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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Schroder Real Estate Investment Trust Limited | LSE:SREI | London | Ordinary Share | GB00B01HM147 | ORD SHS NPV |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 43.30 | 41.80 | 43.30 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Real Estate Agents & Mgrs | 25.23M | -54.72M | -0.1114 | -3.88 | 212.15M |
Hot Features
Premium
TIDMSREI
For release 2 June 2021
Schroder Real Estate Investment Trust Limited
("SREIT"/ the "Company" / "Group")
FULL YEAR RESULTS FOR THE YEARED 31 MARCH 2021
PORTFOLIO WELL PLACED TO MEET EVOLVING OCCUPIER NEEDS WITH INCREASED EXPOSURE
TO HIGHER GROWTH SECTORS AND ACTIVE ASSET MANAGEMENT
Schroder Real Estate Investment Trust, the actively managed UK focussed REIT,
today announces its audited full year results for the 12 months ended 31 March
2021.
Key financial highlights
· Net Asset Value ('NAV') of £296.8 million or 60.4 pps (31 March 2020:
309.8 million or 59.7 pps), supported by an accretive share buy-back programme.
· Net asset value ('NAV') total return for the year to 31 March 2021 of
3.9% (31 March 2020: -1.5%).
· EPRA earnings of £11.6 million, a decrease of 9% (31 March 2020: £12.7
million), reflecting the impact of the pandemic on rent collection rates and a
prudent approach to recognising bad debts.
· IFRS profit of £4.5 million (31 March 2020: loss of £32.5 million, due
to one-off refinancing costs).
· Continued outperformance of the underlying portfolio with a total return
of 4.6% vs. the MSCI Benchmark Index at 1.8%.
· Loan to Value ('LTV'), net of all cash, of 32.3%, within the long-term
strategic range of 25% to 35%
· £12.2 million of cash and £28 million of undrawn debt facilities
provides operational and financial flexibility.
· Dividends totalling £8 million or 1.59 pps paid during financial year,
reflecting dividend cover of 145% based on EPRA earnings. The Company will
institute a further 5% increase in the quarterly dividend to 0.656 pps, to be
paid in the quarter ending June 2021.
· Post year end reduction in the Investment Manager's fees to generate an
annualised saving of approximately £600,000 per annum with effect from 1 July
2021.
Key operational highlights
· Robust collection rate of 90% of rents due over the financial year.
· Two multi-let industrial acquisitions in December 2020 for £36.5
million, reflecting an above average net initial yield of 6.8%
· 80 new lettings, renewals and reviews completed from 1st April 2020 to
2nd June 2021, which totalled £7.9 million per annum of rental income and
underpinned a significant reduction in portfolio vacancy to 4.8% (31 March
2020: 7.3%)
· 73% of the portfolio weighted to the industrial and office sectors (31
March 2020: 68%), with a below Benchmark retail weighting and no shopping
centres
· Successful execution of Responsible and Impact Investment strategy
recognised with the retention of a three Green Star rating in the 2020 Global
Real Estate Sustainability Benchmark ('GRESB') survey, with the Company top in
its GRESB peer group of UK Diversified Listed Companies.
Lorraine Baldry, Chairman of the Board, commented:
"Despite the severe financial and societal impacts of the global pandemic, the
outlook for the Company is positive. This is due to the UK's faster than
expected economic recovery, the underlying quality of the portfolio and its
tenant base and the steps taken to minimise the impact of Covid-19 and maximise
shareholder returns during the financial year. This activity included a
successful share buyback programme which, combined with attractively priced new
investments, enabled dividends to be reinstated in a progressive manner.
"Whilst the recovery from the pandemic will be uneven and have a differential
impact on sectors within the economy, the Board and Manager expect the Company
to build on the resilience of the past year, underpinned by its strong balance
sheet, exposure to higher growth assets and balance sheet capacity to invest
and deliver attractive returns."
Nick Montgomery, Fund Manager, added:
"The Company has a good quality, diversified portfolio that is weighted towards
higher growth parts of the UK real estate market, with cash and undrawn credit
facilities also providing balance sheet capacity to make further investments
and deliver capital expenditure initiatives to enhance total returns.
"Whilst the Company is therefore well placed, the pandemic has provided an
opportunity to reassess the strategy in light of the acceleration in structural
changes and emerging occupier trends. This will lead to greater focus on the
four areas of: Environmental, Social and Governance; a hospitality mindset and
operational excellence; reinvestment into larger assets offering more
sustainable income and total returns; and leveraging Schroders' sector
specialist resources to invest across all parts of the UK market. These four
areas highlighted represent an evolution of the current strategy which, whilst
remaining income focussed, will place greater emphasis on the delivery of long
term sustainable total returns."
