TIDMSREI
RNS Number : 5280G
Schroder Real Estate Inv Trst Ld
16 November 2022
For release 16 November 2022
Schroder Real Estate Investment Trust Limited
('SREIT' / the 'Company' / 'Group')
INTERIM RESULTS FOR THE SIX MONTHSED 30 SEPTEMBER 2022
STRONG INCOME RETURN UNDERPINS POSITIVE TOTAL RETURN PERFORMANCE
AND INCREASED DIVID, FULLY COVERED BY EPRA EARNINGS
Schroder Real Estate Investment Trust Limited, the actively
managed UK focussed REIT, today announces its unaudited interim
results for the six month period ended 30 September 2022.
Low cost, long-term debt profile supporting earnings growth and
further dividend increase
-- Net Asset Value ('NAV') of GBP366.0 million or 74.8 pps (31
March 2022: GBP372.2 million, or 75.8 pps)
-- EPRA earnings increased 3.6% to GBP8.6 million (30 September 2021: GBP8.3 million)
-- Dividends paid during the period increased 20% to GBP7.8
million, or 1.60 pps, reflecting dividend cover of 110% based on
EPRA earnings
-- Positive NAV total return performance of 0.8%, reflecting a
strong income return from the underlying portfolio of 2.8% vs. 1.9%
for the MSCI Benchmark Index (the 'Benchmark'), led by active asset
management
-- L ong term debt maturity profile of 11.2 years at an average
interest cost of 2.7%, with 91% of drawn debt fixed rate or
capped
-- Loan to value, net of all cash, of 31.4% (31 March 2022: 28.6%)
-- Continued total return outperformance of the underlying
portfolio of 1.8% vs 1.2% for the Benchmark
-- 1,969,725 shares acquired for GBP1.0 million as part of the
Company's share buyback programme
Portfolio outperformance driven by recent higher yielding
acquisitions, a disposal ahead of book value and active asset
management
-- Acquisition of St. Ann's House, a mixed-use office and retail
asset in Manchester City Centre, for GBP14.7 million, reflecting a
net initial yield of 7.8%, a reversionary yield of 9.1% and a low
average capital value of GBP283 per sq ft
-- Disposal of a single let industrial asset at Southlink,
Portsmouth for GBP6.5 million, reflecting a net initial yield of
3.2% and a 33% premium to the independent valuation as at 31 March
2022
-- 33 new lettings, rent reviews and renewals completed since
the start of the period totalling GBP5.1 million in annualised
rental income and generating GBP1.9 million per annum of additional
rent above the previous level, including:
o Lease agreements completed at Langley Park Industrial Estate
in Chippenham and the Haywood House office in Cardiff totalling
280,000 sq ft
o 40,000 sq ft lease regear completed post period end with
Buckinghamshire New University in Uxbridge, extending the lease
contract by five years at 13% higher rent
-- Rent collection rates remain high with 99% collected for the
quarter ended 30 September 2022
Increased focus on sustainability as a defining characteristic
of future strategy
-- Further improvement in the Global Real Estate Sustainability
Benchmark ('GRESB') score, placing the Company first amongst a peer
group comprising seven diversified REITs
-- Development of 80,000 sq ft, operational Net Zero Carbon
industrial scheme at Stanley Green, Manchester on track to complete
in Q1 2023, with strong occupier interest generated, further net
zero industrial developments in progress
-- Company announced its 'Pathway to Net Zero Carbon', includes
operational whole buildings emissions to be aligned to a 1.5degC
pathway by 2030
Alistair Hughes, Chairman of the Board, commented:
" The Company's portfolio is well positioned for this more
challenging environment, with high exposure to sectors and
locations experiencing stronger occupational demand, a granular and
resilient tenant base, an above-average income yield and a near
term pipeline of asset management initiatives to support returns.
Crucially, we have a long-term, fixed-rate debt profile, with no
near-term maturities, which positions us favourably and gives us
additional confidence against the uncertain backdrop. Having
increased the dividend earlier this year ahead of the pre-pandemic
level, we expect the dividend to remain fully covered for the
current financial year."
Nick Montgomery, Fund Manager, added:
"Despite a volatile and uncertain economic backdrop, good
progress has been achieved over the period delivering on the
strategy, resulting in a positive NAV total return, sustained
outperformance of the underlying portfolio and a further increase
in the dividend level, which is fully covered. Whilst a rising cost
of capital will continue to put downward pressure on real estate
values and a recession will challenge businesses, our diversified,
higher yielding portfolio, robust occupier mix and strong balance
sheet should support continued income growth against the volatile
and uncertain backdrop."
A webcast presentation for analysts and investors will be hosted
today at 09.00am. In order to register, please visit:
https://registration.duuzra.com/form/SREITHalfYearResults2022
For further information:
Schroder Real Estate Investment Management
Limited
Nick Montgomery / Bradley Biggins 020 7658 6000
Schroder Investment Management Limited
(Company Secretary)
Matthew Riley 020 7658 6000
--------------
FTI Consulting
Dido Laurimore / Richard Gotla / Ollie
Parsons 020 3727 1000
--------------
Interim Report and Condensed Consolidated Financial
Statements
For the period 1 April 2022 to 30 September 2022
Performance Summary
Property performance
Value of property assets and GBP532.0m GBP464.0m GBP523.5m
joint venture assets
Annualised rental income GBP30.7m GBP28.7m GBP30.1m
Estimated open market rental GBP35.4m GBP31.8m GBP33.8m
value
Underlying portfolio total return 1.8% 8.9% 23.5%
MSCI benchmark total return (1.2)% 7.7% 19.9%
Underlying portfolio income
return 2.8% 3.2% 6.3%
MSCI Benchmark income return 1.9% 2.1% 3.9%
----------------------------------- ---------- ---------- ----------
Financial summary
Net Asset Value ("NAV") GBP366.0m GBP323.4m GBP372.2m
NAV per Ordinary Share 74.8p 65.8p 75.8p
EPRA Net Tangible Assets 2 GBP366.0m GBP323.4m GBP372.2m
IFRS profit for the period GBP2.7m GBP33.2m GBP89.4m
EPRA earnings(2) GBP8.6m GBP8.3m GBP15.7m
---------------------------- ---------- ---------- ----------
Capital values
Share price 46.4p 49.2p 57.8p
Share price discount to NAV(1) (38.0)% (25.2)% (23.7)%
NAV total return(2) 0.8% 11.3% 30.9%
FTSE All-Share Index 3,763.48 4,058.96 4,187.78
-------------------------------- --------- --------- ---------
Earnings and dividends
IFRS earnings (pps) 0.5 6.8 18.2
EPRA earnings (pps)(2) 1.7 1.7 3.2
Dividends paid (pps) 1.60 1.33 2.83
Annualised dividend yield on
30 September/31 March share price(1) 6.9% 5.4% 4.9%
---------------------------------------- ------ ----- -----
1 Based on the share price at 30 September 2022 of 46.4p and an
annualised dividend of 3.212 pps.
2 This is an Alternative Performance Measure ("APM"). Details of
the calculation are included in the APM section on page 40 of the
2022 Half Year Reportof the 2022 Half Year Report .
Bank borrowings
On-balance sheet borrowings1 GBP175.9m GBP154.1m GBP162.3m
Loan to Value ratio ("LTV"), net
of all cash2 31.4% 30.7% 28.6%
---------------------------------- ---------- ---------- ----------
Ongoing charges
Ongoing charges (including fund
and property expenses)(3) 1.99% 2.28% 2.21%
Ongoing charges (including fund
only expenses)(3) 1.18% 1.31% 1.26%
--------------------------------- ------ ------ ------
1. On-balance sheet borrowings reflect the loan facilities with
Canada Life and RBSI without the deduction of unamortised finance
costs of GBP0.9m.
2. This is an APM. Details of the calculation are included on
page 40 of the 2022 Half Year Report.
3. This is an Alternative Performance Measure ("APM"). Details
of the calculation are included in the APM section on page 40 of
the 2022 Half Year Report.
Chairman's Statement
Overview
I am pleased to report the unaudited interim results for the six
month period to 30 September 2022, my first as the new Chairman of
Schroder Real Estate Investment Trust Limited ('SREIT', or 'the
Company'). I would like to take this opportunity to thank my
predecessor, Lorraine Baldry, for her contribution to the Company's
success over the past eight years.
The results demonstrate continued progress executing our
strategy, sustained outperformance of the underlying portfolio
compared with the MSCI Benchmark Index (the 'Benchmark'), and a
quarterly dividend now 4% ahead of the pre-pandemic level.
Market conditions and the outlook for UK real estate changed
markedly over the period, with a 3.1% net like-for-like increase in
the Company's underlying portfolio value over the quarter to June
contrasting with a 4.0% decline over the quarter to September.
Although a slowdown was expected, and follows a period of strong
growth in the real estate market, more persistent inflation,
political instability and the resultant impact on gilt rates has
contributed to a sharp change in sentiment and an associated
decline in liquidity. More generally, rising interest rates and
tighter fiscal policy are squeezing household real disposable
incomes and will reduce business investment, leading to weaker GDP
growth and an increased risk of a prolonged recession.
At this stage, it is difficult to assess how far average UK real
estate values will fall in response to rising interest rates but,
assuming the ten year gilt yield settles at approximately 3.5%,
then, based on historical averages, investors may demand a yield
from real estate of 5% to 5.5%. This would imply a decline in
average market values of approximately 15% to 20%. To date we have
indeed seen rapid yield expansion, with lower yielding assets such
as prime south-east industrial and logistics experiencing the
sharpest declines. The next phase of the correction will be more
influenced by weaker GDP growth impacting occupier demand and
therefore rental values, leading to a greater negative impact on
secondary assets with poor fundamentals. Market conditions have led
to the listed real estate market experiencing severe share price
declines, with prices at wide discounts to NAV across both
diversified and specialist real estate strategies.
Against this uncertain backdrop, we benefit from owning good
quality, higher yielding, diversified assets focused on higher long
term growth sectors. These characteristics, combined with
transaction and asset management activity, mitigated the negative
market valuation impact over the period, with a net like-for-like
capital value decline of the underlying portfolio of -1.0%,
compared with the Benchmark at -3.1%. This underlying movement
resulted in a Net Asset Value ('NAV') as at 30 September 2022 of
GBP366.0 million or 74.8 pence per share ('pps'), a marginal
decline of 1.0 pps, or 1.3%, compared with the NAV as at 31 March
2022.
Encouragingly, an attractive income return of 2.8% (Benchmark
1.9%), combined with efficient management of expenses, resulted in
EPRA earnings of GBP8.6 million for the period (six months to 30
September 2021: GBP8.3 million). Dividends paid during the period
totalled GBP7.8 million or 1.6 pps, which reflected dividend cover
of 110% and, together with the movement in NAV, a positive NAV
total return for the period of 0.8%.
Finally, the Company has today separately announced a quarterly
dividend of 0.803 pps, to be paid in the quarter ending 31 December
2022.
Balance sheet
At a time of greater uncertainty and rising interest rates, the
Company is benefitting from relatively low leverage and an average
loan maturity of 11.2 years, with a low average total debt cost of
2.7%. This is a competitive advantage versus peers and the fixed
rate term loan's incremental positive fair value benefit of GBP17.7
million is not reflected in the Company's NAV.
At the period end, the Company had a net loan to value ('LTV')
ratio of 31.4%, which is within the long-term strategic range of
25% to 35%. Whilst the Company has significant headroom against
loan covenants, a decline in portfolio value could result in the
net LTV ratio exceeding our long-term strategic range, and this
will continue to be closely monitored.
During the period the Company acquired 1,969,725 shares under
its share buyback programme for GBP1.0 million, which reflected an
average discount to the 31 March 2022 NAV of 33%. The Board
continues to review the potential for further buybacks in the
future depending on movements in the share price and alternative
uses for the Company's investment capacity.
Strategy
The strategy remains focused on delivering long term sustainable
income growth and improving the quality of the underlying portfolio
through active management and capital investment. The Manager is
well positioned to drive income and value growth for the portfolio
given their 'hospitality' approach in tenant management and
operational excellence in all sectors, combined with a strong track
record in managing sustainability improvements. The market
correction and convergence of returns between the main sectors is
demonstrating the benefits of owning a diversified portfolio, with
the ability and expertise to invest across all sectors.
