Top Picks For 2025: Honorable Mention #5
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Top Picks For 2025: Honorable Mentions
Over the past weeks, we shared our Top 5 Picks for 2025. You can access each of our articles by clicking the links below:
These companies provide some of the best risk-to-reward opportunities in today’s market, in our opinion.
That said, there are many other compelling opportunities available in the current environment. One of our members made the following comment on our live chat:
Hello Jussi. I thought the Top 5 Series was one of the best things you have provided us. Each one of the Top 5 make sense to me. And I have acted upon your recommendations. Of course, diversification is important. With that in mind, would you be comfortable providing a few investments that you would call your HONORABLE MENTIONS? User 51106315
We already shares one "honorable mention:
Today, we present the fifth one:
Honorable Mention #5: Segro PLC
Segro PLC (SGRO / OTCPK:SEGXF) is our biggest industrial real estate investment in Europe. When we invested in it two years ago, we favored it relative to its peers because of five key reasons:
Great urban assets: Segro is one of the leading industrial REITs in the UK and central Europe. It owns mainly urban facilities that enjoy significant barriers to entry and rapid growth prospects. Moreover, we also think that its rents are deeply below market, which provides a predictable path to growth as its leases gradually expire. Finally, it also owns a large land bank, which should allow it to significantly boost its cash flow as it develops new properties.
Alpha-rich strategy: The company is able to develop properties from the ground-up to earn yields of 7-8%, but these properties are really worth a 5% cap rate. As such, it is creating significant value for shareholders instead of simply buying what the market has to offer at low cap rates, which is what most investors are doing. Moreover, the company also has an asset management arm, which allows it to leverage the capital of others to boost its returns by earning additional fees. This typically results in 200 basis point higher initial returns for Segro's capital. They estimate that the yield on new money that they deploy is about 10% at this time.
Strong balance sheet: The company had little debt with a 20% LTV and its maturities are long at 9 years with no major maturities until 2026. Since then, the value of its assets as dropped a bit due to cap rate expansion, but even then, its LTV is today just 30%. It is also able to consistently sell 1-2% of its assets each year to redeploy it into new higher yielding projects and grow externally without having to tap the public equity market.
Rapid growth prospects: Its rents are deeply below market, its leases include annual rent escalations, it owns a large land bank, and it has the financial capacity to keep developing new properties at high cap rates all while also earning fees from third party capital management. All in all, we expect this to result in high single digit annual FFO per share growth over the long run. Even in today's tough environment, it has still managed to grow its FFO per share by 7% so far this year.
Discounted valuation: when we invested in it two years ago, it was just as cheap as its close peers, despite owning better assets and having less leverage. It then traded at a 42% discount to its net asset value, which was truly exceptional for a REIT of this quality. Finally, we also noted in our thesis that the British Pound was historically cheap, resulting in a 'double discount' for US based investors who could profit from additional currency gains in the following years.
Recently, I got to meet the management of Segro and my findings were very positive. You can read my report on them by clicking here.
Since then, nothing major has changed to the long-term growth story, but its share price has dropped a lot lower along with the rest of the UK market and we think that this is a great buying opportunity.
It dropped so much that it is now even cheaper than at the lowest point of the pandemic. The share price is roughly the same, but the company's cash flow has grown by about 25% since then:
We think that there are three reasons for the recent drop:
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