TRANSFORMING SEGRO’S PERFORMANCE ANNUAL REPORT AND ACCOUNTS 2011 TRANSFORMING SEGRO’S PERFORMANCE SEGRO is Europe’s leading owner-manager and developer of industrial property. We serve over 1,600 customers across a range of industry sectors and geographies. Our portfolio comprises £5.1 billion of assets concentrated in and around major conurbations and transportation hubs such as airports, ports and transportation networks. In 2011, SEGRO undertook a detailed review of the Group’s operations and business and launched a new strategy aimed at generating improved shareholder returns. This Report has been structured around the new strategy. The Directors present the Annual Report for the year ended 31 December 2011 which includes the business review, governance report and audited financial statements for the year. References to ‘SEGRO’, the ‘Group’, the ‘Company’, ‘we’, or ‘our’ are to SEGRO plc and/or its subsidiaries, or any of them as the context may require. Pages 1 to 76, inclusive, of this Annual Report comprise a Directors’ Report that has been drawn up and presented in accordance with English company law and the liabilities of the Directors in connection with that Report shall be subject to the limitations and restrictions provided by such law. The Annual Report contains forward looking statements. For further information see the inside back cover. Overview CONTENTS OVERVIEW CORPORATE GOVERNANCE 1 Highlights 54 Board of Directors 2 Chairman’s Statement 56 Governance Report 62 Audit Committee Report PERFORMANCE REVIEW 64 Remuneration Report 4 Chief Executive’s Review 75 Other Statutory Information 7 – New strategy 76 Statement of Directors’ Responsibilities 8 – The right products 9 – The right markets FINANCIAL STATEMENTS 10 – The right business model 77 Independent Auditor’s Report 12 – KPIs 78 Group Income Statement 14 – Strong 2011 operating results 79 Balance Sheets 16 Delivering operational excellence 80 Statements of Changes in Equity 28 Disciplined capital allocation 82 Cash Flow Statements 30 – Valuation movements 83 Notes to the Financial Statements 34 Sustainability 113 Five-year Financial Results 44 Financial Review FURTHER INFORMATION 50 – Principal risks & uncertainties 114 Financial Calendar and Shareholder Information 116 Glossary of Terms OUR HIGHLIGHTS OUR PORTFOLIO (by value) EPRA profit before tax1 Total dividend per share Asset type 17% Logistics Warehousing £138.5million 1 4.8pence 54% Industrial 11 11 138.5 14.8 21% Offices and other business space 10 127.3 10 14.3 8% Land and development 09 104.3 09 14.0 Profit/(loss) before tax2 EPRA net asset value per share Geographical split 35% Thames Valley and £(53.6)million 340pence Regions, UK 34% Greater London, UK 11 (53.6) 11 340 8% France 9% Germany 10 10 197.2 376 7% Poland and Czech Republic 09 09 (248.1) 368 7% Benelux and other 1. As referred to in note 2 of the financial statements Portfolio value3 EPRA earnings per share4 2. Includes property valuation movements 3. Includes Group share of properties held within joint returns £5.1billion 1 8.4pence 4. As referred to in note 13 of the financial statements 11 5.1 11 18.4 10 5.3 10 17.1 09 5.3 09 18.3 OVERVIEW CHAIRMAN’S STATEMENT RESHAPING OUR BUSINESS INTRODUCTION It remains a challenging market in both the 2011 was a year of change for SEGRO with UK and the rest of Europe for industrial property the appointment of a new Chief Executive in companies because many of our tenants face David Sleath. David took over in April on the their own challenges. However, we have retirement of Ian Coull. Clearly, he knew the managed to improve our occupancy and have Company well, having been Finance Director not suffered from too many insolvencies of for the previous five years, but nonetheless he tenants. As a result of property disposals our quickly embarked on a detailed review of the rental income for the year marginally decreased business. Your Board was conscious that over the but our EPRA profits increased, enabling the past few years the Company has underperformed Board to recommend a 14.8 pence full-year in terms of shareholder value. Whilst markets dividend, an increase of 3.5 per cent on the were a factor in this, the Board felt that we prior year. EPRA NAV per share decreased by needed to do more to improve our performance. 