A webcast presentation for analysts and investors will be hosted today at 09.00
am. In order to register, please visit:
https://registration.duuzra.com/form/feedback/SREIannualresults
For further information:
Schroder Real Estate Investment Management 020 7658 6000
Nick Montgomery / Frank Sanderson
Northern Trust 01481 745352
Jingjing Qi
FTI Consulting 020 3727 1000
Dido Laurimore / Richard Gotla / Meth
Tanyanyiwa
Annual Report and Consolidated Financial Statements
for the year ended 31 March 2021
Contents
Overview.. 3
Company Summary. 3
Highlights. 4
Portfolio Overview 5
Investment Philosophy. 7
Our Strategic Objectives. 8
Performance Summary. 9
Strategic Report. 11
Chairman's Statement. 11
Investment Manager's review... 15
Sustainability Report. 31
Task Force for Climate-Related Financial Disclosure.. 38
Business Model 41
Our Stakeholders. 44
Risk and Uncertainties. 46
Governance Report. 49
Board of Directors. 49
Report of the Directors. 51
Corporate Governance.. 59
Remuneration Report. 63
Report of the Audit Committee.. 65
Independent Auditor's report. 68
Financial Statements. 76
Consolidated Statement of Comprehensive Income.. 76
Consolidated Statement of Financial Position.. 77
Consolidated Statement of Changes in Equity. 78
Consolidated Statement of Cash Flows. 79
Notes to the Financial Statements. 80
Other information. 101
EPRA Performance Measures (unaudited). 101
Alternative Performance Measures (unaudited) 105
AIFM disclosures (unaudited) 106
EPRA Sustainability Reporting Performance Measures (unaudited). 108
Report of the Depositary to the Shareholders. 125
Glossary 126
Notice of Annual General Meeting. 127
Corporate Information. 130
Overview
Schroder Real Estate Investment Trust Limited aims to provide shareholders with
an attractive level of income together with the potential for income and
capital growth through investing in UK commercial property.
Company Summary
Schroder Real Estate Investment Trust Limited (the 'Company' and together with
its subsidiaries the 'Group') is a real estate investment company with a
premium listing on the Official List of the Financial Conduct Authority and
whose shares are traded on the premium segment of the Main Market of the London
Stock Exchange (ticker: SREI).
The Company is a Real Estate Investment Trust ('REIT') and benefits from the
various tax advantages offered by the UK REIT regime. The Company continues to
be declared as an authorised closed-ended investment scheme by the Guernsey
Financial Services Commission under section 8 of the Protection of Investors
(Bailiwick of Guernsey) Law, 1987, as amended and the Authorised Closed-ended
Investment Schemes Rules 2008.
Objective
The Company aims to provide shareholders with an attractive level of income and
the potential for income and capital growth as a result of its investments in,
and active management of, a diversified portfolio of UK commercial real
estate.
The portfolio is principally invested in the three main UK commercial real
estate sectors of industrial, office and retail, and may also invest in other
sectors including mixed-use, residential, hotels, healthcare and leisure. The
Company believes that a diversified portfolio by location, sector, size and
tenant will outperform specialist strategies over the long term. Over the
duration of the property market cycle, the portfolio aims to generate an above
average income return with a diverse spread of lease expiries.
The Board has established a gearing guideline for the Investment Manager, which
seeks to target debt, net of cash, at a level reflecting a loan to value of
between 25% to 35%. This relatively low level of gearing is used to enhance
income and total returns for shareholders with the level dependent on the
property cycle and the outlook for future returns.
The dividend policy adopted by the Board is to pay a sustainable level of
quarterly dividends to shareholders. The Board keeps the dividend policy under
active review with a view to ensuring the Company can deliver a sustainable
level of cover whilst having due regard to current and anticipated future
market conditions. It is intended that the successful execution of the
Company's strategy will enable a progressive dividend policy.
Investment strategy
The Company's strategy is to own and actively manage a diversified portfolio of
properties located in the UK's Winning Cities and Regions.[1] These locations
are benefitting from higher economic growth resulting from structural changes
such as urbanisation, rapid changes and growth of technology, changing
demographics and social as well as positive impact themes. These locations have
diversified local economies, sustainable occupational demand and favourable
supply and demand characteristics. These properties offer good long-term
fundamentals in terms of location, specification and sustainability
performance, and are let at affordable rents, with the potential for income and
capital growth due to good stock selection and asset management. We aim to grow
income and enhance shareholder returns through active management and
operational excellence.
