Yes, sure.

Operator

You'll need to pull the

Speaker 4

thing out.

Speaker 1

No, I don't

Speaker 7

know how much you might talk.

Speaker 1

Oh, okay. Well done.

Speaker 7

Yes, no, that's absolutely. So as David has already mentioned, I mean, managing the urban portfolio is different from our big box. It's more intensive from an asset management perspective. And that means that, obviously, we do see periods of elevated vacancy, particularly as we bring assets through the refurbishment and the redevelopment cycle. So as it stands at the moment, our vacancy is higher than we would like, but the teams are working hard to bring that down.

Speaker 7

And I think on a positive note, if you look at our urban vacancy, about 25% of that is either under offer or in active and advanced negotiations for leasing. And also, we have about 30% that is either about to go into or is in refurbishment at the current time. So obviously, that's going to come through. And as you picked up from the presentation, we still remain very positive about the structural drivers which support urban in the medium and longer term.

Operator

Good. I mean, and a good chunk of that UK urban vacancy is going through refurbishment or redevelopments as well. So it's not really effectively available for lease until we get further down the line. What we did what was interesting, and I think Sherman used that example of where we've taken space back. We've refurbished it.

Operator

Obviously, it's non income producing for a while and announced a vacancy, but the uplift in rents when we can create modern sustainable space in the right location is pretty substantial. Obviously, proving those high rental levels is very important. Yes, Sakari?

Speaker 8

Morning and thanks for the presentation. A couple from me, but they are linked, so I'll ask them at the same time. You showed a chart earlier in the presentation that showed, I think, the leasing done by existing space versus development space or new space and the proportion of development space was, I think, the lowest since 2016. Obviously, your retention rate is still higher, 80%. So I sort of take that to mean that actually occupiers are happy in their existing space and are staying more than necessarily moving to newer or even larger space.

Speaker 8

If that is the case, when do you see that potentially changing? And where do you sort of want or expect to see your CapEx guidance get to as and when that demand for new space picks up? And then sort of related to that, do you see any potential impact from tariffs, which I know is very unpredictable, but let's say we did enter a worst case scenario and a more sort of full blown trade war impacting exports. Do you see any impact on your logistics occupancy, but particularly around Heathrow Airport?

Operator

Gosh, quite a lot there. So on just still with the tariff point, first of all. If you look at our portfolio, we are not massively linked to global trade. Remember, two thirds of our portfolio is urban. And most of our logistics space, with a few exceptions, is around supporting inward consumption.

Operator

You chat to, you know, maybe sadly from a UK perspective, you chat with some of the rail operators at somewhere like East Midlands Gateway, we've got rail connected facility. They talk they talk about the containers, they come in they come in full and they leave empty because we're not shipping stuff out. And that is that is true for most of our portfolio. It's mostly around supporting inward consumption by UK businesses and consumers in and around the most densely populated urban areas. We've got a little bit more trade flow dependency in some of the European markets, but it's a relatively small part.

Operator

And we're not massively exposed to traditional auto, the auto sector in Germany, for example. Again, it's mostly about, small and medium sized businesses, very diverse, supporting these, I'd say, you know, wealthy congested population centers. So we're not complacent and don't ignore it, but I don't think we're not particularly concerned in our case about exposure to tariffs and potential trade wars. In terms of, I think your earlier question about pre let and development volumes, where we like to get to. There definitely was a case, by the way, you're right, that a lot of occupiers were sitting on their hands rather than moving.

Operator

We like to have a bit of churn. We want churn, particularly in our urban portfolio. And the concept, you know, was sort of touched on in that slide that I only skipped through briefly. But, you know, big box tends to be longer let, low asset management tends to be, you know, people stay there. And so the returns from a big box are much more development orientated, plus plus, you know, if you like low low cost income on those boxes.

Operator

Whereas the urban piece is much more intensively managed, lots more churn. We like to have some churn, not too much. We've got a big portfolio, so we've always got opportunities to move things around. So I think we're happy with the churn. We'd like to see, as James said, we'd like to see the vacancy rate reduce and fill up some of those units as we particularly bring that refurbished space back onto the market.