Transactional activity undertaken over recent years means the
portfolio is increasingly well positioned in terms of sector focus
and quality, with a 46.2% weighting to multi-let industrial
estates, an 11.8% weighting to retail warehousing, and a 27.9%
weighting to offices, of which 15.9% is concentrated in London and
Manchester, the UK's two dominant urban centres. Primarily due to
the market uncertainty, it has been a quieter period of
transactional activity, with one acquisition of a high yielding
mixed used asset in Manchester city centre, and one small disposal
crystallising a material premium to valuation. Whilst we remain
alert to new opportunities, we expect the investment market to be
muted in the near-term.
Good progress has been made capturing rental growth across our
multi-let industrial estates in particular, where supply and demand
dynamics remain highly favourable, with an income return over the
period of 2.4% compared with the Benchmark 'All Industrial' average
income return of 1.5%. Alongside driving income growth, asset
management activity has focused on improving the portfolio's
defensive qualities. This included agreeing lease extensions with
major tenants such as Buckinghamshire New University in Uxbridge
and IXYS UK Westcode Limited in Chippenham. Looking ahead, there is
significant reversion to capture across the portfolio, which will
be key in partially offsetting the abovementioned yield
expansion.
The weaker economic outlook means we are alert to the potential
affordability challenges that UK business occupiers could face. Our
tenant engagement remains high, and we collected 98% of rent during
the period. With our major tenants operating strong businesses, and
rent representing a small percentage of our tenants' overall
overheads, we remain confident that our income is secure and our
assets will remain in demand.
Sustainability
An increased focus on sustainability is a key pillar of our
strategy, and progress has been made over the period to codify this
evolution. Our research and the evidence across the portfolio
demonstrates that there is a material rental and value premium for
buildings with green certifications, which should grow as extreme
weather events become more common, as additional regulation with
respect to the leasing of buildings with poor energy efficiency
becomes effective and potential forms of carbon taxation are
introduced.
As part of this strategic evolution, the Manager is carrying out
a comprehensive review of the sustainability characteristics of the
portfolio encompassing building fabric, energy systems, services
and utilities, climate risk and resilience, water consumption,
waste management, biodiversity and green infrastructure, transport
and mobility, health and wellbeing, community and social
integration. This analysis will inform a baseline score across a
range of quantitative and qualitative factors against which we will
measure future improvements at an asset level to enable us to
provide transparent reporting to stakeholders.
This exercise will also enable us to refine the modelled cost of
improvements required to achieve improved sustainability
performance and inform asset strategies. In addition, it will
support progress on our 'Pathway to Net Zero Carbon', which we
announced during the period.
Our strategy to acquire and upgrade existing buildings means a
significant proportion of the portfolio will be undergoing
transition whilst sustainability performance is improved. This is
an environmental necessity and, importantly, should support
delivery of enhanced returns through acquiring, actively managing
and transitioning mispriced assets. The Manager's Report contains
practical examples of how we are delivering on these commitments,
notably our operational Net Zero Carbon, 80,000 sq ft industrial
development in Cheadle, Manchester, the first of its type in the
North West.
Our approach is already delivering positive results, with the
Company achieving a further improvement in its score in the Global
Real Estate Sustainability Benchmark ('GRESB'), placing it first
amongst a group comprising seven diversified REITs. The Company
also retained its Gold level compliance with the EPRA
Sustainability Best Practice Recommendations for the fifth
successive year.
Board succession
Having joined the Board in September 2015, Graham Basham will
retire as independent Non-Executive Director and Chairman of the
Management Engagement Committee on 15 November 2022. Graham has
made a significant contribution to the Company, notably on matters
relating to the Company's structure and administration. On behalf
of my fellow directors, I would like to thank Graham for his
service over the past seven years.
We are also today announcing the appointment of Alexandra Innes
as an independent Non-Executive Director, with effect from 16
November 2022. Alexandra will be a member of the Audit and
Nomination Committees, and will Chair the Management Engagement
Committee. Alexandra has a strong track record across investment
banking and investment management, and has relevant non-executive
roles with the Bank of England, Securities Trust of Scotland PLC
and Knight Frank LLP.
As part of the succession process, the Board also asked the
appointed specialist search firm to review Board remuneration
levels, which were last reviewed and increased in 2015. The search
firm advised that the current directors fees were below the level
of comparable real estate investment trusts. To align with
recognised peers, directors fees have been increased to GBP55,000
for the Chairman, GBP40,000 for the Senior Independent Director and
GBP35,000 for the other Directors, with an additional GBP5,000 be
paid to the Chairman of the Audit Committee and Management
Engagement Committee respectively to reflect additional
responsibilities, with effect from 1 November 2022.
Independent valuers
It is expected that the Standards and Regulation Board of the
Royal Institution of Chartered Surveyors will adopt the
recommendations relating to governance and valuer rotation outlined
in the independent review of January 2022, which includes mandatory
rotation of valuers by clients after a period of between five to
eight years. In preparation for these changes, and given the
Company's independent valuer, Knight Frank LLP, has been in place
since IPO in 2004, notice of termination has been served with their
final valuation to be 31 December 2022. A comprehensive tender
process is progressing for a replacement valuer, with a new
appointment to be confirmed by the Board before the end of the
calendar year.
Outlook
The UK economy is facing a recession, with rising interest rates
and government fiscal tightening intensifying the squeeze on
consumers real disposal incomes. This will most likely lead to a
period of declining real estate values, however, given the lower
levels of new development in progress and an apparent healthy
banking system, the correction will be relatively swift compared
with past cycles.
The Company's portfolio is well positioned for this more
challenging environment, with high exposure to sectors and
locations experiencing stronger occupational demand, a granular and
resilient tenant base, an above-average income yield and a near
term pipeline of asset management initiatives to support
returns.
Crucially, the Company has a long-term, fixed-rate debt profile,
with no near-term maturities, which positions the Company
favourably versus the immediate peer group and gives us additional
confidence against the uncertain backdrop. Having increased the
dividend earlier this year ahead of the pre-pandemic level, we
expect the dividend to remain fully covered for the current
financial year.
Finally, as sustainability considerations become even more
important for investors and occupiers, we are making good progress
evolving our strategy to drive more sustainable, long-term
returns.
Alastair Hughes
Chairman
Schroder Real Estate Investment Trust Limited
15 November 2022
Investment Manager's Report
Overview
"These resilient results are the outcome of disciplined
investment decisions and active management of the portfolio.
Conviction in our strategy has resulted in a good quality,
diversified portfolio that is weighted towards parts of the UK real
estate market experiencing stronger occupier demand with
opportunities to add value through asset repositioning and
development. Whilst a rising cost of capital will continue to put
downward pressure on real estate values and a recession will
challenge businesses, our diversified, higher yielding portfolio,
robust occupier mix and strong balance sheet should support
continued income growth against the volatile and uncertain
backdrop."
Schroder Real Estate Investment Trust Limited's ('SREIT', or
'the Company') Net Asset Value ('NAV') as at 30 September 2022 was
GBP366.0 million or 74.8 pence per share ('pps'), compared with
GBP372.2 million, or 75.8 pps, as at 31 March 2022. This reflected
a marginal decrease over the interim period of 1.0 pps or -1.3%.
During the period, dividends totalling GBP7.8 million were paid,
which resulted in a positive NAV total return of 0.8%. A detailed
analysis of the NAV movement is set out in the table below:
GBPm PPS
--------------------------------------------------- ------ ------
NAV as at 31 March 2022(4) 372.2 75.8
--------------------------------------------------- ------ ------
Unrealised change in the valuations of the direct
real estate portfolio and joint ventures(1) (0.9) (0.2)
--------------------------------------------------- ------ ------
Capital expenditure(2) (5.4) (1.1)
--------------------------------------------------- ------ ------
Acquisition costs (0.9) (0.2)
--------------------------------------------------- ------ ------
Realised gain on disposal, net of disposal costs 1.5 0.3
--------------------------------------------------- ------ ------
EPRA earnings(3) 8.6 1.7
--------------------------------------------------- ------ ------
Dividends paid (7.8) (1.6)
--------------------------------------------------- ------ ------
Others (0.3) -
--------------------------------------------------- ------ ------
NAV as at 30 September 2022 (excluding the share
buyback) 367.0 74.7
--------------------------------------------------- ------ ------
Share buyback (1.0) 0.1
--------------------------------------------------- ------ ------
NAV as at 30 September 2022(5) 366.0 74.8
--------------------------------------------------- ------ ------
1. Prior to all capital expenditure, acquisition costs and
movement in IFRS 16 lease incentives.
2. Comprises capital expenditure of GBP5.2m on the directly held
portfolio and GBP0.2m invested for the joint ventures.
3. EPRA earnings as per the reconciliation on page 37 of the 2022 Half.
4. The calculation of pence per share is based on shares in
issue as at 31 March 2022 of 491,080,301.
5. The calculation of pence per share is based on shares in
issue as at 30 September 2022 of 489,110,576.
The underlying portfolio, including joint ventures, decreased in
value by 1.0% on a like-for-like, net of capex, basis over the six
month period to 30 September 2022.
GBP5.4 million of capital expenditure was invested in asset
management and redevelopment projects, including joint ventures,
that should drive capital growth and future rental increases over
the medium to longer term. Acquisition costs totalling GBP900,000
were incurred in May 2022 relating to the GBP14.7 million gross
headline purchase price of St. Ann's House, a mixed-use office and
retail asset in Manchester, which was subsequently valued at
GBP14.8 million as at 30 September 2022.
In June 2022, Southlink, a single let industrial asset in
Portsmouth, was sold for GBP6.5 million, which compared with the 31
March 2022 independent valuation of GBP4.9 million and reflected a
net initial yield of 3.2%. The asset generated an ungeared total
return of 13.2% per annum since acquisition in July 2004.
EPRA earnings for the period totalled GBP8.6 million, or 1.7
pps, an increase of GBP300,000, or 3.6%, on the corresponding
period in the prior financial year of GBP8.3 million. This increase
has been driven by asset management-led rental value growth, a
positive contribution from the off-market industrial portfolio
acquired in December 2021, and the St. Ann's House acquisition.
The total return from the underlying portfolio was 1.8% for the
six month period to 30 September 2022, compared with the MSCI
Benchmark Index (the 'Benchmark') of -1.2%. The portfolio
performance comprised a 2.8% income return and a -1.0% net change
in capital values, with both components outperforming the Benchmark
at 1.9% and -3.1% respectively. The portfolio is ranked on the
10(th) percentile of the Benchmark since the Company's launch in
2004.
Between 28 July 2022 and 15 September 2022 the Company acquired
1,969,725 shares under its share buyback programme for GBP1.0
million, which reflected an average of 50.6 pps and a discount to
the 31 March 2022 NAV of 33%.
Strategy
The Company aims to provide shareholders with an attractive
level of income with the potential for long term, sustainable
income and capital growth. The strategy to deliver this
includes:
- Applying a research-led approach to determine attractive
sectors and locations in which to invest in commercial real
estate;
- Maximising performance by increasing exposure to larger assets
with strong fundamentals and inherent opportunities for active
management and development;
- Driving income and value growth through a hospitality approach
in tenant management (optimising tenant services and lease terms)
and operational excellence in all sectors (optimising operations in
the assets, minimising use of scarce resources and waste);
- Applying our integrated sustainability and ESG approach at all
stages of the investment process and asset lifecycle, targeting
improvement in the sustainability performance of assets to
manufacture the green premium for shareholders; and
- Controlling costs and maintaining a strong balance sheet with
a loan to value, net of cash, within the long term target range of
25% to 35%.
The following progress has been made delivering on the
strategy:
- Increased allocation to higher growth sectors, with the
industrial sector representing 46.2% of the portfolio value,
largely through exposure to multi-let estates (Benchmark 33.5 %).