Highlights for the period to 31 March 2021
· Sustained total return outperformance of the real estate portfolio
comprising +2.8% versus the MSCI Benchmark Index (the 'Benchmark') over the
past 12 months, +2.4% per annum over the past three years and +1.1% per annum
since IPO in July 2004[2]
· Net asset value ('NAV') total return of 3.9%[3] for the year to 31 March
2021
· Active asset management strategy, leveraging sector specialist
capabilities, completing 80 new lettings, renewals and reviews from 1st April
2020 to 2nd June 2021, which totalled £7.9 million per annum of rental income
· Share buyback programme undertaken with £9.5 million of shares purchased
during the financial year, delivering 1.3 pence per share ('pps') of accretion
to shareholders
· 88% of the portfolio located in Winning Cities and Regions[4]
· 73% of the portfolio weighted to the industrial and office sectors
(2020: 68%), with a below Benchmark retail weighting and no shopping centres
· First in peer group of UK Diversified Listed Companies in terms of
sustainability performance, retaining three Green Stars in the 2020 GRESB
survey
· Loan to Value[5] ('LTV'), net of all cash, of 32.3% at a low average
cost of 2.4% per annum
Supporting Information:
· Net asset value of £296.8 million (2020: £309.8 million)
· Amount spent on shares repurchased of £9.5 million
· Net asset value per share of 60.4 pence (2020: 59.7 pence)
· Net asset value ('NAV') total return of 3.9% (2020: -1.5%[6])
· Value of property assets and share of joint ventures £438.8[7] million
(2020: £406.2 million)
· Underlying earnings of £11.6[8] million (2020: £12.7 million)
· Portfolio total return1
o One year: 4.6% SREIT vs. 1.8% MSCI Benchmark Index
o Three years: 4.6% per annum SREIT vs. 2.2% per annum MSCI
Benchmark Index
· Portfolio income return1
o One year: 6.5% SREIT vs. 4.4% MSCI Benchmark Index
o Three years: 6.1% per annum SREIT vs. 4.4% per annum MSCI
Benchmark Index
Portfolio Overview - at a glance
The investment policy of the Company is to own a diversified portfolio of UK
real estate underpinned by good fundamental characteristics. The Group invests
principally in the industrial, office and retail sectors and will also consider
other sectors including mixed-use, residential, hotels, healthcare and leisure.
Sector weightings
Industrial - The Company owns a range of industrial warehouses, the largest
being multi-let estates in the densely populated urban areas of Leeds,
Manchester and Milton Keynes which are positively impacted by structural trends
and where there are significant asset management opportunities to capture
rental growth.
Offices - The Company owns offices with good fundamentals in terms of
specification and location in those Winning Cities and Regions that are
attractive to a diverse occupier base. The largest office investments are in
London (Bloomsbury and Uxbridge), Manchester and Edinburgh.
Retail - The retail assets in the portfolio are predominantly well-managed,
bulky goods retail warehouses let at sustainable rents, and convenience retail
as part of mixed-use assets which are complementary to broader schemes and have
multiple uses such as offices and hotels. The Company does not own any shopping
centres.
Other - Other sectors are hotels and leisure properties. At present, the
apportioned value of the hotels at City Tower, Manchester and Headingley
Central, Leeds and a leisure scheme in Luton represent the Other weighting in
the portfolio.
Sector weightings
Sector weightings by value 2021 2020
(%) (%)
Industrial 38.8 28.6
Offices 34.4 39.6
Retail 20.0 24.6
Retail 11.3 12.8
warehouse 5.0 6.6
Retail part of 3.7 5.2
mixed-use
Retail single
use
Other 6.8 7.2
Top ten properties
The top ten properties, including the share of the joint venture properties at
City Tower in Manchester and Store Street in Bloomsbury, are set out below and
comprise 66% of the portfolio value:
Top ten properties Sector Value (£m) (% of
[9] portfolio)
1 Milton Keynes, Stacey Bushes Industrial Industrial 46.0 10.5
Estate
2 Leeds, Millshaw Industrial Estate Industrial 41.8 9.5
3 Manchester, City Tower (25% share) Office/ 40.2 9.2
mixed-use
4 London, Store Street, Bloomsbury (50% Office 39.4 9.0
share)
5 Bedford, St. John's Retail Park Retail 26.6 6.1
warehouse
6 Leeds, Headingley Central Mixed-use 24.0 5.5
7 Chippenham, Langley Park Industrial Industrial 19.8 4.5
Estate
8 Norwich, Union Park Industrial Estate Industrial 18.9 4.3
9 Cheadle, Stanley Green Trading Estate Industrial 18.0 4.1
10 Uxbridge, 106 Oxford Road Office 16.0 3.6
Total as at 31 March 2021 290.7 66.3
88% of the portfolio by value in higher growth locations
SREIT[10] % of UK GDP
Fastest growing centres 40% 52%
Second quartile 48% 22%
Third quartile 7% 14%
Slowest growing centres 5% 12%
Investment Philosophy
A disciplined approach to investment
Schroder Real Estate Investment Trust aims to provide shareholders with an
attractive level of income, with the potential for income and capital growth,
from owning a diversified portfolio focused on higher growth assets benefiting
from structural changes which are evident across the economy and real estate
markets. The portfolio is managed in accordance with an investment philosophy
centred on consistent principles which are to invest in strong asset
fundamentals and to actively manage assets in order to enhance value.