Operator

But I think what's really missing to sort of, if you like, even out those two parts of that lettings graph is just a bit more volume in the pre let market. And that's mainly going to be around logistics and possibly data centers. And that's where it's too early to say because these projects, they're massive capital investments for the occupier. If you're building a million square foot, which is not uncommon, you know, it's a huge technology investment as well as a real estate investment. It's usually part of a much wider reconfiguration of a supply chain.

Operator

And so I think what we've seen is during the during the, the last couple of years, even though these are long term strategic projects, a lot of occupiers have just been a little bit more cautious about putting pen to paper and committing to those projects. What I hope we're going to start to see soon is that there's, you know, there's this pent up demand building and therefore it gets released into 'twenty five and 'twenty six as people say, okay, the world's not going to stop turning. We do need to put in place these plans. We've held back long enough. Now's the time to start committee.

Operator

So hopefully, we'll see that pick up. We've slightly anticipated that with our own spec development. Sean mentioned it, we're doing a bit more spec actually in urban markets, but also a couple of spec schemes in big boxes in Germany because we just think we've got a really good product and very little supply and good underlying demand.

Speaker 9

Thanks. Good morning. It's Tom Massen at HSBC. Just a couple of questions. First one on the new data center fully fitted ambition.

Speaker 9

The 8% to 12% yield on cost is sort of the same as you reported versus the powered shell approach. Should we expect capital returns and therefore total returns to be higher from the fully fitted ambition? Because I suppose otherwise it's optically very similar return, but suspect that the fully fitted is clearly higher cost of capital.

Operator

Yes. So we're obviously using the same we're using our costs, our capital. We the main attraction you're right, and it's hard to generalize because 8% to 12% is quite a range. And as I said earlier, very great variety of different projects. But fundamentally, 8% to 12% on a much larger amount of capital is whatever you capitalize the finished income at and probably a fully fitted income producing data center will be slightly higher yield when it's finished than, say, just the core shell real estate.

Operator

But nonetheless, the volume of capital deployment and therefore the volume of capital upside, the value creation is just a very much bigger number if you do fully fit it. Do you want to add anything to that, Sean?

Speaker 4

The only

Speaker 1

thing I was going to add is, I think we must be very careful because a lot depends on the specific situation, depends on the cost of land. And particularly, we're talking about doing this in the core availability zones, which means kind of in and around the urban areas where the land price is going to be higher than trying to do it in parts of Europe where frankly there's very few people live. But taking all those caveats into account, you're looking at profit on costs north of 50% and probably north of 60% or 70% in some cases. So that's very, very firm. When David talks about 50% maybe 100 on a powered shell, but eight to 10 times that on a fully fitted basis.

Speaker 1

That's a phenomenal percent absolute profit and percentage profit if we can deliver it on those cases.

Speaker 9

Makes sense. Thanks. If I could just ask a second one. Just within the property disclosures, I think there's GBP 85,000,000 or so of rent due to expire or break within the next twelve months. If we sort of broadly assume stable retention rates, does that create a slight occupancy headwind in 2025?

Speaker 1

I think as I hopefully was trying to say during my presentation, let me do that. One of the things I think this business has done terrifically well over the past twenty four months is capture that reversion and keep whilst keeping the retention rate really high, and where there's been opportunity to re let either potentially directly or through refurbishment and then re letting, we've done that terrifically well as well. So in our mind that we've got terrific real estate, as David talked about, it's part of our model, which is to own really good estates, really good space and capture the like for like growth. And I think we can see really strong growth coming through here. So I've got to say, it's been a concern that has been voiced by people to us.

Speaker 1

But I'd say if you look at the metrics, you look at our like for like capture and all the things that kind of go around it, I don't feel particularly exposed. I don't know if Mark or James you wanted to add anything.

Operator

Any more questions? Right. We go to the conference line next, I think.

Speaker 1

Sorry, those won't be back, but we'll come back.

Operator

We'll come back.

Speaker 10

This is Suraj Goyal from Green Street. Just one question from me on the occupier market. So it looks like the development margins pretty reasonably attractive across the board and maybe suggest a slight pickup in development activity in the sort of near midterm. And then if you couple that with sort of vacancy potentially having peaked, would you say that if we do start to see that pickup, the market would be well placed to absorb the development? And would you still sort of expect sort of ERV growth of 3%?