9.6 per cent, reflecting valuation declines, mainly within the more secondary properties earmarked The Chief Executive’s review was completed for disposal following the strategic review. in the last quarter of the year and, following Board approval of the proposals, these were We go into 2012 determined to execute communicated to the market in November. our strategy and have made a good start to The strategy is to improve shareholders’ returns reshaping our portfolio with the completion through Disciplined Capital Allocation and since the year end of the acquisition of the UK Operational Excellence. Historically we have Logistics Fund in conjunction with a partner and managed our properties well, but we see the disposal of a portfolio of non-core holdings room for improved performance. We have in the UK. Our investment team is also very been less good at capital allocation and there focused on a disposal programme of non-core is a considerable opportunity for improvement, assets, which have been partly responsible for especially with a more proactive approach our underperformance. This will also help to to capital recycling. Our new strategy is the lower our loan to value ratio over time. basis on which we expect to generate value for shareholders over the longer term. David will elaborate on this in his review. FOCUSED ON SUSTAINABILITY We have continued to make progress this year on our journey to embed sustainability into every aspect of our business. Our review of performance begins on page 34. Find out more online by visiting www.segro.com Annual Report and Accounts 2011 2 www.segro.com Overview MANAGEMENT CHANGES £(53.6) million (2010: £197.2 million), including 2012 is likely to be no less challenging than Following David Sleath’s promotion to Chief a £187.0 million write-down in the second half 2011 for the economies in which we operate, Executive, the Board undertook a search for of the year on the assets which were identified with consumer confidence low and industrial a new Finance Director. In August, Justin Read as non-core in the strategic review. demand weak. We remain alert to the potential was appointed Finance Director and joined financial and operational risks to the business the Board. Justin was previously Finance The Board is grateful to all our employees for arising from a further deterioration in the Director at Speedy Hire plc. the delivery of the results for the past year. Eurozone crisis, but nearly all our assets in Continental Europe are concentrated in the As part of the business review, David looked at The decrease in capital value of our portfolio stronger metropolitan areas of Germany, his management structure and decided to create of properties, including joint ventures at Group France, Poland and the Benelux countries. two important new positions of Chief Operating share, amounted to £255 million and EPRA net These potential risks, together with the actions Officer and Chief Investment Officer. Andy asset value per share was, therefore, 340 pence being taken to mitigate our exposure to them, Gulliford and Phil Redding were appointed to (2010: 376 pence). are set out in more detail in the Financial these positions respectively in November. Review and in the discussion of principal risks These were both internal promotions. The final dividend payment will consist of a on pages 50 to 53. We believe that in the 7.0 pence Property Income Distribution (PID) longer term our focus on Disciplined Capital OVERVIEW OF PERFORMANCE and a 2.9 pence ordinary cash dividend. The Allocation and Operational Excellence, together The EPRA profit before tax was £138.5 million Board is offering a Dividend Reinvestment Plan with the commitment of our employees to (2010: £127.3 million) on net rental income of (DRIP) on the PID for the 2011 final dividend. the strategy, will deliver significantly better £271.2 million (2010: £282.1 million). EPRA returns for our shareholders. earnings per share increased by 7.6 per cent The Board stated in November that it expected to 18.4 pence, compared with 17.1 pence in to at least maintain the dividend throughout NIGEL RICH CBE CHAIRMAN 2010, reflecting the continued focus on driving the reshaping process, and is committed to a down both vacancy and the total cost ratio. progressive dividend policy in the longer term. On an unadjusted basis, profit before tax was “THE GROUP HAS MADE GOOD PROGRESS IN 2011, WE ARE NOW LOOKING FORWARD TO TRANSFORMING OUR BUSINESS FOR THE FUTURE” NIGEL RICH CBE CHAIRMAN Annual Report and Accounts 2011 www.segro.com 3 PERFORMANCE REVIEW CHIEF EXECUTIVE’S REVIEW “WE DELIVERED STRONG OPERATING RESULTS FOR 2011 AND HAVE A CLEAR STRATEGY TO TRANSFORM PERFORMANCE FOR THE FUTURE” DAVID SLEATH CHIEF EXECUTIVE CREATING A LEADING INCOME -FO CUSED REIT Annual Report and Accounts 2011 4 www.segro.com Performance Review Performance INTRODUCTION We believe a focus on industrial real estate SEGRO is Europe’s leading owner-manager creates a good basis for building a REIT which and developer of industrial property, with can offer its investors an attractive dividend a high-quality portfolio and leading market yield and resilient capital growth. positions in some of the most attractive markets, including London and the South East of England Industrial property is an attractive asset class and major conurbations in Germany, France and which, in the UK, has outperformed retail and Poland.