SEGRO PLC ANNUAL REPORT & ACCOUNTS 2017 SEGRO PLC | ANNUAL REPORT & ACCOUNTS 2017 OVERVIEW IN THE RIGHT PLACE FOR THE FUTURE 01 AT A GLANCE 02 STRATEGIC REPORT BUSINESS REVIEW 04 CHIEF EXECUTIVE’S STATEMENT 10 MARKET OVERVIEW 13 OUR BUSINESS MODEL 16 OUR STRATEGY 20 OPERATIONAL REVIEW 27 10 -12 FINANCE REVIEW 33 CHIEF EXECUTIVE’S STATEMENT KEY PERFORMANCE INDICATORS 40 2017 has been another year of delivery for SEGRO and we are reporting strong financial, RESPONSIBLE SEGRO 42 operating and portfolio performance metrics. 13-15 PRINCIPAL RISKS 54 MARKET OVERVIEW The economic environment and GOVERNANCE structural trends are supportive across our major markets. CHAIRMAN’S THOUGHTS 62 BOARD OF DIRECTORS 64 LEADERSHIP 70 EFFECTIVENESS 75 ACCOUNTABILITY 77 RELATIONS WITH SHAREHOLDERS 82 REMUNERATION 84 REMUNERATION POLICY 99 DIRECTORS’ REPORT 104 STATEMENT OF DIRECTORS’ RESPONSIBILITIES 106 FINANCIAL STATEMENTS 27-32 INDEPENDENT AUDITOR’S REPORT 108 OPERATIONAL REVIEW TO THE MEMBERS OF SEGRO PLC We have focused on ensuring that our GROUP INCOME STATEMENT 114 portfolio and our developments provide high quality warehouse space for our customers in GROUP STATEMENT OF 114 Europe’s major cities and logistics hubs. COMPREHENSIVE INCOME BALANCE SHEETS 115 STATEMENTS OF CHANGES IN EQUITY 116 CASH FLOW STATEMENTS 118 NOTES TO THE FINANCIAL STATEMENTS 119 FIVE-YEAR FINANCIAL RESULTS 177 FURTHER INFORMATION 42-53 FINANCIAL INFORMATION 178 RESPONSIBLE SEGRO We are committed to operating our business SHAREHOLDER INFORMATION 179 and delivering our strategy in the most sustainable way possible. GLOSSARY OF TERMS 180 62-63 CHAIRMAN’S THOUGHTS The Directors present the Annual Report for the year ended 31 December 2017 has seen the Company successfully 2017 which includes the Strategic Report, Governance report and audited continue to build on the strategy set out Financial Statements for the year. References to ‘SEGRO’, the ‘Group’, the in 2011. ‘Company’, ‘we’ or ‘our’ are to SEGRO plc and/or its subsidiaries, or any of them as the context may require. Pages 04 to 60 inclusive, comprise the Strategic Report, pages 104 to 105 inclusive comprise the Directors’ Report and pages 84 to 98 inclusive comprise the Directors’ Remuneration Report, each of which have been drawn up and presented in accordance with English company law and the liabilities of the Directors in connection with these sections shall be subject to the limitations and restrictions FOR MORE INFORMATION ON SEGRO’S provided by such law. ACTIVITIES AND PERFORMANCE, The Annual Report contains forward-looking statements. PLEASE VISIT OUR WEBSITE: FOR MORE INFORMATION For further information see inside back cover. WWW.SEGRO.COM/INVESTORS WITHIN THIS REPORT 01 OVERVIEW STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS IN THE RIGHT PLACE FOR THE FUTURE Our warehouses, located in Europe’s major cities and transport corridors, play an integral role in ensuring that our customers can service their customers effectively and efficiently. Changes in technology and consumer habits are significantly influencing demand for high quality warehouse space, particularly in urban areas. We have positioned our portfolio to benefit from this demand, but we are mindful that change is constant and we are continually looking ahead to make sure our business is well placed for the future. A PORTFOLIO A CULTURE OUR RESPONSIBILITY POSITIONED FOR LOOKING TO FOR THE FUTURE THE FUTURE THE FUTURE FIND OUT MORE ON PAGES FIND OUT MORE ON PAGES FIND OUT MORE ON PAGES PAGES 04-05 PAGES 06-07 PAGES 08-09 02 SEGRO PLC | ANNUAL REPORT & ACCOUNTS 2017 AT A GLANCE THE RIGHT ASSETS IN THE RIGHT PLACES OUR OUR TOP 20 OUR PRODUCTS: CUSTOMERS: PORTFOLIO: Our top 20 customers represent headline rent of 1 £115 million in aggregate, 32% of the Group’s 8 total headline rent at 31 December 2017 7 1. Deutsche Post DHL 6 2. Amazon 2 3. FedEx 5 BIG BOX WAREHOUSES 4. Worldwide Flight Services (GENERALLY MORE THAN 10,000 SQ M) 5. Royal Mail 4 Demand for large warehouses for inventory storage and regional, 3 national and international distribution is growing, particularly 6. British Airways amongst retailers. The cost of efficiently servicing both a store 7. Sainsbury’s CUSTOMER TYPE BY network and delivery of items direct to homes and offices, along HEADLINE RENT with competitive pressures from discount and online-only retailers, (SEGRO SHARE) has forced companies to restructure their supply chains. 8. Equinix 1. Transport and logistics 23% 9. DSV 2. Food and general 18% 10. Booker Belmont manufacturing 11. La Poste (DPD) 3. Retail (physical 18% and online) 12. Mars 4. Post and parcel delivery 11% 13. Leroy Merlin 5. Technology, media 8% and telecoms 14. ID Logistics 6. Wholesale and 8% retail distribution 15. Virtus URBAN WAREHOUSES 7. Services and utilities 7% (GENERALLY LESS THAN 10,000 SQ M) 16. Geodis 8. Other 7% Proximity to major urban areas is of critical importance to many 17. Wincanton Total 100% occupiers: retailers and parcel delivery companies must distribute goods efficiently to both store networks and homes and offices 18. Yoox Net-a-Porter (the ‘last mile delivery’); businesses need premises which are easily accessible for both their customers and their employees; 19. Hermes data centre operators need to be located close to users of the 3 1 data (particularly financial services) to ensure the fastest possible 20. Marks & Spencer data transfer speeds; and air cargo companies must be located close to major airports. 