Operator

Yes. I mean, we've for quite a while had this guidance range of 2% to 6% for ERV growth, which, let's say, averages 3% to 4% depending on mix, slightly stronger in urban than in big box. But we're comfortable that is a very long term sustainable number, very difficult to predict in short term periods what it's going to be. We clearly massively blew out those numbers in the pandemic and slightly softer since then, but we're still in the right range. We're comfortable that we should at least do those numbers because, you know, as I've been saying pretty consistently previously, they're, you know, they're just not making a lot of land.

Operator

Land is not easily released, whether it's greenbelt or even urban, where you've got these competing uses. So, yeah, we're pretty we're pretty comfortable that the run rate of take up of new logistics space will support a return to some much higher development volumes for logistics. And urban, it's all around, can we get the sites, can we position them, can we make the product available because in many of the urban markets, particularly in Europe, we're creating a product that just doesn't exist. We're introducing a new product. A lot of German businesses own their own very inefficient space.

Operator

So when we go into market, we get a piece of brownfield land, we redevelop it, we create a, you know, a secure well run, well laid out warehouse park, they're getting a much more efficient operation from it. So that's why we're very confident that there's lots of untapped demand still to go there. Does that cover them hopefully? Thanks. Right, let's go to the conference line please.

Speaker 11

The first question from the phone comes from the line of Frederic Renard, Kepler. Please go ahead.

Speaker 12

Hi, good morning guys and thank you for the presentation. Just to come back on the Delta Center opportunity. So you showed a fully fitting model of growth and the yield is the same than what you could achieve on a partial model. But my question would be, what about the depreciation for the full year for this model? So should we look at the 8% to 12 as a growth yield versus a net yield for the other model?

Speaker 12

That would be the first question. And then on the second question, you still depict a very good picture for London, but as was pointed out, your vacancy rate is around 10% now. What does it impact in terms of your rent incentives? Do you give a bit more rent incentive to your tenant? Thank you.

Operator

Sure. Maybe I'll just ask the vacancy one and maybe in the sense, maybe you can pick up on the the first bit. The, I think if you look at our incentive packages, they they they haven't really moved very much. I think it's moved up, you know, less less than less than 1%. So we're still seeing incentives around 6% or 7%.

Operator

It does vary a little bit by market. But, no, one of the one of the pleasing things is that, you know, where we where we have space and we've and we've got an occupier, you know, lined up to take it, people are generally willing to pay the asking price. So very, very slight increase in incentives, but nothing very material. And encouragingly, we've been able to prove and push on rental levels with the deals that we've been doing in 2024, and I'm sure that will continue in 2025. Schonman?

Speaker 1

Yes, Fred, if I try and answer what I think was the question. On the fully fitted model, what we're talking about doing is fitting out things like the chillers, the backup generator. We're not buying the tech, we're not putting the tech in. And as one of the earlier questions I think asked, we're looking to then lease this or pre lease this in its entirety on a triple net basis. So we are underwriting we would be underwriting a wider yield than a pure powered shell to take into account some of that slightly different risk profile.

Speaker 1

But it's still a net yield to us. There's nothing else that we'd be taking into account. Was that the question?

Speaker 12

Yes, that was the question. Thanks.

Operator

Thank you.

Speaker 11

The next question comes from Jonathan Koonover from Goldman Sachs. Please go ahead.

Speaker 13

Good morning. Thank you for taking my questions. Tu, if I may. Just to go back on DCs as well. On the fully fitted model, obviously, you've highlighted on Slide 32 that you had three pools of assets you had where those are secured with power before 2027, the reserve until 02/1930 and then the ones where you have power later than that.

Speaker 13

Can you help us understand where the fully fitted fits in, in terms of timing given those timeline? Is it before 2027? Is it where you have power between 02/1930? Or is it post 02/1930 that you expect to do these fitted? What is the first project in fitted?

Operator

Well, in broad terms, we are looking at current near term projects for fully fitted. So it's not a question of waiting till 02/1930 and beyond. We've got some particular projects and opportunities we're looking at now, which are, you know, would be similar to this the timeframe for a powered shell. The only thing I would just high, you know, just highlight just to mention and give a little more color on that is clearly if you do a if you do a fully fitted, it's a longer journey from when we start construction to actually completing the fit out as well as the building, and therefore when the project becomes income producing. So you're going to be adding twelve or eighteen months to the construction time, at least I would say before you get your income.

