OREANDA-NEWS. Fitch Ratings has affirmed SEGRO plc's (Segro) Long-term Issuer Default Rating (IDR) at 'BBB+', senior unsecured rating at 'A-', and Short-term IDR at 'F2'. The Outlook is Stable.

The ratings reflect SEGRO's high quality logistics property portfolio, its gradual deleveraging, albeit with limited headroom at the current rating level, and its stable rental income. The refocused portfolio towards high quality logistics assets in prime locations continues to perform well and benefits from declining vacancy rates and moderate rental growth.

Greater diversification in their continental portfolio has been achieved across assets and geographies through the use of third-party capital in the move towards larger logistics assets. A significant share of assets (27%) is located in joint ventures (JVs); however, this is mitigated by the still appropriate unencumbered assets cover around 2.0x at the fully owned group level. This cover is in line with our expectation for an investment grade rating, although without significant headroom.

Fitch expects the defensive rental profile to provide a stable EBITDA net interest cover (NIC) above 2.4x (including JV dividends) over the next three years, supported by well-matched lease and debt maturities. We expect the Fitch adjusted loan-to-value (LTV) to remain below 45% as investments in developments and in JVs are offset by proceeds from disposals in 2015.

KEY RATING DRIVERS

Completing Non-Core Assets Disposals
SEGRO had successfully sold GBP1.5bn of non-core assets as at end-Q115 ahead of schedule four years after announcing their strategy to divest GBP1.6bn of assets by 2016. Further assets sales will be balanced with acquisitions and new developments as part of their recycling strategy. The non-core disposals have focused SEGRO's portfolio principally towards prime London and Thames Valley logistics and warehouse space.

Deleveraging Target Achieved
Leverage continued to fall in 2014, supported by lower yields, and reached management's LTV target of 40% (including development property and proportionally consolidated JVs). Fitch's corresponding adjusted net LTV (excluding development property and including proportionally consolidated investment property and net debt in JVs) fell to 44.9% at end-2014 from 49.3% at end-2013 and is considered consistent with the ratings, albeit without significant headroom.

Remains Largest UK Logistics Landlord
SEGRO remains the largest UK landlord of commercial and industrial space measured at square meters. Its GBP3.6bn fully owned property portfolio is focused (around 80%) on the UK and has critical mass in its core London area, which is arguably the most liquid and stable in Europe. SEGRO's additional GBP2.5bn of assets under management (AUM) in its JV portfolio, whereof SEGRO owns 50%, are located in continental Europe and in the UK. Combined these portfolios are one of the largest and best located industrial portfolios in the UK and makes SEGRO a key player in Europe.

Joint Venture Structure
Property assets held in JVs remain a significant share of total assets (27% at end-2014) but are mitigated by the still appropriate unencumbered assets cover around 2.0x at the group level, which is in line with our expectation for an investment grade rating, although without significant headroom.

The JVs now provide dividend income of GBP22.2m and further GBP11.8m in sustainable income in the form of management fees. SEGRO continues to invest in these partnerships, but as a proportion of assets the investments in JVs are counterbalanced by investments in its fully owned portfolio and by dissolving smaller JVs, the most recent being Big Box in June 2015.

Expanding SELP Joint Venture
Following the creation of the Segro European Logistics Partnership (SELP) joint venture in 2013, SEGRO has grown the SELP portfolio to GBP1.3bn at end-2014. The creation and subsequent sale of part of the SELP portfolio to PSP aided deleveraging and introduced third-party capital in their continental portfolio, while assisting SEGRO to achieve the critical size where their market position is not as strong as in the UK.

As a result of the transactions, SEGRO's geographical diversification (measured as percentage of their total portfolio) was reduced, but is now growing again. Fitch expects the international diversification to continue, in the SELP JV and in direct investments, and this will require additional investments over the coming years.

More Development
SEGRO has stepped up their development pipeline following high investor interest in logistics properties, which has pushed down yields on income-producing investment properties to levels where acquisitions become less attractive. Fitch expects development to grow further as SEGRO moves from acquisitions to development to benefit from the yield differential. Following years of limited development across the sector SEGRO is well placed to benefit as one of the few large players that has the financial headroom and an available land bank to increase development.

Moderate Speculative Development
Development capex increased 41% in 2014 with 25 completed projects. Committed capex in their development pipeline increased to GBP134m in 1H15 from GBP108m at end-2014 and GBP88m in 2013, with 44% pre-let at end-2014 compared with 60% at end-2013. Fitch views the overall size of development as moderate (well below 15% of their portfolio) and the inherent risk of a higher proportion of speculative development is to some extent mitigated by being mostly "edge-of-town" industrial property with short construction time and thus giving SEGRO more market visibility.

Long Leases, Lower Vacancy
SEGRO's high quality portfolio had an average lease length of 8.6 years (6.7 years to first break) at end-2014, with a significantly improved vacancy rate (down to 6.3% at end-2014 from 8.5% at end-2013), close to the lower bound of SEGRO's target vacancy rate of 6-8%. Management expects higher volatility as more speculative development is completed as was the case in 1H15. Fitch expects the low vacancy rate to support development plans and considers the tenant profile well diversified with no tenant representing more than 5% and the largest 20 tenants representing 27% of rents at end-2014.

Sound Asset-Liability Match
The long lease length secures visibility on future incoming cash flows and SEGRO matches this with a conservative approach towards debt obligations with an average maturity of 6.9 years (including debt in JV) at end-2014 and even longer, excluding JV debt. The average maturity is longer than most peers and some of bonds issued extending as far out as 2035. This is an important credit positive for a capital-intensive industry as interest cover can be protected.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

-Capex at 5% of portfolio value per year over the rating horizon
-Disposals funding roughly half of capex through asset recycling, below previous years due to limited non-core assets.
-Continued international expansion with LTV in JVs gradually rising towards group LTV.
-Low single-digit rental growth on existing portfolio
-Stable net interest through the use of derivatives, excluding effects of less interest received from the PSP receivables and on cash.

RATING SENSITIVITIES

Future developments that may, individually or collectively, result in negative rating action are:
-Deterioration in EBITDA NIC to below 1.75x on a sustained basis
-Fitch adjusted LTV (net debt/investment properties, excluding development property and including proportionally consolidated investment property and net debt in JV) above 45% over the cycle on a sustained basis
-Liquidity score below 1.25x (committed undrawn facilities plus cash divided by debt maturities and committed capex) over 18-24 months
- Deterioration in unencumbered asset cover to significantly below 2.0x on a sustained basis, which may affect the IDR and the senior unsecured rating uplift

Future developments that may, individually or collectively, result in positive rating action are:
-Material improvement in SEGRO's sector or geographical diversification
-Increase in Fitch adjusted EBITDA NIC above 2.5x
-Fitch adjusted LTV (net debt/investment properties, excluding development property and including proportionally consolidated investment property and net debt in JV) sustainably below 30%

LIQUIDITY

SEGRO recently announced additional credit facilities signed post 2Q; amounting to GBP150m. Taking these facilities into account together with available facilities and unrestricted cash at 1H15 SEGRO would have GBP448m of available liquidity, which covers more than its committed capex and maturing debt for the next 12 months.