Friday, December 30, 2022

SEGRO REIT: exposure to rising interest rates

Quick look at a promising company, its a fast growing UK/EU industrial REIT whose share price is now tumbling.

For debt heavy REITS, one of the first things we look at is interest rate sensitivity.

As of end 2021, they had 3406m pounds of debt vs 15bn pounds of property.  Thats reasonable.

Their debt was well spread out:

Source: 2021 Full Year Results Presentation, slide 44.

And its all fixed rate too.  Looks really good:

Source: 2021 AR, p197

Wait, whats this?  After applying derivative instruments, they had a 1.5bn of variable rate debt:

Thats around 45% of their 3406bn debt being variable.  How can this be?

They have converted 1.9bn of their fixed rate debt to floating rate debt using derivatives....WTF?

~1bn of this only expires after 2026.  So they are not getting out of it anytime quickly.  ~600m expires from 2022 to 2026.

This is why their interest rate sensitivity is so high.  A decrease of 17m for a 1% increase in rates (p203) is about a 5% decrease in CFO.  If we expect UK risk free rates to rise to 4.5 to 5.25% by 2023, while they were under 0.5% in all of 2021, thats a 20-25% decrease in CFO.

I'm throwing this into the "too hard" basket.  Their debt has changed since then, and 2022 results will be out on 17th Feb.  But probably not worth looking at yet.  If I buy a REIT I want predictable cashflows, not a bet on interest rates.

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