SEGRO is set to take a significant income and value hit on its German portfolio after Neckermann.de, the Frankfurt based mail-order company that leases around 3m sq ft of offices and warehousing from the REIT, announced that it will today file for insolvency proceedings.
Today’s announcement follows an announcement on 27 April 2012 in which Neckermann advised that, in order to remain viable, it needed to restructure its operations around its e-commerce offering.
Analysts however have played down the impact of the insolvency on SEGRO, particularly as the REIT has been "characteristically" open about the issue.
Investec write in a note to investors: "We had taken some provision for the event of a Neckermann insolvency in our forecasts, and also the previously announced intention to sell the larger of the assets (now a more difficult proposition), but now trim them to fully reflect this event.
"Earnings for FY12E are unaffected, assuming the bank guarantees are solid, consequently our EPS of 17.9p (unchanged) fully covers our DPS of 15.0p.
"We estimate a fall in NAV to 324p (from 329p), and at this stage do not expect this single event to impact wider valuations in Germany, for which we had already assumed capital value falls over the coming year."
SEGRO owns a 309,000 sq m facility in Frankfurt, of which 291,000 sq m is occupied by Neckermann. This principally houses the company's head office staff, together with its catalogue and clothing operations.
In 2011, rental income received from Neckermann in respect of the site totalled approximately £12m.
Since April 2012, SEGRO has been in extensive discussions with Neckermann and its owner, Sun Capital Partners, Inc., regarding the Frankfurt lease and future plans for the site.
SEGRO said it had been both proactive and constructive in exploring ways to restructure Neckermann's lease (which expires in October 2017) in order to help address the company's financial situation and accommodate its recent plans to reduce its Frankfurt operations.
Neckermann's decision to file for insolvency proceedings however means that SEGRO must await further developments in order to clarify Neckermann's future requirements.
Rent has been paid by Neckermann up to the end of July 2012.
SEGRO holds bank guarantees which should cover rent and other amounts due in respect of the site over the remainder of 2012, in the event of future non-payment by Neckermann.
SEGRO said it was seeking to identify both alternative customers and alternative uses for the Frankfurt site in the event that Neckermann exits the facility.
However, SEGRO said that given the bespoke nature of much of the facility, there is a significant risk that, from the beginning of 2013, it will be unable, at least in the short term, to replace the rent currently being generated from Neckermann.
At 31 December 2011, the Frankfurt site was valued at £86m.
In light of recent events, including the assumption that Neckermann will vacate the site, SEGRO's independent valuer CBRE indicates that this will fall to approximately £43m as at 30 June 2012.
Neckermann also leases from SEGRO a logistics facility at Alzenau, approximately 35 kms east of Frankfurt.
This 25,000 sq m building has, in turn, been sub-let by Neckermann to a third party until the end of 2012 to support a logistics activity unrelated to Neckermann's business.
In 2011, rental income received in respect of this building totalled approximately £0.8m.
SEGRO holds a bank guarantee covering three months’ rent in the event of non-payment by Neckermann and in due course expects to be able to re-lease this space in the event that the Neckermann lease is terminated.
SEGRO said it will update the market further when appropriate.