Mega themes
Long-term performance of real estate assets will be driven by structural
changes or 'mega themes' arising from demographic changes, urbanisation,
technological change, environmental and social changes and other factors that
are outside of the normal real estate market cycle. These include:
· Climate Change and Decarbonisation: The world is not yet on course to
meet the Paris targets. The Net Zero Carbon pathway at asset and fund level a
key priority.
· Urbanisation: The decline of retail stores will create opportunities for
more mixed use development in town and city centres.
· Demographics: The UK population is ageing. The number of people over 80
years old will increase by a third by 2030.
· Technology: Covid-19 will accelerate the growth of life sciences in the
UK and benefit cities and town with strong universities and knowledge based
economies.
· Emerging markets: Beijing now has more billionaires than New York. China
forecast to be the biggest economy by 2030 with likelihood of growing demand
for UK real estate.
· Impact investing: Positively impacting the environment and society with
the potential to benefit investment returns.
High quality research
Research is focussed on cyclical and structural trends in order to determine
market strategy and exploit mispricing. In addition, to better understand real
estate fundamentals, our research focuses on occupational demand at a town and
city level and other factors such as construction starts, infrastructure
investment and pricing relative to other assets.
Business plan-led approach
Every asset is managed as a business with a detailed plan that is the key focal
point for identifying and implementing active management strategies that will
maximise returns.
Responsible and Positive Impact Investment
Sustainability and Environmental Social Governance ('ESG') and Impact
Investment considerations are integral to good investment management and should
generate better long-term returns, contribute to our tenants' business
performance and create tangible benefits to the communities where we are
invested. The Company's work in this area was recognised by an EPRA Gold award
for Sustainability Best Practice Reporting in the 2020 year end accounts and
retention of Three Green Stars in the 2020 GRESB survey.
Winning Cities and Regions
Occupier demand is increasingly concentrated in 'Winning Cities and Regions',
those that offer a competitive advantage in terms of higher levels of GDP,
employment and population growth; differentiated local economies with higher
value industries; well-developed infrastructure; and places where people want
to live and work. Winning Cities and Regions will change over time and
investments will be made in other locations where we see higher rates of future
growth that could lead to mispricing opportunities.
· Differentiated economy: Globally facing, financial services, TMT hubs,
life sciences and value add manufacturing.
· Infrastructure improvements: Transport, distribution, energy and
technology.
· Employment growth: High value new jobs, wealth effect and population
growth.
· Environment: Live and work, tourism and amenities, universities,
cathedral cities, dominant retail and leisure.
Our Strategic Objectives
Exposure to Winning Cities and Regions experiencing higher levels of GDP,
employment and population growth
The strategy focuses on Winning Cities and Regions which offer a competitive
advantage in terms of higher levels of GDP per capita, employment and
population growth; differentiated local economies with higher value industries;
well developed infrastructure; and places where people want to live and work.
Increasing net income through transactions and asset management
Disciplined acquisition strategy focused on investing primarily in industrial
and regional office assets in Winning Cities and Regions, combined with active
asset management initiatives and operational excellence to drive net income
growth and dividend cover. The intention is to pursue a progressive dividend
policy.
Increasing exposure to assets and sectors with strong fundamentals
Post completion of asset business plans, the Company will seek to dispose of
assets where strong returns have been crystallised and that are expected to
underperform, in order to reinvest in assets with stronger fundamentals. A more
active approach to selling smaller, non-core assets on completion of business
plans, with proceeds reinvested into larger, more resilient assets in higher
growth sectors which offer a high standard of operational and sustainability
performance, should deliver more sustainable income and total returns over the
long term.
Managing portfolio risk in order to enhance the portfolio's defensive qualities
The Company has a diversified tenant base of 299 occupiers and an average
weighted lease term of 5.3 years. Priority is given to continue efforts to let
the vacant space, improve covenants and increase the average lease length
through new lettings and lease restructurings, alongside prudent management of
our balance sheet, targeting a Loan to Value ratio of between 25% and 35%.
The Company remains focused on delivering sustainable and growing income and
total returns
The key strategic steps are:
- Deliver a progressive dividend policy together with attractive and
sustainable total returns;
- Maintain the long-term track record of outperformance of the underlying
portfolio;
- Increase exposure to assets with strong fundamentals in higher growth
locations;
- Provide climate change leadership with ESG fully integrated and
relevant to the strategy;
- Actively manage the Company and its assets to maximise shareholder
returns;
- Evolve the Company's active asset management approach to include a
hospitality mindset and operational excellence; and
- Maintain a strong balance sheet.