The remaining portfolio is comprised of retail warehousing of 11.8%
(Benchmark 9.7 %) and good quality offices located in higher growth
Winning Cities such as in London, Manchester and Edinburgh of 27.9%
(Benchmark 25.2 %);
- The acquisition of St. Ann's House, a higher yielding,
mixed-use office and retail asset in Manchester City Centre, which
demonstrates the benefits of being able to source investment
opportunities across all sectors;
- Portfolio outperformance driven by active asset management,
including completion of major lease agreements at Langley Park
Industrial Estate in Chippenham and the Haywood House office in
Cardiff, conditional lease agreements also exchanged for two new
Starbucks drive-thru restaurants at retail parks in Bedford and
Milton Keynes, and letting all warehouse space at Valley Park,
Birkenhead which was acquired with void in December 2021. Post
period end, a major lease regear was completed with Buckinghamshire
New University in Uxbridge, which extended the lease contract by
five years at a higher rent;
- In aggregate, 33 new lettings, rent reviews and renewals
completed since the start of the period totalling GBP5.1 million in
annualised rental income and generating GBP1.9 million per annum of
additional rent above the previous level;
- Rent collection rates at pre-pandemic levels, proving the
resilience of the portfolio. Good progress has been made collecting
historical arrears through constructive engagement with
tenants;
- Continued investment to deliver operational excellence in
larger assets offering higher returns, with progress on key
initiatives such as the construction of an operational Net Zero
Carbon warehouse scheme at Stanley Green Trading Estate in Cheadle,
Manchester and planning secured for a new operational Net Zero
Carbon warehouse at Stacey Bushes in Milton Keynes;
- Enhanced ESG performance across the portfolio with
sustainability-led building improvements, improved tenant data
collection, and positive engagement with occupiers;
- This led to a further improvement in the Global Real Estate
Sustainability Benchmark ('GRESB') score to 77 out of 100 in 2022
(2021: 75), achieving the maximum possible result for the
Management aspects of the assessment and placing SREIT first
amongst a group comprising seven diversified REITs (2021: second of
eight);
- Announcement of the Company's pathway to Net Zero Carbon;
- Opportune timing of refinancing the revolving credit facility
(' RCF'), fixing a margin of 1.65% (previously 1.60%), increasing
the facility size to GBP75 million and extending the maturity by
four years; this reduces refinancing risk and further enhances the
Company's already strong balance sheet; and
- Efficient cost control leading to ongoing charges (including
fund and property expenses) declining to 1.18% compared to 1.31%
for the corresponding period in the prior financial year.
Rent collection
The diversification and granularity of the underlying rental
income, and a high level of occupier engagement, has supported
improving rent collection rates with 99% of the contracted rents
collected for the quarter to 30 September 2022. The breakdown
between sectors is 99% of office rent collected, 98% of industrial
rent collected and 98% of retail, leisure and other rent
collected.
The Company remains in active dialogue with its tenants for
historical arrears which totalled GBP3.2 million, net of VAT, at
the period end, of which GBP600,000 is categorised as a bad debt.
This compares to GBP4.2 million and GBP800,000 respectively as at
30 September 2021.
Portfolio performance
As noted above, the underlying portfolio continues to outperform
the Benchmark, driven by portfolio sector allocations, active
management and a high income return. The table below shows
performance to 30 September 2022:
SREIT Total Return MSCI Benchmark Total Relative
Return
Period to Six Three Since Six Three Since Six Three Since
30 September months years IPO* months years IPO* months years IPO*
2022 (%) (% p.a.) (% p.a.) (%) (% p.a.) (% p.a.) (%) (% p.a.) (% p.a.)
-------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Retail 4.3 3.0 4.6 0.6 0.7 3.7 3.7 2.3 0.9
-------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Office 0.0 4.9 7.7 -1.1 2.0 6.8 1.2 2.9 0.8
-------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Industrial 1.8 18.3 11.1 -3.2 16.7 10.1 5.2 1.4 0.9
-------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
Other 4.5 4.5 3.8 0.0 3.3 7.2 4.5 1.1 -3.2
-------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
All sectors 1.8 9.3 7.9 -1.2 6.1 6.5 3.1 3.0 1.3
-------- ---------- ---------- -------- ---------- ---------- -------- ---------- ----------
*IPO in July 2004
Real estate portfolio
As at 30 September 2022, the portfolio comprised 42 properties
valued at GBP532.0 million. This includes the share of joint
venture properties at City Tower in Manchester and the University
of Law in Bloomsbury, London.
The portfolio generated rental income of GBP30.7 million per
annum, reflecting a net initial yield of 5.4%, which compared with
the Benchmark of 4.1%. The portfolio also benefits from fixed
contractual annualised rental income uplifts of GBP900,000 per
annum over the next 24 months.
The independent valuers' estimated rental value ('ERV') of the
portfolio is GBP35.4 million per annum, reflecting a reversionary
income yield of 6.6%, which compares favourably with the Benchmark
at 4.8%. As an asset under development, the independent valuer is
yet to reflect the expected rent of GBP1.3 million per annum to be
generated by the operational Net Zero Carbon scheme at Stanley
Green Trading Estate in Cheadle, Manchester.
At the period end the portfolio void rate was 8.8%, calculated
as a percentage of estimated rental value. This compares with the
Benchmark void rate of 7.9%. The portfolio weighted average lease
length, calculated to the earlier of lease expiry or break, is 5.1
years.
Approximately 15% of the portfolio by contracted rent is
inflation linked, typically structured as five yearly reviews to
either the Retail Price Index ('RPI') or the Consumer Price Index
('CPI'). In some cases these inflation-linked leases can also be
reviewed to open market value, if higher, or include fixed
guaranteed increases. A further 5% of rent benefits from fixed
uplifts without an inflation link. The proportion of the portfolio
with inflation-linked leases should increase with ongoing asset
management activity.
The tables below summarise the portfolio information as at 30
September 2022. The property values and weightings represent the
period end valuations as determined by the independent valuers as
at 30 September 2022:
Top 15 properties by value Sector Value (GBPm) % of portfolio
[1] value
------------------------------------ -------------------------------- ------------- ---------------
Milton Keynes, Stacey
1 Bushes Industrial Estate Industrial 61.1 11.5
--- ------------------------------- -------------------------------- ------------- ---------------
Leeds, Millshaw Park
2 Industrial Estate Industrial 56.0 10.5
--- ------------------------------- -------------------------------- ------------- ---------------
London, Bloomsbury, The
University of Law Campus
3 (50% share) Office/university 41.5 7.8
--- ------------------------------- -------------------------------- ------------- ---------------
Manchester, City Tower Office/hotel/retail/leisure/car
4 (25% share) park 38.7 7.3
--- ------------------------------- -------------------------------- ------------- ---------------
Bedford, St. John's Retail
5 Park Retail Warehouse 34.7 6.5
--- ------------------------------- -------------------------------- ------------- ---------------
Cheadle, Stanley Green
6 Trading Estate Industrial 29.5 5.5
--- ------------------------------- -------------------------------- ------------- ---------------
Chippenham, Langley Park
7 Industrial Estate Industrial 26.8 5.0
--- ------------------------------- -------------------------------- ------------- ---------------
Norwich, Union Park Industrial
8 Estate Industrial 24.9 4.7
--- ------------------------------- -------------------------------- ------------- ---------------
9 Leeds, Headingley Central Retail/hotel/leisure 23.8 4.5
--- ------------------------------- -------------------------------- ------------- ---------------
Manchester, St Ann's
10 House Office/retail 14.8 2.8
--- ------------------------------- -------------------------------- ------------- ---------------
Telford, Horton Park
11 Industrial Park Industrial 14.7 2.8
--- ------------------------------- -------------------------------- ------------- ---------------
Uxbridge, 106 Oxford
12 Road Office/university 13.1 2.5
--- ------------------------------- -------------------------------- ------------- ---------------
Birkenhead, Valley Park
13 Industrial Estate Industrial 13.0 2.4
--- ------------------------------- -------------------------------- ------------- ---------------
14 Edinburgh, The Tun Office 11.9 2.2
--- ------------------------------- -------------------------------- ------------- ---------------
Salisbury, Churchill
15 Way Retail Warehouse 10.7 2.0
--- ------------------------------- -------------------------------- ------------- ---------------
Total as at 30 September
2022 415.2 78.0
--- ------------------------------- -------------------------------- ------------- ---------------
Sector weighting by Like-for-like net of
value as at 30 September capex capital growth
2022 for the six month period
ended 30 September 2022
SREIT(1) Benchmark(1) SREIT Benchmark
=========== =============== ========== ================
South East 11.5% 20.9%
=========== =============== ========== ================
Rest of UK 34.7% 12.6%
=========== =============== ========== ================
Industrial 46.2% 33.5% -0.5% -4.5%
=========== =============== ========== ================
City 0.0% 3.6%
=========== =============== ========== ================
Mid-town and West End 7.8% 6.6%
=========== =============== ========== ================
Rest South East 4.4% 7.9%
=========== =============== ========== ================
Rest of UK 15.7% 7.2%
=========== =============== ========== ================
Offices 27.9% 25.2% -3.1% -2.9%
=========== =============== ========== ================
Retail warehouse 11.8% 9.7% 3.5% -0.3%
=========== =============== ========== ================
South East 0.7% 6.4%
=========== =============== ========== ================
Rest of UK 7.3% 3.2%
=========== =============== ========== ================
Standard retail 7.9% 9.6% -2.1% -3.5%
=========== =============== ========== ================
Standard retail by
ancillary/single use
=========== =============== ========== ================
- Retail ancillary 5.1% -
to main use
=========== =============== ========== ================
- Retail single use 2.8% -
=========== =============== ========== ================
Other 6.1% 16.8% -0.5% -2.0%
=========== =============== ========== ================
Shopping centres - 1.8%
=========== =============== ========== ================
Unattributed indirects - 3.4%
=========== =============== ========== ================
Regional weighting by value as at 30 September
2022
SREIT Benchmark
================== =============================
Central London 7.8% 19.1%
================== =============================
South East excluding Central
London 18.5% 34.1%
================== =============================
Rest of South 10.4% 15.5%
================== =============================
Midlands and Wales 21.6% 13.1%
================== =============================
North 39.5% 14.0%
================== =============================
Scotland 2.2% 4.1%
================== =============================
Northern Ireland 0.0% 0.2%
================== =============================
1. Columns do not sum due to rounding.
Rental income is diverse and as at 30 September 2022 comprised
314 tenants, including the tenants of properties held by joint
ventures. The largest and top fifteen tenants represent 6.51% and
32.15% respectively of the portfolio, calculated as a percentage of
annual rent:
Top 15 tenants by annual rent Annual rent GBP % of total
million annual rent(1)
University of Law Limited 2.00 6.51%
================ ================
Siemens Mobility Limited 1.22 3.97%
================ ================
Buckinghamshire New University 1.15 3.75%
================ ================
The Secretary of State 0.59 1.92%
================ ================
Matalan Retail Limited 0.57 1.86%
================ ================
Express Bi Folding Doors Limited 0.54 1.76%
================ ================
TJX UK t/a HomeSense 0.51 1.66%
================ ================
Jupiter Hotels Limited 0.46 1.50%
================ ================
Premier Inn Hotels Limited 0.42 1.37%
================ ================
Lidl Great Britain Limited 0.42 1.37%
================ ================
Schneider Electric Limited 0.41 1.34%
================ ================
Ingeus (UK) Limited 0.41 1.34%
================ ================
Wickes Building Supplies Limited 0.40 1.30%
================ ================
Balfour Beatty Group Limited 0.39 1.27%
================ ================
Morgan Sindall Construction & Infrastructure
Limited 0.38 1.24%
================ ================
Total as at 30 September 2022 9.87 32.15%
================ ================
1. Column does not sum due to rounding.
Transactions
Manchester, St. Ann's House (Mixed-Use Office and Retail)
St. Ann's House in Manchester was acquired on 27 May 2022 for a
gross headline price of GBP14.7 million, reflecting a net initial
yield of 7.8%, a reversionary yield of 9.1% and a low average
capital value of GBP283 per sq ft. The mixed-use office and retail
asset generates GBP1.22 million per annum of headline rent compared
with an ERV of GBP1.27 million.
The freehold, 51,885 sq ft building, is 97% occupied by ERV and
comprises 40,277 sq ft of office space over five upper floors with
five retail units at the ground floor level and ancillary basement
space. It is prominently located on St. Ann's Square, near to the
prime retail core. St. Ann's Square features a listed church, the
Royal Exchange theatre, a mix of office occupiers and high-quality
luxury retail as well as leisure operators. The building benefits
from its close proximity to two tram stations.
The office space is fully let to four office tenants at an
average rent of GBP18.48 per sq ft, with the potential to increase
rental levels through refurbishment and improving sustainability
performance. There is also the opportunity to enhance income by
offering fitted out office space.
The appeal of St. Ann's Square to high quality luxury retailers
is reflected in the current tenant mix with complementary retailers
located in close proximity. During the pandemic rents were rebased
by the previous landlord and there are currently no arrears. At
acquisition, the tenants were Watches of Switzerland, Russell &
Bromley and Space NK. Since acquisition, we have let a unit to
David M Robinson Limited, a north-west based retailer of luxury
watches and jewellery, for GBP70,000 per annum, or GBP76.75 per sq
ft, which is in line with ERV and reflects 69% of the pre-pandemic
rent on a per square foot basis.