Operator

But again, this is all about scale of the value creation opportunity rather than the near term income impacts.

Speaker 13

And does that mean that it's a way for you to accelerate the CapEx that you're opening into data centers? Or is it just a question of demand for powered shell that is perhaps not as strong as what you thought initially?

Operator

Sorry, say that last bit again.

Speaker 13

The question is, is it a way for you to accelerate CapEx? Or is it you're shifting to fully fitted because demand for power channel is not as strong as you thought initially?

Operator

There's well, it's I think as I said during the presentation, the real reason why we're looking at this is that it's an opportunity to create a lot more value in totality. It's fair to say that fully fitted is a more flexible, I'd say doable model across more European markets. We found that powered shell demand is exceptionally strong in Slough, because frankly, we've got such a unique replaceable asset there that anybody who wants to plug into the network needs to be there and Powered Shell is all we've been willing to offer. In other markets across Europe, it's a bit patchier. Given a choice, most operators would rather own their facility, and there's probably a bit less demand for the powered shell model.

Operator

It's not impossible, but there's less demand for powered shells. So it's another reason why the fully fitted model may well be the best route and the quickest route to extracting value from the opportunity set we have.

Speaker 13

Okay. Very clear. One follow-up just on the sort of take up and net absorption. Obviously, you had strong take up this year, but there was also space return in equal number to take up on the existing space. Can you perhaps give a bit of color on the space being returned?

Speaker 13

Is it from 3PLs? What type of operators? And I understand also it's not from space taken back from redevelopment, if I read you for that, right?

Speaker 6

Yes. Sure.

Operator

No, Shimon covered that in his in part of his presentation. But why don't you just mention that again, the take back? Yes. So I

Speaker 1

mean, look, if there was one particular example on Tethr of the take back, which was the which was referred to a global media company that chose to give us back their space in North London, which actually we see is a really interesting opportunity. It's three buildings. We've had multiple viewings and we'd hope to set some interesting rental levels on it this year. But that in particular accounted for about 50 basis points of the of vacancy. So, you're almost over half the step up in last year's vacancy.

Speaker 1

Otherwise, if you kind of get beneath the kind of the special cases, it was there was nothing in particular that was different about that. But there was one special case that affected last year. That

Speaker 13

was particularly big. Yes.

Operator

And there's I mean, there's also the Matches fashion unit that came back in part Royal. So Premier Park Matches fashion went insolvent, that unit has come back to us. That's a great opportunity for redevelopment. So if you actually took out that Matches fashion unit and the studio operator that Shomen was alluding to, I think you'd say that the level of take back was pretty normal and very similar to last to the year before.

Speaker 14

Okay. Very clear. Thank you.

Operator

Okay. Two

Speaker 11

more. The next question comes from John Wong from Kempen and Co. Please go ahead.

Speaker 14

Hi, good morning. Thank you for taking my questions. You were just talking about the strong sentiment in leasing activity. At the same time, your balance sheet has much more headwind now. But your expected development CapEx has not materially changed compared to, say, last year despite the relatively short lead times in developments.

Speaker 14

Could you perhaps elaborate on that?

Operator

Sharmen, do you want to cover that?

Speaker 1

Yes. I think we tried to talk about the balance sheet has got the capacity to grow. We've got billion plus of available liquidity. In terms of the development pipeline, as I think I talked about, it's a mixture of things. There are fewer large very, very large pre lets around.

Speaker 1

There are deals we've done. We've say, we signed one of the largest pre lets in The U. K. Last year at Northampton. And we're looking at several now.

Speaker 1

The Investor Committee in January, we looked at several. But we have to say that the time from inquiry through to signing is longer than we might have liked and it is just a feature of the market over the last eighteen months or so. We have started spec schemes because particularly where we see pockets of demand on our standing estates, which makes us feel very confident about starting, particularly on the urban side with a couple of big box schemes as David mentioned. And so where we are, we are taking that risk run spec to keep to kind of keep those development volumes high. But really, we do want those to convert more of the inquiries into actual pre lets through the course of this year.