Performance Summary
Property performance
31 March 2021 31 March 2020
Value of Property Assets and Joint Venture Assets £438.8m £406.2m
[11]
Annualised rental income [12] £28.3m £24.9m
Estimated open market rental value [13] £31.2m £29.5m
Underlying portfolio total return 4.6% 1.9%
MSCI Benchmark total return [14] 1.8% 0.2%
Underlying portfolio income return 6.5% 6.1%
MSCI Benchmark income return 4.4% 4.4%
Financial summary
31 March 2021 31 March 2020
Net Asset Value ("NAV") £296.8m £309.8m
NAV per Ordinary Share 60.4p 59.7p
EPRA Net Tangible Assets [15] £296.8m £309.8m
Profit/(loss) for the year £4.5m (£32.5m)
EPRA earnings [16] £11.6m £12.7m
Dividend cover [17] 145% 90%
Capital values
31 March 2021 31 March 2020
Share price 39.9p 38.9p
Share price discount to NAV (33.9%) (34.8%)
NAV total return [18] 3.9% (1.5%)
FTSE All-Share Index 3,831.05 3,107.42
FTSE EPRA/NAREIT UK Real Estate Index 1,635.89 1,402.39
Earnings and dividends
31 March 2021 31 March 2020
EPRA earnings[19] (pps) 2.3 2.5
Dividends paid (pps) 1.59 2.72
Annualised dividend yield on 31 March share price 4.0% 7.0%
Bank borrowings
31 March 2021 31 March 2020
On-balance sheet borrowings [20] £154.1m £129.6m
Loan to Value ratio (LTV), net of 32.3% 23.7%
all cash [21]
Ongoing charges
31 March 2021 31 March 2020
Ongoing charges (including fund and property 2.5% 2.3%
expenses) [22]
Ongoing charges (including fund only expenses) [23] 1.4% 1.4%
From 1 July 2021, the Board and the Manager have agreed a change to the
Manager's fees which will result in an initial saving of approximately £600,000
per annum, with tiering providing scope for a further ad valorem fee reduction
with growth of the Company. Pro forma, this equates to a 0.2% reduction in the
ongoing charges shown above for the period to 31 March 2021.
Strategic Report
Chairman's Statement
Overview
The past year has been a tumultuous period for the global economy, dominated by
the financial and societal impact of the Covid-19 pandemic. In response to the
pandemic, governments and central banks have provided significant policy
support together with unprecedented levels of investment in public health and
vaccination programmes. As a result, the global economy is emerging from a deep
recession, with expectations of a strong recovery reflected in elevated
financial markets.
Levels of expected growth are predicated on the rollout of vaccines and the UK
is currently benefiting from being at a more advanced stage compared with the
majority of other economies. Activity levels have also improved during the
recent UK lockdown as companies and households found ways of coping with
restrictions, leading to improved business confidence and household spending.
As a result, real UK Gross Domestic Product growth is forecast to be above 5%
for both 2021 and 2022, with this bounce back in stark contrast to the period
following the global financial crisis.
Against this backdrop, our strategy over the financial year to 31 March 2021
was initially focussed on mitigating the impact of the pandemic and improving
the portfolio's defensive qualities. As the effects and impact of the pandemic
were better understood, the strategy focussed on selective higher yielding
acquisitions and maximising shareholder returns through active asset management
and the share buyback programme.
The underlying property portfolio continued to deliver strong relative
performance compared with its peer group, with an underlying portfolio total
return of 4.6% for the financial year to 31 March 2021, compared with the MSCI
Benchmark Index (the 'Benchmark) of 1.8%. The portfolio's performance comprised
a 6.5% income return and a 1.8% decline in capital values, with both components
outperforming the Benchmark. The portfolio is now ranked on the 13th percentile
of the Benchmark since its launch in 2004.
The outperformance was driven by an above-average income return as result of
active asset management by the Manager's sector specialist teams focused on
rental collection and delivering long-term sustainable income. As a result of
this activity, the Company's void rate is at historic lows and the strongly
performing industrial sector now represents the portfolio's largest weighting.
The portfolio also performed best in its peer group of UK Diversified Listed
Companies in terms of sustainability performance, retaining Three Green Stars
in the 2020 GRESB survey.
The successful delivery of the strategy resulted in a net asset value ('NAV')
of £296.8 million or 60.4 pence per share ('pps') at 31 March 2021, an increase
of 1.2% compared with 59.7 pps as at 31 March 2020. This resulted in a NAV
total return, including dividends paid of 1.5 pps, of 3.9%. During the year £
9.5 million was invested in the share buyback programme which contributed 1.3
pps to the NAV.
Strategy
The immediate focus in response to the pandemic was on the safety and wellbeing
of our occupiers, suppliers and other stakeholders, whilst protecting
shareholders' long-term interests. The Investment Manager worked with the
Government and other industry participants to bring forward the Covid-19 Code
of Practice for commercial property, which set out the principles of behaviour
and responses to tenant difficulties in a proportionate and measured way. These
principles have been applied consistently and, alongside extensive occupier
engagement, supported a collection rate of 90% of rents due over the financial
year, a figure that we expect to increase in line with the roll out of the
vaccination programme and easing of lockdown restrictions. As Government
measures protecting tenants for non-payment of rent are lifted, it is important
that any further intervention fairly treats the interests of both landlords and
tenants. This is important such that parties can work towards mutually
beneficial solutions, securing sustainable long-term income and value for all
stakeholders.