The weighted average unexpired lease term is 2.8 years to
earliest termination and 5.3 years to lease expiries. 58% of the
property by floor area currently has an EPC rating of 'B' with the
remainder rated 'C'.
The strategy is to undertake a rebranding of the building,
introduce additional amenities for the offices such as bike and
shower facilities and refurbish the property as floors become
available with a focus on improving sustainability performance.
This will increase the rental tone of the offices. We will aim to
leverage the close proximity of luxury jewellers and watch
retailers to attract similar occupiers to the subject asset at
higher rents.
Portsmouth, Southlink (Industrial)
Southlink, a 26,975 sq ft single let industrial asset in
Portsmouth, was sold on 24 June 2022 for GBP6.5 million. The price
compares with the 31 March 2022 independent valuation of GBP4.9
million and reflects a net initial yield of 3.2%.
Situated within the Walton Road Industrial area, Southlink was
acquired in July 2004. The asset produced a net rent of GBP225,000
per annum with a lease term of 2.4 years. Based on the disposal
price, the asset has generated an ungeared total return of 13.2%
per annum since acquisition, compared with the All Property MSCI
Benchmark for the same period of 6.8% per annum, and MSCI All
Industrial for the same period of 10.6% per annum.
Active asset management
Set out below are examples of ongoing active management
initiatives that should support continued outperformance of the
underlying portfolio from both a financial and sustainability
perspective.
Manchester, Cheadle, Stanley Green Trading Estate
(Industrial)
Asset overview and performance
Stanley Green Trading Estate in Cheadle, Manchester was acquired
in December 2020 for GBP17.3 million. The asset comprises 150,000
sq ft of trade counter, self-storage and warehouse accommodation
across 14 units on a nine acre site, with an adjoining 3.4 acre
development site. The site was acquired with a historic planning
consent for 48,000 sq ft of trade counter and warehouse space,
which we have subsequently increased to 80,000 sq ft.
As at 30 September 2022 the valuation was GBP29.5 million,
reflecting a net initial yield of 3.1% and a reversionary yield of
3.6% (4.7% and 5.8% respectively excluding development land). Over
the interim period the asset delivered a total return of 3.9% which
compared with MSCI All Industrial over the same period of
-3.2%.
Asset strategy
The strategy over the interim period was to crystallise higher
rents, develop an 80,000 sq ft, operational Net Zero Carbon ('NZC')
scheme on the adjoining 3.4 acre site and begin marketing to
pre-let the new accommodation.
Key activity
- The speculative development of 11 warehouse and trade units is
progressing with GBP4.9 million of capital expenditure incurred to
the period end, with a further GBP3.8 million allocated. The
development is on budget and scheduled to complete in early 2023.
The target rental income is GBP1.3 million per annum, or GBP16.00
per sq ft. Pre-lettings are in legal negotiations with prospective
tenants relating to 28% of the floor space, on terms that exceed
the original underwriting assumptions.
- Negotiations are progressing with a number of occupiers to
re-gear their leases across the existing trading estate which
should support continued income growth.
Chippenham, Langley Park Industrial Estate (Industrial)
Asset overview and performance
Langley Park Trading Estate in Chippenham was acquired in
December 2020 for GBP19.3 million and comprises a multi-let
industrial estate comprising 400,000 sq ft of warehouse and
ancillary office accommodation on a large site of 28 acres located
close to Chippenham town centre. As at 30 September 2022, the
valuation of GBP26.8 million reflected a net initial yield of 6.9%
and a reversionary yield of 7.3%. Over the period the asset
delivered a total return of 0.9%, which compared with the MSCI All
Industrial Benchmark over the same period of -3.2%.
Asset strategy
The strategy over the period was to drive net income growth, the
average unexpired lease term, and quality of accommodation across
the estate.
Key activity
- Siemens Mobility Limited ('Siemens') rent review completed at
GBP1.2 million per annum or GBP4.64 per sq ft, reflecting a 26%
increase in contracted rental income. Following completion of the
rent review, which was backdated to June 2021, Siemens became the
Company's second largest tenant.
- A new ten year lease renewal without breaks has completed with
IXYS UK Westcode Limited ('IXYS'), the UK subsidiary of Littelfuse,
a global manufacturer which has provided a parent company
guarantee. The rent is GBP465,000 per annum, or GBP5.50 per sq ft,
reflecting a 31% increase over the current contracted rent of
GBP355,000 per annum. IXYS receive 12 months' rent free which ends
in December 2023, and will receive a contribution to repair works
up to the value of GBP250,000 if undertaken within two years of
lease completion. The lease includes a rent review at year five to
the higher of open market value or RPI, with a collar of 1% per
annum and a cap of 5% per annum.
- The next phase of the business plan at Langley Park is to
consider longer term development plans which could involve the
creation of new space for existing tenants. Any development of new
warehouse units would be to an operational Net Zero Carbon ("NZC")
standard and a pre-planning application to develop 130,000 sq ft of
space has been submitted to Wiltshire County Council.
Valley Road Industrial Estate, Birkenhead (Industrial)
Asset overview and performance
Valley Road Industrial Estate in Birkenhead was acquired in
November 2021 for GBP11.4 million, which reflected a net initial
yield of 6.8%, a reversionary yield of 7.8% and a low average
capital value of GBP60 per sq ft. The ten-acre estate comprises
190,000 sq ft of warehouse space and ancillary offices across 15
units. The estate is located close to Junction 1 of the M53 and
features a manned secure access, low site cover and good
circulation. As at 30 September 2022, the valuation of GBP13.0
million reflected a net initial yield of 4.8% and a reversionary
yield of 6.7%. Over the period the asset delivered a total return
of 1.7%, which compared with the MSCI All Industrial Benchmark over
the same period of -3.2%.
Asset strategy
The strategy during the period was to let the void warehouse
space at or above ERV and finalise a plan to develop the ancillary
offices to enable them to be let.
Key activity
- A new five-year lease has been agreed with Balfour Beatty
Group Limited for six units totalling 10,577 sq ft, at a total rent
of GBP84,616 per annum, or GBP8.00 per sq ft. At year five, the
lease includes a tenant only break option and a rent review to the
higher of open market value or CPI, with a collar of 1.5% and a cap
of 3.5% per annum. This letting is in line with the 30 September
2022 ERV.
- A new five-year lease has been agreed with Transport for Wales
Rail Ltd for a 6,275 sq ft unit at GBP44,000 per annum, or GBP7.01
per sq ft, in line with the 30 September 2022 ERV.
- A new five-year lease has completed with SM Service Centre
Limited for a 1,605 sq ft unit at GBP13,700 per annum, or GBP8.54
per sq ft, in line with the 30 September 2022 ERV.
- As a result of the above, the warehouse element of the site is
fully let, completing a key objective of the business plan at
acquisition.
106 Oxford Road, Uxbridge (Office being used as a
university)
Asset overview and performance
106 Oxford Road in Uxbridge is let to the Company's third
largest tenant, the Buckinghamshire New University ('BNU'),
generating GBP1.15 million per annum with a tenant break option in
November 2023. BNU is a public university with campuses in High
Wycombe, Aylesbury and the subject asset, where teaching is
focussed on nursing and healthcare, including a range of working
wards, simulation labs and operating theatres. As at 30 September
2022, the valuation of GBP13.1 million reflected a net initial
yield of 8.24% and a reversionary yield of 6.8%, due to the
independent valuers adopting an office rental value of GBP950,000.
Over the period the asset delivered a total return of -8.4%, which
compared with the MSCI All Office Benchmark over the same period of
-1.1%. This was due to risk associated with the tenant break
option.
Asset strategy
The strategy during the period was to understand the tenant's
longer term strategy and mitigate the risk of the tenant break
option in November 2023.
Key activity
- Lease variation completed on 25 October 2022 that removes the
tenant break option in November 2023 and provides certainty of
income until lease expiry in November 2028. The tenant received
nine months rent free, and the rent increases from GBP1.15 million
per annum to a guaranteed GBP1.3 million in January 2024, becoming
the Company's second largest tenant. The independent valuer
estimated that the value on completing the lease regear, net of the
rent free, would be in the region of GBP14 to GBP14.5 million.
- Having completed the regear, we are exploring the potential
for a longer term lease commitment in return for the Company
carrying out more significant sustainability improvements to the
building, which would be in line with BNUs own ESG-related
commitments.
Sustainability and Responsible Investment
The Board and Schroders Capital Real Estate believe that a
successful sustainable investment programme should deliver enhanced
returns to investors, improved business performance to tenants and
tangible positive impacts to local communities, the environment and
wider society.
Offering occupiers resource-efficient and flexible space is
critical to ensure our investments are fit for purpose and sustain
their value over the long term. As a landlord, we have the
opportunity to help reduce running costs for our occupiers,
increase employee productivity and wellbeing, and contribute to the
prosperity of a location through building design and public
realm.
The 80,000 sq ft warehouse development under construction at
Stanley Green, Cheadle is an example of our sustainability led
approach. The scheme will be delivered to BREEAM Excellent, EPC A+
rating and operational NZC specification and expected to be the
first to achieve this status in the North West. Operational NZC
will be driven by the use of photovoltaics, recycled materials,
insulated cladding to mitigate heat loss and installation of LED
lighting. Electric vehicle charging and cycle storage facilities
will be installed to promote active travel. As part of the
Investment Manager's Sustainable Refurbishment and Redevelopment
guide, the contractor is encouraged to use local suppliers to boost
local employment. Eight apprenticeship schemes have been undertaken
and work experience opportunities are being advertised to local
students. Local community projects and charities have been
supported through donations and industry talks.
Active management at Haywood House, an office in Cardiff, has
led to occupancy increasing from 77% to 93% during the period, at
higher rents and with improved sustainability performance.
Following a refurbishment of part of the asset, where we installed
a dedicated variable refrigerant flow ('VRF') air-conditioning
system and LED lighting, increasing the EPC rating from an 'E' to a
'B', we moved an existing tenant from elsewhere in the property to
this space at a rent 45% ahead of the ERV at the beginning of the
period. The space vacated has now been let to the University of
Wales at a rent 9% ahead of the ERV at the beginning of the
period.
As previously noted, a continuing focus on sustainability will
be a defining characteristic of our future strategy. As described
in the Chairman's Statement, progress has been made over the period
to codify this evolution. In addition, during the period we
announced our 'Pathway to Net Zero Carbon', this includes the
following commitments:
-- Operational whole buildings emissions to be aligned to a 1.5degC pathway by 2030.
-- Embodied emissions for all new developments and major renovations to be net zero by 2030.
-- Operational Scope 1 and 2 (landlord) emissions to be net zero by 2030.
-- Operational and embodied whole building (scope 1, 2 and 3 -
landlord and tenant) emissions to be net zero by 2040.
These are ambitious targets, as our strategy to acquire and
upgrade existing buildings means a proportion of the portfolio will
be undergoing a transition whilst sustainability performance is
improved.
Finance
The Company has two loan facilities, a GBP129.6 million term
loan with Canada Life and a GBP75.0 million RCF with Royal Bank of
Scotland International ('RBSI'), of which GBP46.3 million was drawn
at the period end. The RBSI loan has an interest rate cap for
GBP30.5 million that comes into effect if GBP 3 month SONIA exceeds
1.5%. The cap became effective in August and expires on 3 July
2023. Properties with combined values of GBP314.4 million and
GBP140.4 million are secured against the Canada Life and RBSI loan
facilities respectively.
In addition to the properties secured against the Canada Life
and RBSI loan facilities, there are unsecured properties with a
value of GBP77.3 million and cash of GBP8.9 million(1) . This
results in a loan to value ratio, net of cash, of 31.4% at an
average interest cost of 2.7% (including the benefit of the cap),
and a long weighted maturity profile of 11.2 years.
GBP129.6 million term loan with Canada Life
The Company has significant headroom with loan to value ('LTV')
and interest cover ratio ('ICR') covenants as summarised below.
