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Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
---|---|---|---|---|---|
Invista Fnd Tst | AQSE:SREI.GB | Aquis Stock Exchange | Ordinary Share | GB00B01HM147 |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 45.05 | 42.80 | 47.30 | 45.05 | 44.651 | 45.05 | 33,480 | 15:29:32 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
---|---|---|---|---|---|
0 | 0 | N/A | 0 |
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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November 16, 2022 02:00 ET (07:00 GMT)
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