2 ASSET TYPE BY VALUE (SEGRO SHARE) ALTERNATIVE “HIGHER VALUE” USES OF INDUSTRIAL LAND 1. Urban warehousing 55% 2. Big box warehousing 41% The location of our urban warehouse estates and land holdings, close to major population centres, makes them ideal for 3. Higher value uses 4% other, higher value uses, such as car showrooms, self storage of industrial land facilities and trade counters which need to be easily accessible Total 100% by employees and customers. These will usually form a small element of a larger urban warehouse estate. 03 OVERVIEW STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS OUR OUR MAIN PORTFOLIO: LOCATIONS: 6 1 5 4 3 2 HAMBURG GEOGRAPHICAL MIDLANDS SPLIT BY VALUE AMSTERDAM BERLIN POZNAN WARSAW LONDON & SOUTH (SEGRO SHARE) ŁODZ EAST ENGLAND DÜSSELDORF LEIPZIG 1. Greater London 40% FRANKFURT KATOWICE 2. Thames Valley 18% PRAGUE PARIS 3. Midlands Big Box 10% MUNICH 4. Southern Europe 14% – France 8% – Italy/Spain 6% LYON MILAN 5. Northern Europe 12% BOLOGNA – Germany/Austria 10% MARSEILLE – Belgium/Netherlands 2% 6. Central Europe 6% ROME BARCELONA – Poland 5% – Czech Republic/ 1% MADRID Hungary Total 100% MAP KEY: GREATER LONDON NORTHERN EUROPE Big box warehouses Providing modern space in Delivering quality big box and a supply-constrained market. urban warehouses in major cities. Urban and big box warehouses PAGE 27 PAGE 30 THAMES VALLEY SOUTHERN EUROPE Providing modern space Increasing development in France; for growing businesses. building scale in Italy and Spain. PAGE 28 PAGE 31 UK BIG BOX LOGISTICS CENTRAL EUROPE WAREHOUSES Making progress in Facilitating efficient retailer and a competitive market. manufacturer supply chains and PAGE 32 parcel delivery. FOR MORE INFORMATION SEE PAGE 29 OUR OPERATIONAL REVIEW PAGES 27-32 04 SEGRO PLC | ANNUAL REPORT & ACCOUNTS 2017 A PORTFOLIO 3 1 POSITIONED FOR THE FUTURE 2 CURRENT PORTFOLIO 1. Big box warehouses 41% The shape of our portfolio is driven by our 2. Urban warehouses 55% strategy to own high quality warehouse 3. Other 4% assets capable of generating attractive, long Total 100% term returns for our shareholders. Over the years, we have transformed the portfolio as we have repositioned it to cater for the changing needs of our customers, both now 1 and in the future. 2 3 PORTFOLIO IN 2011 1. Big box warehouses 18% 2. Urban warehouses 59% 3. Offices & Other 23% Total 100% The success of our portfolio strategy is in the wrong location or non-industrial assets, dependent on our ability to respond to the including offices and retail. Our portfolio new trends, challenges and opportunities today reflects the quality, the focus and the facing our customers. This involves identifying locations we were targeting six years ago. and owning warehousing in markets where Although acquisitions have played a major supply of space is limited and demand is likely part in creating the portfolio today, over the to remain strong over the long term. past five years, we have invested £1.1 billion For example, our largest acquisition into development, creating new assets, which during the year was the 50 per cent of the service the needs of our customers who want APP portfolio owned by our joint venture modern, sustainable buildings in markets partner, Aviva. The APP portfolio is mainly convenient for serving their customers and concentrated around Heathrow Airport, with easy access to their workforce. situated in Greater London’s protected green We apply our knowledge and expertise belt, restricting the availability of land for in real estate sector and in our markets new development. The airport accounts for to assess the risks and the returns for approximately two-thirds of UK air freight each development we approve. In 2017, which is a key source of occupier demand the development projects we completed for warehouses in the immediate vicinity. represent capital investment of approximately In 2017, air freight volumes through £330 million. During the year, they generated Heathrow grew by around 10 per cent, a valuation gain of £176 million and have the Skyline development adding further demand pressure to this potential to generate £27 million of headline supply-constrained market. rent, of which £25 million has been secured. The buildings in the foreground make up the Skyline development, The strategy we set out in 2011 was These developments, with their high positioned directly adjacent to designed to ensure that all of our assets were sustainability credentials, are designed to Heathrow Airport, ensuring in markets with similar long-term structural generate attractive returns not only today but rapid access.