Lender Loan Maturity Total Asset Cash LTV LTV ICR ICR Projected Projected
(GBPm) interest value (GBPm) ratio ratio (%)(7) covenant ICR ICR
rate (GBPm) (%)(6) covenant (%)(7) (%)(4) covenant
(%) (%)(6) (%)(4)
Facility
A 64.8 15/10/2032 2.4 314.4 0.0 41.2 65 530 185 502 185
======= =========== ========= ======= ======= ======= ========= ======= ========= ========== ==========
Facility
B 64.8 15/10/2039 2.6
======= =========== ========= ======= ======= ======= ========= ======= ========= ========== ==========
Canada
Life
Term
Loan 129.6 2.5(5)
======= =========== ========= ======= ======= ======= ========= ======= ========= ========== ==========
- Net LTV on the secured assets against this loan is 41.2%. On
this basis the properties charged to Canada Life could fall in
value by 37% prior to the 65% LTV covenant being breached;
- The interest cover ratio is 530% based on actual net rents for
the quarter to 30 September 2022. A 65% fall in net income could be
sustained prior to the loan covenant of 185% being breached;
and
- The projected interest cover ratio is 502% based on projected
net rents for the year to 30 September 2023. A 58% fall in net
income could be sustained prior to the loan covenant of 185% being
breached; and
- After utilising available cash and uncharged properties, the
valuation and actual net rents could fall by 53% and 71%
respectively prior to either the LTV or interest cover ratio
covenants being breached.
GBP75.0 million revolving credit facility ('RCF') with RBSI
The Company has headroom with both LTV and ICR covenants as
summarised below:
Lender Loan/ Maturity Total Asset LTV LTV Projected Projected
amount interest value ratio ratio ICR (%)(8) ICR covenant
drawn rate (GBPm) (%)(6) covenant (%)(8)
(GBPm) (%) (%)(6)
RBSI 75.0/
RCF 46.3(9) 06/06/2027 3.8(10) 140.4 33.0 65(11) 310 250
========== ============ ========== ======== ======== ========== ============ ==============
- Net LTV on the secured assets against this loan is 33.0%. On
this basis the properties charged to RBSI could fall in value by
49% prior to the 65% LTV covenant being breached;
- The projected interest cover ratio is 310% based on actual net
rents for the quarter to 30 September 2022. A 19% fall in net
income could be sustained prior to the loan covenant of 250% being
breached, however, five additional assets are in the process of
being secured against the RBSI loan facility which will increase
the projected interest cover ratio materially;
- After utilising available cash and uncharged properties, the
valuation and actual net rents could fall by 74% and 54%
respectively prior to either the LTV or projected interest cover
ratio covenants being breached; and
- Replacement hedging options are being considered for the
interest rate cap that expires in July 2023.
1. Cash held at the balance sheet date includes GBP700,000 of
cash that is held within the joint ventures.
2. Loan balance divided by the property values as at 30 September 2022.
3. For the quarter preceding the Interest Payment Date ('IPD'),
(rental income received - void rates, void service charge and void
insurance)/interest paid.
4. The projected ICR covenant for the contracted four quarters
following the IPD deducting assumed non-recoverable costs (void
rates, void service charge and void insurance)/interest paid, based
on the average of the past four quarters.
5. Fixed total interest rate for the loan term.
6. Loan balance divided by the property values as at 30 September 2022.
7. For the quarter preceding the IPD, (rental income received -
void rates, void service charge and void insurance)/interest
paid.
8. The projected ICR covenant of the contracted four quarters
following the IPD deducting assumed non-recoverable costs (void
rates, void service charge and void insurance)/interest paid) based
on the average of the past four quarters.
9. Facility drawn as at 30 September 2022 from a total available facility of GBP46.3 million.
10. Total interest rate as at 30 September 2022 comprising a
three-month SONIA rate of 2.19% and the margin of 1.60% at a LTV
below 60%. Should the LTV be above 65%, the margin increases to
1.90%.
11. LTV ratio covenant of 65% for years one to three, then 60%
for years four and five.
Outlook
Despite a volatile and uncertain economic backdrop, good
progress has been achieved over the period delivering on the
strategy, resulting in a positive NAV total return, sustained
outperformance of the underlying portfolio and a further increase
in the dividend level, which is fully covered.
Higher yielding acquisitions in sectors and regions with
stronger occupier demand, sustainability led value add investments
into the existing portfolio, and an active approach to asset
management should lead to further income growth. We have a robust
and diverse tenant base that we expect to be resilient through a
recessionary period.
The strength of the balance sheet, with long term, mainly fixed
rate, debt is a key competitive advantage and there will be limited
impact on the Company from rising interest rates.
We are in a challenging period with persistent inflation leading
to higher interest rates, market volatility and lower levels of
economic growth. Whilst valuations will decline, the combination of
a clear strategy with increased emphasis on sustainability, a
diversified portfolio and a strong balance sheet should enable us
to maintain relative outperformance compared with our peers and
continue delivering an attractive and growing income return.
Nick Montgomery
Fund Manager
15 November 2022
Responsibility Statement of the Directors in respect of the
Interim Report
The Board is responsible for preparing the Interim Report and
Consolidated Financial Statements.
The Board is also responsible for the Company's system of risk
management and internal controls, and for reviewing its
effectiveness.
Principal risks and uncertainties
The principal risks and uncertainties with the Company's
business relate to the following risk categories: investment policy
and strategy; implementation of investment strategy, economic and
property market; custody; gearing and leverage; accounting, legal
and regulatory; valuation; service provider; and health and safety.
A detailed explanation of the risks and uncertainties in each of
these categories can be found on pages 26 to 29 of the Company's
published Annual Report and Consolidated Financial Statements for
the year ended 31 March 2022.
Since the Company's Annual Report and Consolidated Financial
Statements was published in June 2022, the Board has noted that
property market risk and interest rate risk have increased
materially. Other than as outlined above, the principal risks and
uncertainties have not materially changed during the six months
ended 30 September 2022.
Going concern
The Board believes it is appropriate to adopt the going concern
basis in preparing the financial statements. A comprehensive going
concern statement setting out the reasons the Board considers this
to be the case is set out in note 1 on page 27.
Related party transactions
There have been no transactions with related parties that have
materially affected the financial position or the performance of
the Company during the six months ended 30 September 2022. Related
party transactions are disclosed in note 14 of the condensed
consolidated interim financial statements.
We confirm that to the best of our knowledge:
-- the condensed set of financial statements has been prepared
in accordance with IAS 34 Interim Financial Reporting; and
-- the interim management report (comprising the Chairman's and
the Investment Manager's report) includes a fair review of the
information required by:
(a) DTR 4.2.7R of the Disclosure Guidance and Transparency
Rules, being an indication of important events that have occurred
during the first six months of the financial year and their impact
on the condensed set of financial statements; and a description of
the principal risks and uncertainties for the remaining six months
of the year; and
(b) DTR 4.2.8R of the Disclosure Guidance and Transparency
Rules, related party transactions that have taken place in the
first six months of the current financial year and that have
materially affected the financial position or performance of the
entity during that period; and any changes in the related party
transactions described in the last Annual Report that could do
so.
We are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's
website, and for the preparation and dissemination of financial
statements. Legislation in Guernsey governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
By order of the Board
Alastair Hughes
Chairman
15 November 2022
Condensed Consolidated Statement of Comprehensive Income
Notes GBP000 GBP000 GBP000
(unaudited) (unaudited) (audited)
Rental income 12,729 11,832 23,859
Other income 76 270 558
Property operating expenses (1,077) (806) (1,919)
Net rental and related income,
excluding joint ventures 11,728 11,296 22,498
Share of total net income in
joint ventures 2,063 1,583 2,740
-------------------------------------- ------ ------------ ------------ ----------
Net rental and related income,
including joint ventures 13,791 12,879 25,238
-------------------------------------- ------ ------------ ------------ ----------
Gain on disposal of investment
property 1,513 - 3,165
Net unrealised valuation (loss)/gain
on investment property 6 (3,718) 24,689 66,536
Expenses
Investment management fee 2 (1,561) (1,397) (2,994)
Valuers' and other professional
fees (901) (759) (1,547)
Administrator's fee 2 (37) (60) (82)
Auditor's remuneration (100) (102) (190)
Directors' fees (92) (75) (157)
Other expenses (103) (161) (442)
Total expenses (2,794) (2,554) (5,392)
-------------------------------------- ------ ------------ ------------ ----------
Net operating profit before
net 6,729 33,431 86,807
finance costs
Interest receivable 1 - -
Finance costs (2,418) (2,041) (4,139)
Refinancing costs (247) - -
-------------------------------------- ------ ------------ ------------ ----------
Net finance costs (2,664) (2,041) (4,139)
Share of total net income in
joint ventures 7 2,063 1,583 2,740
Share of net valuation (loss)/profit
in joint ventures 7 (3,446) 224 3,960
-------------------------------------- ------ ------------ ------------ ----------
Profit before taxation 2,682 33,197 89,368
Taxation 4 - - -
-------------------------------------- ------ ------------ ------------ ----------
Profit and total comprehensive
income for the period attributable
to the equity holders of the
parent 2,682 33,197 89,368
-------------------------------------- ------ ------------ ------------ ----------
Basic and diluted earnings
per share 0.5p 6.8p 18.2p
All items in the above statement are derived from continuing
operations. The accompanying notes 1 to 16 form an integral part of
the condensed interim financial statements.
Condensed Consolidated Statement of Financial Position
Investment property 6 445,131 377,301 433,486
Investment in joint ventures 7 80,254 79,964 83,700
Non-current assets 525,385 457,265 517,186
Trade and other receivables 8 18,378 19,117 16,169
Cash and cash equivalents 9 8,236 10,626 11,601
Current assets 26,614 29,743 27,770
Total assets 551,999 487,008 544,956
Issued capital and reserves 403,121 359,472 408,286
Treasury shares (37,101) (36,103) (36,103)
Equity 366,020 323,369 372,183
Interest-bearing loans and
borrowings 10 174,973 153,510 161,791
Lease liability 6 1,860 1,987 1,987
Non-current liabilities 176,833 155,497 163,778
Trade and other payables 11 9,146 8,142 8,995
Current liabilities 9,146 8,142 8,995
Total liabilities 185,979 163,639 172,773
Total equity and liabilities 551,999 487,008 544,956
------------------------------ --- --------- --------- ----------
Net Asset Value per ordinary
share 12 74.8p 65.8p 75.8p
------------------------------ --- --------- --------- ----------
The financial statements on pages 23-36 were approved at a
meeting of the Board of Directors held on 15 November 2022 and
signed on its behalf by:
Alastair Hughes
Chairman
The accompanying notes 1 to 16 form an integral part of the
condensed interim financial statements.
Condensed Consolidated Statement of Changes in Equity
For the period from 1 April 2021 to 30 September 2021
(unaudited)
Balance as at 31 March
2021 219,090 (35,967) 113,721 296,844
-------------------------------------------------- --- -------- ---------- --------- ----------------
Profit for the period - - 33,197 (33,197)
Dividends paid 5 - - (6,536) (6,536)
Share buyback 12 - (136) - (136)
Balance as at 30 September
2021 219,090 (36,103) 140,382 323,369
-------------------------------------------------- --- -------- ---------- --------- ----------------
For the year ended 31 March 2022 (audited) and for the period from
1 April 2022 to 30 September 2022 (unaudited)
Balance as at 31 March 2021 219,090 (35,967) 113,721 296,844
-------------------------------------------------- --- -------- ---------- --------- ----------------
Profit for the year - - 89,368 89,368
Dividends paid 5 - - (13,893) (13,893)
Share buyback - (136) - (136)
-------------------------------------------------- --- -------- ---------- --------- ----------------
Balance as at 31 March
2022 219,090 (36,103) 189,196 372,183
-------------------------------------------------- --- -------- ---------- --------- ----------------
Profit for the period - - 2,682 2,682
Dividends paid 5 - - (7,847) (7,847)
Share buyback 12 - (998) - (998)
-------------------------------------------------- --- -------- ---------- --------- ----------------
Balance as at 30 September
2022 219,090 (37,101) 184,031 366,020
-------------------------------------------------- --- -------- ---------- --------- ----------------
The accompanying notes 1 to 16 form an integral part of the
condensed interim financial statements.