Speaker 1

But the yes, we're positive around the sentiment change that we saw two, three months ago.

Operator

I think the reality is even if the sentiment converts into more pre lets that we signed this year, which we hope will be the case, the likelihood is the amount of time on-site will be this year will be relatively limited. So the ability to spend significant amounts of additional capital this year, it's limited. So we think hopefully demand will ramp up. We'll sign more pre lets this year, but the CapEx will start ticking in soon after then and will it most likely impact '26 rather than '25.

Speaker 14

Okay. That's clear. And then just one more on data centers. I appreciate the difference in the absolute investment point but with similar returns, it's just that there's not much of a difference in risk premium assigned to, say, execution or obsolescence risk of the fit out. What's your thought on this?

Operator

I thought well, our thought is that we're going to approach this to the way we approach every capital investment decision, which is we're looking for an attractive risk adjusted return. And we're not getting into the specifics of a deal that we can't talk to you about just yet. There's no point in speculating about that. But what we can say is, we're looking at the returns, we're looking at an evaluation of the risks involved, very clear what sort of return we want to make. And the overall value creation opportunity is sufficiently large that this is getting some serious energy and attention.

Operator

And we'll definitely share more details when we can. But I don't think there is a one size fits all answer to that question. Any more questions?

Speaker 11

The next question comes from Paul May from Barclays. Please go ahead.

Speaker 4

Hi guys, couple of ones for me. Apologies, sort of similar to what we had, but more commentary around the outlook seems very positive, but some of the overall operational figures, for example, vacancy higher since year end 'twenty one over every period and is lower than Q3 'twenty four, like for like growth has been slowing, pre met's at the lowest level. But I think I couldn't recall it maybe ever probably 0.2 not being quite as strong. And given market vacancy rates are expected to grow and take up as weekly year on year, I think CBRE has prime rents in London warehouses flat since Q2 'twenty three. Just wondered what should we take away from the numbers?

Speaker 4

What numbers should we be looking at to give us confidence in the operational outlook that you have? Because the sort of data would suggest potentially slightly otherwise in terms of the overall numbers and the headline numbers. I've got a second question after that. Thank you.

Operator

Sam, do you want to

Speaker 1

I think so. Well, let me start. Look, the I think we've talked a couple of times around the OcPal market this morning. The reality is we've had a normalization in the market since 2021, '20 '20 '2. And I think regarding that is that the benchmark is the wrong thing in our view.

Speaker 1

When When you kind of look at the conditions in 2024, I showed you on the chart where I showed you the kind of difference in activity levels by month. We had some months who were really strong, months who were less strong. I think that we take it actually as a positive. In a year like that, we delivered very healthy levels of leasing activity, really healthy levels of reversion capture. And importantly, in terms of momentum into 'twenty five, we finished the year really strongly.

Speaker 1

So all of that in our minds shows look, it's a market that is kind of working through some of what happened in the pandemic, but it's in good shape to be able to kind of recover from here. And as I've said a couple of times, if we can convert some of the inquiry levels into deal activity, yeah, we can actually start to drive the kind of that those development volumes, you know, pretty strongly. And if we performed as well as we did last year, it doesn't take a lot to change it. So I think we just can be realistic in terms of it's a market where there's things to do and we're just going to make sure that we convert those opportunities that we can find.

Operator

Yes. I mean, and the other thing I'll just add, Paul, to that is, again, remember, most of the market data you look at will be market wide, big box logistics. Two thirds of our business is not that. And I don't know whether you've got better sources. We find it very difficult to get market wide data on urban markets.

Operator

So what we're telling you is what we're seeing and what's coming from our conversations with occupiers and local agents and teams on the ground. The proof of the pudding will be in the eating. We'll see what happens. But our expectation is that occupancy will improve as we go through this year.

Speaker 4

Okay. So just to say that lastly, so occupancy rates improving through the year and pre Lex also improving through the year, would that be the expectation?

Operator

We're not going to give you a forecast of our year end vacancy rate. Good try, though.

