Segro CFO on capturing the value of online shopping

When he was approached to be the next CFO of Segro 2 years ago, Soumen Das says the huge potential of the warehouse-owning group quickly dawned on him.

For although Das he was already working in commercial property he hadn’t grasped until then just how strong the portfolio of the FTSE 100 member was – especially as the internet shopping boom had driven growth in recent years. “The more I got to talk to the team here the more I realised it’s a far more fascinating business than I’d realised from the outside,” he says.

When predecessor Justin Read retired, Das stepped in to become CFO at Segro that has a market value that has grown rapidly in recent years to now be worth over £6bn. He says the team led by CEO David Sleath, “has been quietly getting on with their own revolution” since 2011 when Sleath took the top job.

That process involved selling less profitable assets across the group’s UK and continental European portfolio while developing higher value sites such as the new 1.2m sq ft site near Rugby that is let to Amazon, DHL and H&M.

Das says the casting off of weaker performing businesses, gave Segro the means to expand into more lucrative channels. “If the business hadn’t taken the self-help steps in the early part of this decade it wouldn’t have put itself in the position to benefit from the ecommerce revolution today,” says Das. The repositioning resulted in Segro “owning the right assets in the right location, to perform long term”.

What Das could offer Segro was a finance leader with an entrepreneurial instinct, a valuable combination for growing the company. “They were looking for someone to help them push on to the next level,” he says.

Having started out as an investment banker focused on the real estate sector at City powerhouse SG Warburg that was acquired by Swiss giant UBS, Das joined property fund manager Mountgrange Investment Management, now called Clearbell Capital.

Das was then tempted to retail shopping centre giant Liberty International, which he helped split into two soon after his arrival – leading him to become managing director of one half named Capital & Counties (Capco), which owns London retail shopping centre Covent Garden and a residential site at Earls Court, also in the capital.

The challenge of running finance at a bigger, more diverse portfolio across sites in the UK and Europe led him to join Segro in January 2017. “There was a definite personal challenge in saying to myself, I’ve done this and it’s worked perfectly at Capco, can I do it again?” he reveals.

Another attraction was the team he was going to work with, that included chairman Gerald Corbett, who has chaired companies including Britvic and SSL International, and is one of the most respected figures in British corporate life. “With these people I realised I’d be able to make a difference,” he says.

Fast start

Within 2 days of arriving in January 2017, Das was quickly immersed in a major deal: the acquisition of Segro’s joint venture stake near Heathrow airport for over £500m. “I immediately discussed with the board whether we were going to finance the deal with debt and equity. It was a hell of a way to announce my arrival,” he enthuses.

The acquisition was supported by a £570m right issue, launched by Das following a £300m equity raise undertaken by the group in September 2016. “It’s unusual for any company to raise equity twice in a 6-month period, and certainly not for positive and front foot reasons,” he reveals.

The £900m injection gave the group the firepower it needed to grow. “One thing I have learned over time is that you have to invest and you have to broaden your equity base if you’re going to make the most of structural change,” say Das, who previously employed his investment banking experience to raise equity at Capco. “The equity base ultimately determines your scale, and your ability to deploy that equity well depends on the growth drivers of the industry,” he adds.

Das was able to tap into relationships with shareholders, many of whom are also Capco investors, to support Segro’s growth plan. “When we came to articulate our story and the reasons for what we wanted the capital for, they were prepared to listen,” he says.

But although the group had a phenomenally successful 2017, with pre-tax profits more than doubling to £976.3m, it was no plain sailing as raising so much capital heaps considerable pressure on a company, says Das. “There is no doubt that raising equity increases the expectation on the management team and the company to deliver,” he says. “Setting out your investment case is one thing, but setting out a specific reason to raise money and spend it puts particular emphasis on spending it very well.”

Das says that the art of raising capital – especially in the commercial property sector he knows well is recognising how much to raise and when to support property investment. “Having the right equity and debt mix and having liquidity are the critical elements to allowing the property side of the business to flourish – to create value.

“Capital is the lifeblood of this industry,” Das asserts. “If you squeeze the capital base too thin it gives you too much risk and then it can be quite difficult for the property side of the business to take the risks it needs to take as well,” he says.

On the warpath

With a war chest of about £1.3bn, Segro is well placed to make further strategic acquisitions. In the last year the group invested £702m and is projected to spend another £350m on bolt-on acquisitions this year.

Das is confident Segro will avoid the worst effects of Brexit by virtue of the fact that a third of the group is located in continental Europe. “There’s a very natural hedge there,” he says. But most of all it is the relentless boom of internet shopping that fills Das with most confidence.

“The growth driver of the tech revolution and the growth of ecommerce created demand that is bigger than whether we are in the EU or not, because fundamentally consumers will continue to spend online,” he says.

Das sees growing opportunities on the back of greater ecommerce penetration in continental Europe. “It is a revolution that we think will continue through each European market. We think it’s just a matter of time, because the underlying drivers are the same,” he says.

Das observes that although absolute retail sales are flat across Europe, “the online part of that relatively stable pie is increasing, particularly in urban centres”.  He says: “If you have an online-based model it is much easier to service consumers in urban locations. The same trends we see playing out in London and the south-east we see in Paris or German cities, and other big European hubs.”

Another major contribution from Das has been to massively reduce borrowing through a series of re-financings that has lowered the average interest rate for debt from 3.6% to 2.2% and increased maturity from 6 to 11 years. “When I joined I could certainly see an opportunity to reset the capital structure.

“It’s a nice place to be. If you’re constantly worried about where the next pound is coming from, it’s hard to take the right level of risk you need to on the operating side. This situation allows us to push the operating leverage to take advantage of what is a very positive occupational market,” he says.

Managing expectations

Crucial to the success of the business model at Segro is securing new rental payments. Last year new rentals for the group hit a record, with secured new rental revenue of £53m. This will certainly be surpassed this year as new rentals for the first quarter have already reached half that level. “As long as occupier demand stays, it should translate through to rental growth,” says Das.

“We’ve got a great land bank and some great customer relationships. If we can use those two to continue to win new business and lease that new space, the operating business and the underlying business will continue to perform well,” he says. “It’s my view that the rental growth embedded in this sector offsets any interest rate rises in the near term,” he adds.

Regarding risk, Das counters the idea of a backlash against large warehouses and the vast fleet of vehicles on the road needed to support ecommerce, by talking up the diverse mix of businesses operating on the group’s industrial parks.

He says many of the group’s London sites contain productive businesses such as the Brompton bicycle factory at Greenford, in north-east London. “It’s not just warehousing in terms of storing goods, it’s also flexible space for small, medium-sized businesses to operate and create employment,” insists Das, whose company launched a report last year called ‘Keep London Working’ to consider ways of ensuring the capital’s industrial sites can produce more jobs.

The same is true of the 97-year-old Slough trading estate, the original business of Segro, which accounts for one fifth of the group’s assets. Confectioner Mars has been on the site since the 1930s, but a new set of companies have arrived including 22 data centres. “Everything has evolved enormously,” says Das of the Slough site, as it approaches its centenary – what will be a big milestone for the group.

 

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