Condensed Consolidated Statement of Cash Flows
Operating activities
Profit for the period/year 2,682 33,197 89,368
Adjustments for:
Profit on disposal of investment
property (1,513) - (3,165)
Net valuation loss/(gain) on investment
property 3,718 (24,689) (66,536)
Share of loss/(profit) of joint
ventures 1,383 (1,807) (6,700)
Net finance cost 2,664 2,041 4,139
Operating cash generated before
changes in working
capital 8,934 8,742 17,106
(Increase)/decrease in trade and
other receivables (2,209) (2,072) 859
Increase in trade and other payables 391 244 1,098
Cash generated from operations 7,116 6,914 19,063
Finance costs paid (2,158) (1,918) (3,847)
Interest received 1 - -
Net cash from operating activities 4,959 4,996 15,216
----------------------------------------------- --------- --------- ---------
Investing activities
Net proceeds from the sale of
investment property 6,413 - 12,835
Additions to investment property (5,245) (836) (4,924)
Acquisitions of investment property (15,146) - (19,850)
Additions to joint ventures - (620) (620)
Net income distributed from joint
ventures 1,663 1,583 2,598
----------------------------------------------- --------- --------- ---------
Net cash (used in)/from investing
activities (12,315) 127 (9,961)
----------------------------------------------- --------- --------- ---------
Financing activities
Share buyback (998) (136) (136)
Additions to external debt 13,600 - 21,200
Repayment of external debt - - (13,000)
Loan arrangement fees paid (764) - -
Dividends paid (7,847) (6,536) (13,893)
----------------------------------------------- --------- --------- ---------
Net cash from/(used in) financing
activities 3,991 (6,672) (5,829)
----------------------------------------------- --------- --------- ---------
Net decrease in cash and cash equivalents
for the period/year (3,365) (1,549) (574)
Opening cash and cash equivalents 11,601 12,175 12,175
----------------------------------------------- --------- --------- ---------
Closing cash and cash equivalents 8,236 10,626 11,601
----------------------------------------------- --------- --------- ---------
The accompanying notes 1 to 16 form an integral part of the
condensed interim financial statements.
Notes to the Interim Report
1. Significant accounting policies
Schroder Real Estate Investment Trust Limited (the "Company") is
a closed-ended investment company incorporated in Guernsey. The
condensed interim financial statements of the Company for the
period ended 30 September 2022 comprise the Company, its
subsidiaries and its interests in joint ventures (together referred
to as the "Group").
Statement of compliance
The condensed interim financial statements have been prepared in
accordance with the Disclosure Guidance and Transparency Rules of
the United Kingdom Financial Conduct Authority and IAS 34 Interim
Financial Reporting. They do not include all the information
required for the full annual financial statements, and should be
read in conjunction with the consolidated financial statements of
the Group as at and for the year ended 31 March 2022. The condensed
interim financial statements have been prepared on the basis of the
accounting policies set out in the Group's annual financial
statements for the year ended 31 March 2022. The financial
statements for the year ended 31 March 2022 have been prepared in
accordance with International Financial Reporting Standards
("IFRS") as issued by the International Accounting Standards Board,
and interpretations issued by the International Financial Reporting
Interpretations Committee.
Going concern
The Directors have examined significant areas of possible
financial risk, including the non-collection of rent and service
charges; potential movements in property valuations; have reviewed
cash flow forecasts; and have analysed forward-looking compliance
with third party debt covenants, in particular the Loan to Value
covenant and interest cover ratios in a rising interest rate
macroeconomic environment.
Overall, after utilising available cash, excluding the cash
undrawn against the RBSI facility, and uncharged properties and
units in Joint Ventures, and based on the reporting period to 30
September 2022, property valuations would have to fall by 37%
before the relevant Canada Life Loan to Value covenants were
breached, and actual net rental income would need to fall by 65%
before the interest cover covenants were breached.
The Company's office sector weighting has remained just below
its minimum requirement of 20% as at the interim period end. The
Company has received a waiver from Canada Life on this until June
2023.
Furthermore, the properties charged to RBSI could fall in value
by 49% prior to the 65% LTV covenant being reached and, based on
actual net rents for the quarter to September 2022, a 46% fall in
net income could be sustained prior to the RBSI loan covenant of
185% being breached.
As at the period end, the undrawn capacity of the RBSI facility
was GBP28.7 million. This facility is an efficient and flexible
source of funding due to its ability to be repaid and redrawn as
often as required. The facility was refinanced in June 2022 with a
new five-year term to 2027 and with an increase in the amount that
can be drawn from GBP52.5m to GBP75m.
The Board and Investment Manager continue to closely monitor the
Company's rental collection in a continually changing macroeconomic
environment and the requirement to distribute dividends in
accordance with the REIT regulations. All future dividends will be
kept under constant review to ensure the Company's liquid resources
will be sufficient to cover any working capital requirements.
The Directors have not identified any matters which would cast
significant doubt on the Group's ability to continue as a going
concern for the next twelve months from the date of approval of the
financial statements.
The Directors have satisfied themselves that the Group has
adequate resources to continue in operational existence for at
least the next twelve months from the date of approval of the
financial statements. After due consideration, the Board believes
it is appropriate to adopt the going concern basis in preparing the
interim financial statements.
Notes to the Interim Report (continued)
1. Significant accounting policies (continued)
Use of estimates and judgements
The preparation of financial statements requires management to
make judgements, estimates and assumptions that affect the
application of policies and the reported amounts of assets and
liabilities, income and expenses. Actual results may differ from
these estimates. The estimates and underlying assumptions are
reviewed on an ongoing basis. Revisions to accounting estimates are
recognised in the period in which the estimates are revised and in
any future periods affected. There have been no changes in the key
judgements and estimates used by management as disclosed in the
last Annual Report and financial statements for the year ended 31
March 2022.
Segmental reporting
The Directors are of the opinion that the Group is engaged in a
single segment of business, being property investment, and in one
geographical area, the United Kingdom. There is no one tenant that
represents more than 10% of the Group's revenue. The chief
operating decision-maker is considered to be the Board of Directors
who are provided with consolidated IFRS information on a quarterly
basis.
2. Material agreements
Schroder Real Estate Investment Management Limited is the
Investment Manager to the Company. The Investment Manager is
entitled to a fee, together with reasonable expenses incurred in
the performance of its duties. The fee is payable monthly in
arrears at currently one twelfth of the aggregate of 0.9% of the
Net Asset Value ("NAV") of the Company. The Investment Management
Agreement can be terminated by either party on not less than twelve
months written notice or on immediate notice in the event of
certain breaches of its terms or the insolvency of either
party.
The fee covers all of the appointed services of the Investment
Manager and there are standard provisions for the reimbursement of
expenses. Additional fees can be agreed for out-of-scope services
on an ad hoc basis.
The current tiered fee structure is as follows:
NAV Management fee percentage per annum
of NAV
<GBP500 million 0.9%
------------------------------------
GBP500 million - GBP1 billion 0.8%
------------------------------------
GBP1 billion+ 0.7%
------------------------------------
The total charge to the Consolidated Statement of Comprehensive
Income during the period was GBP1,561,000 (year to 31 March 2022:
GBP2,994,000; six months to 30 September 2021: GBP1,397,000). At
the period end no amount was outstanding (31 March 2022: GBPnil; 30
September 2021: GBPnil).
Langham Hall (Guernsey) Limited and Langham Hall UK Depositary
LLP provided Administration, Designated Manager and Depositary
services to the Group, with effect from 1 October 2021. The
Administrator was entitled to an annual fee equal to GBP57,000 of
which no sum (31 March 2022: GBP37,000; 30 September 2021: GBPnil)
was outstanding at the period end.
Schroder Investment Management Limited also provides with effect
from 1 October 2021 company secretarial services to the Company
with an annual fee equal to GBP50,000. Company secretarial fees for
the period were GBP25,000 (year to 31 March 2022: GBP25,000; six
months to 30 September 2021: GBPnil). At the period end GBP25,000
was outstanding (31 March 2022: GBP25,000; 30 September 2021:
GBPnil).
3. Basic and diluted earnings per share
The basic and diluted earnings per share for the Group is based
on the profit for the period of GBP2,682,000 (31 March 2022: profit
of GBP89,368,000; 30 September 2021: profit of GBP33,197,000) and
the weighted average number of ordinary shares in issue during the
period of 490,784,091 (31 March 2022: 491,085,850 and 30 September
2021: 491,086,039).
Notes to the Interim Report (continued)
4. Taxation
Tax expense in the period/year - - -
------------------------------------------- -------- -------- ---------
Reconciliation:
Profit before tax 2,682 33,197 89,368
-------------------------------------------- -------- -------- ---------
Effect of:
Tax using the UK corporation tax rate
of 19% 510 6,307 16,980
Revaluation loss/(profit) not taxable 706 (4,691) (12,642)
Share of revaluation loss/(profit)
of joint ventures not taxable 263 (43) (1,273)
Profit on disposal of investment property
not taxable (287) - (601)
UK REIT exemption on non-capital income (1,192) (1,573) (2,464)
Current tax expense in the period/year - - -
-------------------------------------------- -------- -------- ---------
SREIT has elected to be treated as a UK real estate investment
trust ("REIT"). The UK REIT rules exempt the profits of SREIT and
its subsidiaries' (the "Group") UK property rental business from
corporation tax. Gains on UK properties are also exempt from tax,
provided they are not held for trading or sold in the three years
after completion of development. The Group is otherwise subject to
corporation tax.
As a REIT, SREIT is required to pay Property Income
Distributions equal to at least 90% of the Group's exempted net
income. To retain UK REIT status there are a number of conditions
to be met in respect of the principal company of the Group, the
Group's qualifying activity and its balance of business. The Group
continues to meet these conditions.
Notes to the Interim Report (continued)
5. Dividends paid
Q/e 31 March 2022 (dividend paid
30 June 2022) 491.08 million 0.795 3,904
Q/e 30 June 2022 (dividend paid
19 August 2022) 491.02 million 0.803 3,943
----------------------------------- --------------- ------ ------
1.598 7,847
----------------------------------- --------------- ------ ------
Q/e 31 March 2021 (dividend paid
25 June 2021) 491.08 million 0.656 3,221
Q/e 30 June 2021 (dividend paid
13 August 2021) 491.08 million 0.675 3,315
---------------------------------- --------------- ------ ------
1.331 6,536
---------------------------------- --------------- ------ ------
Q/e 31 March 2021 (dividend paid
25 June 2021) 491.08 million 0.656 3,221
Q/e 30 June 2021 (dividend paid
13 August 2021) 491.08 million 0.675 3,315
Q/e 30 September 2021 (dividend
paid 17 December 2021) 491.08 million 0.726 3,565
Q/e 31 December 2021 (dividend paid
25 March 2022) 491.08 million 0.772 3,792
------------------------------------- --------------- ------ -------
2.829 13,893
------------------------------------- --------------- ------ -------
A dividend for the quarter ended 30 September 2022 of 0.803
pence per share (totalling GBP3.93 million) was approved on 15
November 2022 and will be paid on 9 December 2022.
6. Investment property
For the period 1 April 2021 to 30 September 2021 (unaudited)
Fair value as at 1 April 2021 36,376 315,400 351,776
Additions - 836 836
Fair value leasehold adjustment - - -
Net valuation gain on investment property 1,082 23,607 24,689
------------------------------------------- ------- -------- --------
Fair value as at 30 September 2021 37,458 339,843 377,301
------------------------------------------- ------- -------- --------
Notes to the Interim Report (continued)
6. Investment property (continued)
For the year 1 April 2021 to 31 March 2022 (audited)
Fair value as at 1 April 2021 36,376 315,400 351,776
Additions 118 3,669 3,787
Acquisitions - 19,850 19,850
Acquisition costs - 1,138 1,138
Disposal of asset held at fair value - (9,600) (9,600)
Fair value leasehold adjustment (1) - (1)
Net unrealised valuation gain on investment
property 3,300 63,236 66,536
--------------------------------------------- ------- -------- --------
Fair value as at 31 March 2022 39,793 393,693 433,486
--------------------------------------------- ------- -------- --------
For the period 1 April 2022 to 30 September 2022 (unaudited)
Fair value as at 1 April 2022 39,793 393,693 433,486
Additions 33 5,212 5,245
Acquisitions - 14,289 14,289
Acquisition costs - 857 857
Net proceeds on disposal - (6,413) (6,413)
Realised gain on disposal - 1,513 1,513
Fair value leasehold adjustment (128) - (128)
Net valuation gain/(loss) on investment
property 173 (3,891) (3,718)
----------------------------------------- ------- -------- --------
Fair value as at 30 September 2022 39,871 405,260 445,131
----------------------------------------- ------- -------- --------
The fair value of investment property, as determined by the
valuer, totals GBP451,900,000 (31 March 2022: GBP440,100,000; 30
September 2021: GBP384,375,000). None of this sum was in relation
to an unconditional exchange of contracts (31 March 2022: GBPnil;
30 September 2021: GBPnil).
As at 30 September 2022, GBP8,630,000 (31 March 2022:
GBP8,602,000; 30 September 2021: GBP9,062,304) in connection with
lease incentives is included within trade and other receivables.