The pandemic has accelerated structural changes such as the penetration of
online retail and adoption of flexible working practices. This has driven
polarisation in performance across real estate sectors, with strong demand for
warehousing during lockdowns contrasting with a challenging environment for
high street retail and shopping centres. Whilst the rate of this polarisation
will slow down as the economy opens up and social distancing restrictions ease,
continued divergence in returns is expected. At the same time, cities and
regions with knowledge-based economies, which has been a central component of
our strategy, will benefit disproportionally from stronger occupational demand.
These Winning Cities and Regions should also benefit from the Governments
'levelling up' strategy and increased fiscal spending to boost growth.
The steps taken by the Company during the past few years mean that the
underlying portfolio is well positioned to benefit from these structural
changes, with an above average and growing exposure to the industrial sector,
and significant office holdings in Winning Cities such as London and
Manchester. In addition, the portfolio has a below average weighting to retail,
with the majority of our retail weighting comprised of retail warehousing,
which has proven to be a more resilient retail format during the pandemic. The
Company also has no exposure to shopping centres, the most challenging part of
the retail market. Overall, the portfolio comprises high quality, multi-let
assets which, together with a strong income return, offer scope to add value
through asset management and capital expenditure.
Whilst it is too early to make accurate predictions regarding the long term
impact of the pandemic on occupational demand, we retain a strong conviction
that physical offices will remain core to future plans of businesses of all
shapes and sizes. However, it is clear that occupiers require greater levels of
flexibility in terms of service levels and contract terms. This means that real
estate will become increasingly operational. Landlords will therefore be
required to think innovatively around services to be offered within the assets,
invest in new technologies to reduce energy consumption and deliver operational
excellence. Schroders, as Manager, is increasing investment in these areas and
has specialist asset management teams focused on delivering increased service
levels to occupiers. An example of this is City Tower in Manchester, where
fitted out office space is being leased on flexible terms to drive higher
revenue growth compared with more traditional office lettings.
More broadly, the most significant structural change that the pandemic serves
to highlight is the required level of global co-ordination to address climate
change and the transition to net zero. This presents both a significant
challenge and an opportunity for the real estate industry, which is widely
considered to be responsible for approximately 40% of global carbon emissions.
The Company's approach to sustainability is outlined below.
Sustainability
The Board and Manager believe that focusing on sustainability throughout the
real estate lifecycle will deliver enhanced long-term returns for shareholders
as well as a positive impact to the environment and the communities where the
Company is investing. As a result, key sustainability objectives have been
agreed for the current financial year, which include the Company issuing its
own Net Zero Carbon Pathway. Work has already begun in this area with a
proposed operational net zero carbon industrial development at Stanley Green,
Manchester, the first of its type in the North West. Further detail is
contained within the Manager's report.
During the current financial year the Board and Manager also intend to align
the Company's sustainability objectives with the principles contained within
the EU Sustainable Finance Disclosure Regulation, or 'SFDR'. This is a new
investment disclosure standard applying in the European Union which is expected
to be replicated in the UK by the FCA, during 2021 or 2022. SFDR requires
complying companies to report on the extent to which sustainability risk is
part of the investment considerations. The reporting is intended to include
both the considered risk of climate change on the portfolio itself as well the
intended impact of the investment strategy. The Board and Manager expect to be
able to demonstrate, based on current activity, that these considerations are
fully integrated and relevant to the Company's strategy. This will include
binding commitments relating to the portfolio's environmental and social
characteristics, as well as demonstrating good governance.
Share buybacks
In September 2020 the Company announced a share buyback due to the prevailing
share price offering attractive value for shareholders. During the financial
year, 27.1 million shares were acquired for £9.5 million, which reflected an
average price of 35.1 pps and an average discount to the last prior financial
year end NAV of -41%. This resulted in NAV accretion of 1.3 pps. Since the
financial year end a further 340,000 shares have been acquired at an average
discount to the March 2021 NAV of -33%.
Since the start of the buyback in September, the share price has increased by
53% to 46.15 pps as at 28 May 2021, which now reflects a discount of 24% to the
latest reported NAV. The share buyback is one of a range of measures that the
Board has undertaken to address the share price discount to NAV, with others
including the major refinancing in 2019 which reduced the average financing
costs by £2.5 million. The Board will 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.
Dividend
In April 2020, due to uncertainty relating to the pandemic, the Board withheld
the dividend payment originally due to be paid in June 2020. We are pleased
that progress with rent collection and implementing the strategy enabled
dividends to be reinstated and progressively increased to 0.625 pps for the
dividend paid in the quarter ended 31 March 2021. As a result, during the
financial year, dividends totalling £8 million or 1.59 pps were paid,
reflecting dividend cover of 145% based on EPRA earnings.