Speaker 4

Okay. And sorry, just the second question on the leverage and the balance sheet. I think you've worked hard to get your net debt to EBITDA down to towards a reasonable level in a European context, still high on the global context. Just wondering what gives you the confidence that this should move higher? Because obviously if you are investing that will move higher.

Speaker 4

I just wonder what your thoughts were around that and how much the net debt to EBITDA is a focus or is it all about LTV which has become less relevant at least in our conversations with investors? Thank you.

Speaker 1

Sure. Look, I'll give you an answer that I think I've already given for several years, which is there is no single one debt metric that is the right one. You've got to look at them all. You've got to look at low to value. You've got to look at the debt to EBITDA, which is the debt which is effectively is the debt yield and you've got to look at the interest cover, which frankly people stopped looking at five or so years ago.

Speaker 1

Our covenants are all set against LTV. So frankly, that is the relevant one to kind of focus on. I think there if you look at kind of where we are rated, you look at kind of where we're rated against European population. I've said this before, you can take your pick. You can have a high loan to value and a lower net debt to EBITDA or you can have our balance sheet, which is 28% levered and 8.5% net debt to EBITDA.

Speaker 1

I know which one I would pick every day of the week because a high yield is no sign of a good set of assets and it's the sustainability of that leverage in the balance sheet that matters. David talked about kind of the approach we have around the portfolio management. It's the same thing on the balance sheet. And so just having lots of high yielding assets that artificially depress your net debt to EBITDA doesn't really get you very far. And the companies in Europe that have outside of our sector in fairness that have lower net debt to EBITDA, I would question whether those loan to values are sustainable or not.

Speaker 1

So I think it's not a simple answer, Paul. We look at all of them, but I'm pretty comfortable as to where we sit in terms of the balance sheet today. And it's got more than enough funding available for what we've got in front of us. And hopefully, as David says, hopefully things do start to pick up. We've got the firepower we need to capitalize on that.

Speaker 4

I agree. It's multiple factors. The question was at 8.6% you mentioned that you're happy today. Would you be happy seeing that 8.6% move to 9% move to 9.5% move to 10% again? Or would you prefer to keep that around 8.6 in which case it implies there's actually not that much funding available or leverage available to invest?

Speaker 1

We've been pretty clear that we like our A minus rating. And that is that requires a net debt to EBITDA around the nine times area plus or minus half a turn. Now that's quite a lot of flexibility, particularly when you've got the EBITDA growing through that period as well. So I think you as I said, you've got to kind of look at the whole thing and flex every piece of it to really understand what the firepower and the opportunity set looks like.

Operator

Yes. Thank you. I don't talk to the rate agency the way Sherman does. So you might kick if you were closer, if you might kick me on the table here. But I think what just to add a little bit more color on that, we're certainly not planning on having our net debt to EBIT day EBITDA go in the wrong direction by, for example, buying a whole load of land that's non income producing sticking on the balance sheet.

Operator

If it were to go up temporarily because we happen to have signed up a lot of pre lets and it caused a temporary increase whilst we're waiting for those pre lets to become income producing. That would be a high quality problem to have and not something I'd be too worried about. I'm not sure about you, Shimon.

Speaker 1

No, exactly right. As I said, the EBITDA is the thing to keep an eye on it, which is the thing that will which for all the things we talked about is a huge opportunity to capture.

Operator

Yes. Okay. Any more questions?

Speaker 11

And the last question for today's call comes from Paul Gorrie from Citi. Please go ahead.

Speaker 6

Hi all. Just one more follow-up on the data centers from me. The Slide 32 with the breakdown of the gigawatts is very helpful. Can I just ask on the split between secured, reserved and application in progress, how much of the kind of reserved and applications in progress is dependent on, say, the either upgrade or other kind of infrastructure products or projects, I should say? And how much is just kind of you going through the process of applying for power?

Speaker 6

I guess, I'm trying to gauge how much is kind of in your control and how much there's maybe external factors that impacts delay, make it more difficult on the power side?

Operator

Paul, it's a great question. And the answer is there's a whole mix. I mean, most people who know in this who are in this sort of power business, it's a moving it's always a moving target. We to your specific point, there is some some of that capacity is related to Slough and the Iver upgrade. If you're looking for something more encouraging on that front, we know that this week the planning permission for the Iveragh upgrade was granted by Buckinghamshire County Council, which is first time we've actually had a firm date in mind.