Furthermore, included in non-current liabilities is a sum of
GBP1,860,000 (31 March 2022: GBP1,987,117; 30 September 2021:
GBP1,987,395) relating to the fair value of the leasehold element
of The Galaxy, Luton.
The fair value of investment property has been determined by
Knight Frank LLP, a firm of independent chartered surveyors, who
are registered independent appraisers. The valuation has been
undertaken in accordance with the current editions of RICS
Valuation - Global Standards, which incorporate the International
Valuation Standards, and the RICS UK National Supplement issued by
the Royal Institution of Chartered Surveyors (the "Red Book").
The properties have been valued on the basis of "Fair Value" in
accordance with the RICS Valuation - Professional Standards
VPS4(7.1) Fair Value and VPGA1 Valuations for Inclusion in
Financial Statements which adopt the definition of Fair Value used
by the International Accounting Standards Board.
The valuation has been undertaken using appropriate valuation
methodology and the Valuer's professional judgement. The Valuer's
opinion of Fair Value was primarily derived using recent comparable
market transactions on arm's length terms, where available, and
appropriate valuation techniques (The Investment Method).
The properties have been valued individually and not as part of
a portfolio.
Notes to the Interim Report (continued)
6. Investment property (continued)
All investment properties are categorised as Level 3 fair values
as they use significant unobservable inputs. There have not been
any transfers between levels during the year. Investment properties
have been classed according to their real estate sector.
Information on these significant unobservable inputs per class of
investment property is disclosed below:
Quantitative information about fair value measurement using
unobservable inputs (Level 3) as at 30 September 2022
(unaudited)
Fair value
(GBP'000) 245,950 113,000 74,300 18,650 451,900
------------- ---------------- -------------- ------------ ----------------
Area ('000
sq ft) 2,310 550 369 177 3,406
------------- ---------------- -------------- ------------ ----------------
Net passing Range GBP0 - GBP0 - GBP32.85 GBP4.93 GBP1.00 GBP0 - GBP32.85
rent psf Weighted GBP14.00 GBP13.61 - GBP29.10 - GBP13.00 GBP7.71
per annum average GBP5.07 GBP15.55 GBP7.39
----------- ------------- ---------------- -------------- ------------ ----------------
Gross ERV Range GBP2.50 GBP7.74 GBP10.00 GBP2.10 GBP2.10
psf per Weighted - GBP14.50 - GBP29.83 - GBP24.00 - GBP13.00 - GBP29.83
annum average GBP6.17 GBP14.73 GBP17.96 GBP7.91 GBP8.92
----------- ------------- ---------------- -------------- ------------ ----------------
Net initial Range 2.61% - 0% -10.43% 2.84% - 4.49% - 0% - 11.68%
yield (1) 7.74% 4.46% 11.68% 7.24% 8.43% 5.44%
Weighted 6.21% 6.58%
average
------------------------- ------------- ---------------- -------------- ------------ ----------------
Equivalent Range 4.71% - 5.00% - 6.51% - 4.77% - 4.71% -
yield 8.49% 5.49% 9.37% 6.37% 9.24% 7.81% 9.23% 9.37% 6.42%
Weighted 7.28%
average
------------------------- ------------- ---------------- -------------- ------------ ----------------
Notes: (1) Yields based on rents receivable after deduction of
head rents, but gross of non-recoverables.
Quantitative information about fair value measurement using
unobservable inputs (Level 3) as at 31 March 2022 (audited)
Fair value
(GBP000) 248,950 97,450 75,450 18,250 440,100
------------- ---------------- -------------- ------------ ----------------
Area ('000
sq. ft) 2,338 499 369 177 3,383
------------- ---------------- -------------- ------------ ----------------
Net passing Range GBP0 - GBP0 - GBP32.85 GBP0 - GBP1.00 GBP0 - GBP14.00
rent per Weighted GBP14.00 GBP12.77 GBP29.10 - GBP13.00 GBP4.93
sq. ft per average GBP4.93 GBP16.49
annum
----------- ------------- ---------------- -------------- ------------ ----------------
Gross ERV Range GBP2.50 GBP7.40 GBP10.00 GBP2.10 GBP2.10
per sq. Weighted - GBP14.00 - GBP29.83 -GBP27.50 - GBP13.00 - GBP29.83
ft per annum average GBP5.93 GBP13.86 GBP17.80 GBP7.91 GBP8.50
----------- ------------- ---------------- -------------- ------------ ----------------
Net initial Range 3.29% - 0% - 9.26% 4.33% -12.80% 4.75% - 3.29% -
yield (1) 7.25% 4.34% 7.56% 8.55% 7.25% 4.34%
Weighted 6.12%
average
--------------------------- ------------- ---------------- -------------- ------------ ----------------
Equivalent Range 4.20% - 4.99% - 5.79% - 4.75% - 4.20% -
yield Weighted 7.76% 5.17% 9.97% 6.37% 9.36% 7.50% 9.21% 7.76% 5.17%
average
----------- ------------- ---------------- -------------- ------------ ----------------
Notes: (1) Yields based on rents receivable after deduction of
head rents, but gross of non-recoverables.
Notes to the Interim Report (continued)
6. Investment property (continued)
Sensitivity of measurement to variations in the significant
unobservable inputs
The significant unobservable inputs used in the fair value
measurement categorised within Level 3 of the fair value hierarchy
of the Group's property portfolio, together with the impact of
significant movements in these inputs on the fair value
measurement, are shown below:
Passing rent Increase Decrease
Gross ERV Increase Decrease
Net initial yield Decrease Increase
Equivalent yield Decrease Increase
------------------ --------- ---------
There are interrelationships between the yields and rental
values as they are partially determined by market rate conditions.
The sensitivity of the valuation to changes in the most significant
inputs per class of investment property is shown below:
Increase in ERV by 5% 11,268 3,947 3,447 504 19,166
Decrease in ERV by 5% (10,703) (4,961) (3,316) (325) (19,305)
Increase in net initial yield
by 0.25% (13,055) (4,374) (2,481) (682) (20,592)
Decrease in net initial yield
by 0.25% 14,605 4,741 2,659 736 23,741
------------------------------- --------- -------- -------- ------ ---------
Increase in ERV by 5% 11,240 3,307 3,378 605 18,530
Decrease in ERV by 5% (11,372) (3,462) (3,609) (416) (18,859)
Increase in net initial yield
by 0.25% (13,574) (3,825) (2,416) (645) (20,460)
Decrease in net initial yield
by 0.25% 15,236 4,152 2,582 694 22,664
------------------------------- --------- -------- -------- ------ ---------
Increase in ERV by 5% 9,209 2,611 3,878 738 16,436
Decrease in ERV by 5% (9,055) (3,420) (3,788) (455) (16,718)
Increase in net initial yield
by 0.25% (9,507) (3,390) (2,771) (598) (16,266)
Decrease in net initial yield
by 0.25% 10,549 3,664 2,967 643 17,823
------------------------------- -------- -------- -------- ------ ---------
Notes to the Interim Report (continued)
7. Investment in joint ventures
For the period 1 April 2021 to 30 September 2021 (unaudited)
Opening balance as at 1 April 2021 79,120
Share of net rental income 1,583
Distributions received/receivable (1,583)
Purchase of units in City Tower Unit Trust to fund
capital expenditure 620
Share of valuation profit 224
Closing balance as at 30 September 2021 79,964
----------------------------------------------------- --------
For the year 1 April 2021 to 31 March 2022 (audited)
Opening balance as at 1 April 2021 79,120
Purchase of units in City Tower Unit Trust 620
Share of valuation profit 3,960
-------------------------------------------- -------
Closing balance as at 31 March 2022 83,700
-------------------------------------------- -------
For the period 1 April 2022 to 30 September 2022 (unaudited)
Opening balance as at 1 April 2022 83,700
Share of net rental income 2,063
Distributions received/receivable (2,063)
Share of valuation loss (3,446)
Closing balance as at 30 September 2022 80,254
------------------------------------------ --------
8. Trade and other receivables
Rent receivable 3,028 4,072 3,608
Sundry debtors and prepayments 6,720 5,982 3,959
Lease incentives 8,630 9,063 8,602
18,378 19,117 16,169
-------------------------------- ------- ------- -------
GBP3.78 million (gross of VAT) was owed by tenants as at the
period end and a net bad debt provision of GBP0.6m was made with
regard to expected credit losses (31 March 2022: GBP0.9m; 30
September 2021: GBP0.8m).
When determining an appropriate bad debt provision the following
key factors were considered: the tenants' rent deposits held; the
tenants' covenants; financial strength and rent and service
charge-paying histories; and the current trading situation of the
tenants.
Notes to the Interim Report (continued)
9. Cash and cash equivalents
As at 30 September 2022 the Group had GBP8.2 million in cash (31
March 2022: GBP11.6 million; 30 September 2021: GBP10.6
million).
10. Interest-bearing loans and borrowings
The Group has in place a GBP129.6 million loan facility with
Canada Life and the loan is split into two equal tranches of
GBP64.8 million as follows:
- Facility A matures in October 2032 and attracts an interest rate of 2.36%; and
- Facility B matures in October 2039 and attracts an interest rate of 2.62%.
As at the period end, the Canada Life interest cover ratio was
530% (31 March 2022: 650%; 30 September 2021: 563%) against a
covenant of 185%; the forecast interest cover ratio was 502% (31
March 2022: 487%; 30 September 2021: 441%) against a covenant of
185%; and the Loan to Value ratio was 41.2% (31 March 2022: 40.1%;
30 September 2021: 44.6%) against a covenant of 65%.
The Canada Life facility has a first charge of security over all
the property assets in the ring-fenced security pool which at 30
September 2022 contained properties valued at GBP314.4 million (31
March 2022: GBP322.9 million; 30 September 2021: GBP290.8 million).
Various restraints apply during the term of the loan although the
facility has been designed to provide significant operational
flexibility.
At the period end the Group also had in place a GBP75m revolving
credit facility ("RCF") with the Royal Bank of Scotland with
GBP46.3m drawn down (31 March 2022: GBP32.7 million; 30 September
2021: GBP24.5 million). The facility carries an interest rate of a
1.65% margin plus three-month SONIA rate with a 0.62%
non-utilisation fee. An interest rate cap for GBP30.5 million of
the loan has been entered into and this comes in to effect if the
three-month SONIA rate reaches 1.5%. The three-month SONIA rates
exceeded 1.5% in August 2022.
As at the period end, the forecast interest cover ratio was 310%
(31 March 2022: 538%; 30 September 2021: 1079%) against a covenant
of 250%; and the Loan to Value ratio was 33.0% (31 March 2022:
24.0%; 30 September 2021: 18.3%) against a covenant of 65%.
The RBSI facility has a first charge security over all the
assets held in SREIT No.2 Limited which at 30 September 2022
contained properties valued at GBP140.4 million (31 March 2022:
GBP136.5 million; 30 September 2021: GBP133.8 million).
As at 30 September 2022, the Group has total loan balances drawn
of GBP175.89 million and GBP0.9 million of unamortised arrangement
fees (31 March 2022: GBP162.25 million and GBP0.5 million of
unamortised arrangement fees; 30 September 2021: GBP154.09 million
and GBP0.6 million of unamortised arrangement fees).
The fair value of the fixed-interest Canada Life debt is based
on the present value of future cash flows discounted at a market
rate of interest. As at 30 September 2022, the fair value of the
Group's GBP129.59 million loan with Canada Life was GBP111.8
million (31 March 2022: GBP125.8 million; 30 September 2021:
GBP129.4 million).
Non-current liabilities
Loan facilities 175,885 154,085 162,252
Unamortised arrangement fees (912) (575) (461)
174,973 153,510 161,791
------------------------------ -------- -------- --------
Notes to the Interim Report (continued)
11. Trade and other payables
Deferred income 4,145 3,812 4,123
Rental deposits 2,038 1,480 1,744
Interest payable 1,034 807 840
Other payables and accruals 1,929 2,043 2,288
9,146 8,142 8,995
----------------------------- ------ ------ ------
12. NAV per ordinary share and share buyback
On 27 July 2022 the Company announced that it was recommencing a
share buyback programme. Between 28 July 2022 and 15 September 2022
the Company purchased a sum of 1,969,725 shares for a sum of GBP1.0
million at an average price of 51 pence per share.
As a consequence of the buyback, the number of ordinary shares
in issue fell from 491,080,301 to 489,110,576 during the reporting
period.