The Board and Manager have prudently considered both EPRA and cash earnings as
part of determining dividend payments, with the latter impacted as a result of
tenant incentives and arrears. The Board's objective is to deliver a
sustainable and progressive dividend policy and therefore, adopting this
approach, the Company has today announced a further 5% increase in the dividend
to 0.656 pps, to be paid in the quarter ending 30 June 2021.
Debt
The Company has two loan facilities, a £129.6 million term loan with Canada
Life and a £52.5 million revolving credit facility ('RCF') with Royal Bank of
Scotland International ('RBSI') of which £24.5 million was drawn at 31 March
2021. These facilities provide a low all-in average cost of debt of 2.4% and a
blend of maturities in 2023, 2032 and 2039, reducing refinancing risk.
In addition to the properties secured against the Canada Life and RBSI loan
facilities, the Company has unsecured properties with a value of £39.4 million
and cash and undrawn debt of approximately £40 million. The Company has
significant headroom on all debt covenants. The Company's Loan to Value ratio,
net of cash, is 32%, within the long term strategic range of 25% to 35%.
The Investment Manager
The Board and the Manager have agreed a change to the Manager's fees which will
result in an initial saving of approximately £600,000 per annum, with tiering
providing scope for a further ad valorem fee reduction with growth of the
Company. This is in the process of being documented and will take effect from 1
July 2021. The Board are pleased with the performance of the management team
over the financial year and are satisfied that they have the necessary skills
and resources to deliver the future strategy.
Nick Montgomery is the Fund Manager of the Company, supported by the Manager's
specialist asset management teams and Group infrastructure. In July 2020, the
Company announced that Duncan Owen had decided to step down from his role as
Joint Fund Manager of the Company and Global Head of Real Estate at Schroder
Real Estate. Since 1 January 2021, Sophie van Oosterom has been appointed as
Global Head of Real Estate of Schroder Real Estate, and Duncan Owen has acted
as Special Advisor to the Board.
Outlook
Despite the severe financial and societal impacts of the global pandemic, the
outlook for the Company is positive. This is due to the UK's faster than
expected economic recovery, the underlying quality of the portfolio and its
tenant base, and the steps taken to minimise the impact of Covid-19 and
maximise shareholder returns during the financial year. This activity included
a successful share buyback programme which, combined with attractively priced
new investments, enabled dividends to be reinstated in a progressive manner.
Looking forward, the objective is to deliver a progressive dividend policy
together with attractive and sustainable total returns supported by asset
management.
Whilst the recovery from the pandemic will be uneven and have a differential
impact on sectors within the economy, the Board and Manager expect the Company
to build on the resilience of the past year, underpinned by its strong balance
sheet, exposure to higher growth assets and balance sheet capacity to invest
and deliver attractive returns. Furthermore, the Company is well placed to
capitalise on the trends that have accelerated as a result of the pandemic,
including responding to changes in occupier demand, a focus on operational
excellence and ensuring that sustainability priorities are fully integrated
within the Company's investment process.
Lorraine Baldry
Chairman
Schroder Real Estate Investment Trust Limited
1 June 2021
Investment Manager's review
Investment Manager's report
Good progress has been made during the financial year to 31 March 2021
delivering on the strategy against the backdrop of significant volatility and
uncertainty caused by the Covid-19 pandemic. At the outset of the pandemic, and
across the first half of the financial year, our efforts were focussed on
mitigating the effects of the pandemic on our portfolio, tenants and wider
stakeholders. The second half of the financial year has been characterised by a
high level of positive activity including new investments, active asset
management and evolving the strategy to deliver sustainable outperformance as
the economy reopens and real estate markets adjust to a new normal.
The Company's Net Asset Value ('NAV') as at 31 March 2021 was £296.8 million or
60.4 pence per share ('pps'), which reflects an increase over the financial
year of 0.7 pps or 1.2%, and a NAV total return of 3.9%. A detailed analysis
of the NAV is set out below:
£m pps
NAV as at 31 March 2020 309.8 59.7
Unrealised change in valuation of direct real estate 2.5 0.5
portfolio and Joint Ventures[24]
Capital expenditure[25] (7.1) (1.4)
Acquisition costs (2.3) (0.4)
Realised gains on disposals 0.1 -
Net revenue/EPRA earnings 11.6[26] 2.3
Dividends paid (8.0) (1.5)
Others (0.3) (0.1)
NAV as at 31 March 2021 (excluding the share buyback) 306.3 59.1[27]
Share buyback (9.5) 1.3
NAV as at 31 March 2021 296.8 60.4[28]
The underlying portfolio, including joint ventures and the impact of capital
expenditure, decreased in value by -1.8% over the 12 months to March 2021,
which compared favourably with the MSCI Benchmark (the 'Benchmark') of -2.5%.