Operator

So that is that will be there will be some of that powers related. So it's secured, we have it, we're right in the right place in the in the queue for that. We now need that upgrade to be delivered, which will be which will happen before 02/1930 is our current understanding. And then there's a whole bunch of other ones that are at various different stages of certainty around the group.

Speaker 6

Okay. Yes, that's helpful. Thanks.

Operator

Claire's got some on the webcast, I think, or on the web line, web chat.

Speaker 15

I'll try and group these in the interest of time.

Operator

Well, we've set out a slide showing the breakdown by years. So that is what's available to us. It will potentially slightly increase as ERV growth continues. But we've given a slide which gives you the breakdown of ERV available through reversion capture.

Speaker 15

Thank you. And then I think that's working now. On development CapEx, can you give the split between on-site and new constructions on the million of development CapEx?

Speaker 1

So of the million, about million of that is infrastructure, we think, this year. And of the rest, it's probably half and half into the stuff we already had on-site and half that started.

Speaker 15

Thank you. Couple more questions on data centers. Would you be looking to transfer the data center assets into a separate subsidiary or fund something like you've done with SELP?

Operator

Possibly, but we'll cross that bridge when we get closer to it.

Speaker 15

And then another one, DCs. Can you explain a little more about what you mean by the increased operational risk associated with data centers?

Operator

Well, we didn't talk about operational risk. I think what we're talking about is the is just the the additional complex associated with installing all of that equipment. And that's something that we don't think is too difficult. But we do think in terms of credibility with customers, we're right to be doing that with people who have got a tried and tested track record. Thank you.

Speaker 15

Solar, what percentage of the roof space is covered with solar at the moment? When you install when you enter into it or when you install it, do you enter into agreements with customers to buy that? And what's the yield on cost for those projects?

Operator

Look, it varies enormously. We've got all kinds of things. I can't tell you it's quite a low percentage of the total roof space that we have, probably 10% or 15% in totality. What we what we'll be doing, because we've got a very large established portfolio, we've been doing over the last few years is retrofitting solar, where we can. That's not always straightforward because in The UK, the, the occupier is responsible for the roof, so you can't interfere with that.

Operator

On the continent, it's a bit easier. Some markets, it's very easy to supply the excess power you generate into the grid and get a sensible price. In other markets, it's not. So it's very hard to give you a one size fits all. But we would say we'll be looking for a high single digit yield on cost where we do this.

Operator

We're looking to do it more actively on all new developments, again, where there's an attractive feed in tariff available from the local marketplace. So I think you'll just see it continue to grow, but it's offering a sensible return. Some cases, we do a power purchase agreement and the customer pays for the energy. In other cases, we simply charge them additional rent, a flat rate for it. So it's a very wide variety of different practices.

Operator

But we're very pleased that we're able to double the amount of solar we had installed in the portfolio during 2024. We've now got 123 megawatts we're looking to add to that as we go forward.

Speaker 15

Thank you. Two last ones. One for you, Shimon, on capitalized interest. Can you confirm what rate you are using to capitalize interest?

Speaker 1

Yes, of course. So we use a variety of rates between kind of 3.55.5% as we talked about probably two years ago now. You capitalized the marginal rate at the point which you start a project and that's been locked in for the duration of that project. As we go forward from here, obviously, with rates kind of, well, euros certainly are a bit lower, I'd expect that number to come down over the next couple of years.

Speaker 15

Thank you. And one final question. Given the amount of cash and capacity on the balance sheet, would you consider doing share buybacks?

Speaker 1

Look, I think David talked about our approach to disciplined capital allocation. So obviously, we have to have all options on the table at all times. Having said that, Dave has also laid out, I think, a really exciting sort of array of opportunities both across the development book on industrial logistics and a phenomenally exciting opportunity on data centers. I think with that in mind, I think we find it using capital to buy back shares would be the wrong option to take at this point in time. Investing that capital into those opportunities we think will create the better value for shareholders going forward.

Operator

Okay. Well, thank you again, everybody for joining us here or online. Have a great day and enjoy the weekend when you get to it. Personally, I can't wait.

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Earnings Conference Call
SEGRO H2 2024
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