The NAV per ordinary share is based on the net assets of
GBP366,020,000 (31 March 2022: GBP372,183,000; 30 September 2021:
GBP323,369,000) and 489,110,576 ordinary shares in issue at the
Statement of Financial Position reporting date (31 March 2022:
491,080,301 and 30 September 2021: 491,080,301).
13. Financial risk factors
Since the Company's Annual Report and Consolidated Financial
Statements was published in June 2022, the Board has noted that
property market risk and interest rate risk have increased
materially. Other than as outlined on page 22, the principal risks
and uncertainties have not materially changed during the six months
ended 30 September 2022.
The Board regularly reviews and agrees policies for managing all
key risks.
14. Related party transactions
Material agreements are disclosed in note 2. The Directors'
remuneration for the six-month to 30 September 2022, for services
to the Group was GBP88,000 (31 March 2022: GBP156,927; 30 September
2021: GBP75,000) of which GBPnil was outstanding at period end (31
March 2022: GBPnil; 30 September 2021: GBPnil). Transactions with
joint ventures are disclosed in note 7.
15. Capital commitments
At 30 September 2022 the Group had capital commitments for
capital expenditure of GBP9.1 million (31 March 2022: GBP12.3
million; 30 September 2021: GBP4.1 million).
16. Post balance sheet events
There were no significant events occurring after the balance
sheet date.
EPRA Performance Measures
As recommended by the European Public Real Estate Association
("EPRA"), key performance measures are disclosed in the section
below.
a. EPRA earnings and EPRA earnings per share
Represents total IFRS comprehensive income excluding realised
and unrealised gains/losses on investment property and the share of
net valuation profit/loss in joint ventures, divided by the
weighted average number of shares.
Six months Six months
to to Year to
30 September 30 September 31 March
2022 2021 2022
GBP000 GBP000 GBP000
--------------------------------------------------- ------------- ------------- -----------
Earnings per IFRS income statement 2,682 33,197 89,368
--------------------------------------------------- ------------- ------------- -----------
Adjustments to calculate EPRA earnings:
--------------------------------------------------- ------------- ------------- -----------
Profit on the disposal of investment property (1,513) - (3,165)
--------------------------------------------------- ------------- ------------- -----------
Net unrealised valuation loss/(gain) on investment
property 3,718 (24,689) (66,536)
--------------------------------------------------- ------------- ------------- -----------
Refinancing costs 247 - -
--------------------------------------------------- ------------- ------------- -----------
Share of valuation loss/(gain) in joint ventures 3,446 (224) (3,960)
--------------------------------------------------- ------------- ------------- -----------
EPRA earnings 8,580 8,284 15,707
--------------------------------------------------- ------------- ------------- -----------
Weighted average number of Ordinary Shares 490,784,091 491,086,039 491,085,850
--------------------------------------------------- ------------- ------------- -----------
EPRA earnings per share (pence) 1.7 1.7 3.2
--------------------------------------------------- ------------- ------------- -----------
b. EPRA Net Reinstatement Value
Six months
to
30 September
2022
GBP000
-------------------------------------------------------- -------------
IFRS equity attributable to shareholders 366,020
-------------------------------------------------------- -------------
Adjustment in respect of real estate transfer taxes and
costs 35,680
-------------------------------------------------------- -------------
EPRA Net Reinstatement Value 401,700
-------------------------------------------------------- -------------
Shares in issue at the end of the period 489,110,576
-------------------------------------------------------- -------------
EPRA Net Reinstatement Value per share (pence) 82.1
-------------------------------------------------------- -------------
c. EPRA Net Tangible Assets
Six months
to
30 September
2022
GBP000
------------------------------------------- -------------
IFRS equity attributable to shareholders 366,020
------------------------------------------- -------------
EPRA Net Tangible Assets 366,020
------------------------------------------- -------------
Shares in issue at the end of the period 489,110,576
------------------------------------------- -------------
EPRA Net Tangible Assets per share (pence) 74.8
------------------------------------------- -------------
EPRA Performance Measures (continued)
d. EPRA Net Disposal Value
Six months
to
30 September
2022
GBP000
---------------------------------------------------------- -------------
IFRS equity attributable to shareholders 366,020
---------------------------------------------------------- -------------
Adjustment for the fair value of fixed interest rate debt 17,735
---------------------------------------------------------- -------------
EPRA Net Disposal Value 383,755
---------------------------------------------------------- -------------
Shares in issue at the end of the period 489,110,576
---------------------------------------------------------- -------------
EPRA Net Disposal Value per share (pence) 78.5
---------------------------------------------------------- -------------
Glossary
Alternative performance please see page 40 for full details of the key
measure ("APM") APMs used by the Company.
Annualised dividend being the dividend paid during the period annualised
yield and expressed as a percentage of the period end
share price.
Articles means the Company's articles of incorporation,
as amended from time to time.
Companies Law means the Companies (Guernsey) Law, 2008.
Company is Schroder Real Estate Investment Trust Limited.
Directors means the Directors of the Company as at the date
of this document.
Disclosure Guidance means the disclosure guidance and transparency
and Transparency rules contained within the FCA's Handbook of Rules
Rules and Guidance.
Earnings per share is the profit after taxation divided by the weighted
("EPS") average number of shares in issue during the period.
Estimated rental is the Group's external valuers' reasonable opinion
value ("ERV") as to the open market rent which, on the date of
valuation, could reasonably be expected to be obtained
on a new letting or rent review at a property.
EPRA is the European Public Real Estate Association.
EPRA Earnings per is the EPRA earnings divided by the weighted average
share number of shares in issue during the period.
EPRA Net Tangible is the IFRS equity attributable to shareholders
Assets adjusted for items including deferred tax, the
fair value of financial instruments and intangible
assets.
EPRA Net Disposal is the IFRS equity attributable to shareholders
Value adjusted for items including goodwill as a result
of deferred tax and the fair value of interest
rate debt
EPRA Net Reinstatement is the IFRS equity attributable to shareholders
Value adjusted to represent the value required to rebuild
the entity and assumes that no selling of assets
takes place
FCA is the UK Financial Conduct Authority.
Gearing is the Group's net debt as a percentage of adjusted
net assets.
Group is the Company and its subsidiaries.
Initial yield is the annualised net rents generated by the portfolio
expressed as a percentage of the portfolio valuation.
Interest cover is the number of times Group net interest payable
is covered by Group net rental income.
Listing Rules means the listing rules made by the FCA under Part
VII of the UK Financial Services and Markets Act
2000, as amended.
MSCI (formerly Investment Property Databank or "IPD")
is a Company that produces an independent benchmark
of property returns.
Net Asset Value is the IFRS equity attributable to shareholders
("NAV") and NAV divided by the number of shares in issue at the
per share period end.
NAV total return is calculated taking into account both capital
returns and income returns in the form of dividends
paid to shareholders.
Net rental income is the rental income receivable in the period after
payment of ground rents and net property outgoings.
REIT is a Real Estate Investment Trust.
Reversionary yield is the anticipated yield which the initial yield
will rise to once the rent reaches the estimated
rental value.
Alternative Performance Measures
The Company uses the following Alternative Performance Measures
("APMs") in its Interim Report and Consolidated Financial
Statements. The Board believes that each of the APMs provides
additional useful information to the shareholders in order to
assess the Company's performance.
Dividend Cover - the ratio of EPRA Earnings (page 37) to
dividends paid (note 5) in the period. Earnings excludes capital
items such as revaluation movements on investments and gains or
losses on the disposal of investment properties.
Dividend Yield - the dividends paid, expressed as a percentage,
relative to the share price. To note that for six-monthly interim
periods this is annualised.
EPRA Earnings - earnings excluding all capital components not
relevant to the underlying net income performance of the Company,
such as the unrealised fair value gains or losses on investment
properties and any gains or losses from the sales of properties.
See page 37 for a reconciliation of this figure.
EPRA Net Tangible Assets - the IFRS equity attributable to
shareholders adjusted to reflect a Company's tangible assets and
assumes that no selling of assets takes place.
EPRA Net Disposal Value - the IFRS equity attributable to
shareholders adjusted to reflect the NAV under an orderly sale of
business, where any deferred tax, financial instruments and certain
other adjustments are calculated to the full extent of their
liability.
EPRA Net Reinstatement Value - IFRS equity attributable to
shareholders adjusted to represent the value required to rebuild
the entity and assumes that no selling of assets takes place.
Gross LTV - the value of the external loans unadjusted for
unamortised arrangement costs (note 10) expressed as a percentage
of the market value of property investments as at the Balance Sheet
date. The market value of property investments includes joint
venture investments as per external valuations and have not been
adjusted for IFRS lease incentive balances or the fair value of the
head lease at Luton.
LTV Net of Cash - the value of the external loans unadjusted for
unamortised arrangement costs (note 10) less cash held (note 9)
expressed as a percentage of the market value of the property
investments as at the Balance Sheet date. The market value of
property investments includes joint venture investments as per
external valuations and have not been adjusted for IFRS lease
incentive balances or the fair value of the head lease at
Luton.
Ongoing Charges (including fund only expenses) - all fund costs
expected to be regularly incurred and that are payable by the
Company expressed as a percentage of the average quarterly NAVs of
the Company for the financial period. Any capital costs, including
capital expenditure or acquisition/disposal fees, are excluded.
Ongoing Charges (including fund and property expenses) - all
fund and property costs expected to be regularly incurred and that
are payable by the Company expressed as a percentage of the average
quarterly NAVs of the Company for the financial period. Any capital
costs, including capital expenditure and acquisition/disposal fees,
are excluded.
Share Discount/Premium - the share price of the Company is
derived from buyers and sellers trading their shares on the stock
market. This price is not identical to the NAV per share of the
underlying assets less liabilities of the Company. If the share
price is lower than the NAV per share, the shares are trading at a
discount. Shares trading above the NAV per share are said to be at
a premium. The discount/premium is calculated as the variance
between the share price as at the Balance Sheet date and the NAV
per share (page 24) expressed as a percentage.
NAV total return - the return to shareholders calculated on a
per share basis by adding dividends paid (note 5) in the period on
a time-weighted basis to the increase or decrease in the NAV per
share (page 24).
Corporate information
Registered Address Independent Auditor
Town Mills Ernst & Young LLP
North Suite 2 Royal Chambers
Rue Du Pre St. Julian's Avenue
St. Peter Port St. Peter Port
Guernsey GY1 1LT Guernsey GY1 4AF
Directors (All Non-Executive) Property Valuers
Alastair Hughes (Chairman) Knight Frank LLP
Lorraine Baldry (resigned 26 July 55 Baker Street
2022) London
Graham Basham (resigned 15 November W1U 8AN
2022)
Stephen Bligh Sponsor and Broker
Priscilla Davies (appointed 7 June J.P. Morgan Securities
2022) plc
Alexandra Innes (appointed 16 November 25 Bank Street
2022) Canary Wharf
London E14 5JP
Investment Manager and Accounting
Agent Tax Advisers
Schroder Real Estate Investment Deloitte LLP
Management Limited 2 New Street Square
1 London Wall Place London
London EC4A 3BZ
EC2Y 5AU
Receiving Agent and UK
Administrator Transfer/Paying Agent
Langham Hall (Guernsey) Limited Computershare Investor
Town Mills Services
North Suite 2 (Guernsey) Limited
Rue Du Pre 13 Castle Street
St. Peter Port St. Helier
Guernsey GY1 1LT Jersey
JE1 1ES
Company Secretary
Schroder Investment Management Limited
1 London Wall Place
London
EC2Y 5AU
Solicitors to the
Company as to Guernsey Depositary
as to English Law: Law: Langham Hall UK Depositary
Stephenson Harwood Mourant LLP
LLP Royal Chambers 8th Floor
1 Finsbury Circus St. Julian's Avenue 1 Fleet Place
London St. Peter Port London
EC2M 7SH Guernsey GY1 4HP EC4M 7RA
ISA
The Company's shares are eligible
for Individual Savings Accounts ('ISAs').
FATCA GIIN
5BM7YG.99999.SL.831
1 Based on the share price at 30 September 2022 of 46.4p and an
annualised dividend of 3.212 pps.
(2) This is an Alternative Performance Measure ("APM"). Details
of the calculation are included in the APM section on page 40.
[1] As per third party valuation reports unadjusted for IFRS
lease incentive amounts.
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END
IR EAFFSFASAFAA
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November 16, 2022 02:00 ET (07:00 GMT)
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