The pandemic had a negative impact on values during the first half of the
financial year, with a capital value decline of -3.4% (Benchmark -3.4%)
comparing with a capital value increase of 1.7% over the second half (Benchmark
+1.0%).
This capital value movement includes the dilutive impact of acquisitions costs,
totalling £2.3 million, associated with the purchase of two industrial estates
in Manchester and Chippenham in December for £36.5 million. These acquisitions
reflected an above average net initial yield of 6.8% and were revalued to £37.8
million as at March 2021, an uplift of £1.3 million or 4%.
Net revenue for the year totalled £11.6 million, or 2.3 pps, which was 8% below
the previous financial year and due to the impact of the pandemic on rent
collection rates, which were 90% of rents due for the financial year. This
figure also reflects what we believe was a prudent approach to recognising bad
debt provisions, which totalled £1.1 million at the year end.
Dividends totalled £8 million for the financial year comprising of three
payments, with the first interim dividend withheld due to pandemic related
uncertainty. The subsequent payments comprised £2 million (0.39 pps) for the
quarter ended September 2020, £2.9 million (0.575 pps) for the quarter ended
December 2020 and £3.1 million (0.625 pps) for the quarter ended March 2021.
This reflected dividend cover of 145% based on EPRA earnings.
As part of determining dividend payments, the Board and Manager prudently
considered both EPRA and cash earnings, with the latter lower as a result of
smoothing tenant incentives and arrears. On a cash basis, the dividend cover
over the financial year was fully covered. Cash dividend cover over the next
financial year should be boosted by the recovery of arrears and the potential
reversal of bad debt provisions.
During the year £9.5 million was invested buying back shares at an average
discount to the 31 March 2020 NAV of 41.2%. This added 1.3 pps to the NAV as
well as enhancing the dividend cover by reducing the number of shares in issue
(excluding shares held in treasury) from 518.5 million to 491.4 million.
Review of strategy and activity during the financial year
The strategy and activity over the financial year focused on delivering the
following key objectives:
- Mitigating the impact of the Covid-19 pandemic on the portfolio,
tenants and wider stakeholders;
- Delivering attractive and sustainable shareholder income and total
returns;
- Outperforming the MSCI Benchmark Index at an underlying portfolio level
over one and three years, including generating an above average income return;
- Increasing exposure to higher growth sectors in Winning Cities and
Regions;
- Delivering best-in-class Environmental, Social and Governance ('ESG')
performance; and
- Maintaining a strong balance sheet with significant headroom on loan
covenants.
Good progress has been made executing this strategy, reflected in the
highlights below:
- High level of occupier engagement resulted in robust rent collection
rates and new lease agreements, with a small number of tenants most adversely
impacted by the pandemic;
- NAV total return of 3.9% supported by a high level of activity across
the portfolio as well as share buybacks and efficient balance sheet management.
A recovery in capital values contributed to a NAV total return of 3.8% for the
quarter to March 2021, with acquisitions and improving rent collection rates
supporting a further 5% increase in the dividend to be paid in the quarter
ending June 2021;
- The underlying portfolio delivered a total return of 4.6% over the
financial year compared with the Benchmark of 1.8%. Over three years the
portfolio also delivered a total return of 4.6% per annum compared with the
Benchmark of 2.2% per annum. The outperformance over the year was driven by an
income return of 6.5% (Benchmark 4.4%), an above average weighting to the
industrial sector and active management across the portfolio;
- During the financial year steps were taken to increase exposure to
higher growth sectors. This is reflected in an increase in the portfolio's
industrial weighting, now the highest sector exposure, to 38.8% (March 2020
28.6%), a reduction in the single use retail weighting to 15% (March 2020: 18%)
and a reduction in the void rate to 4.8% (March 2020: 7.3%);
- The Company achieved a three star rating in the GRESB sustainability
survey and was top of its peer group of UK Diversified Listed Companies. The
Company also achieved a GRESB Public Disclosure A Rating and the EPRA Best
Practice Sustainability Reporting Gold Award for the third consecutive year;
and
- The Company has a strong and stable balance sheet with a net loan to
value of 32%, an average interest cost of 2.4%, and a long weighted maturity
profile of 13 years. The Company, factoring in cash and unsecured properties,
could withstand a valuation decline in the underlying portfolio of
approximately 42% before breaching covenants.
This activity means the Company is well positioned to continue delivering
attractive returns for shareholders whilst evolving the strategy in response to
the structural changes and occupier trends emerging following the pandemic.
These are outlined in more detail following the market overview below.
Market overview
The impact of the pandemic has been polarised across the real estate sectors,
with an average capital value decline of -2.5% for the MSCI Benchmark over the
year to March 2021 masking a historically high divergence between the three
main sectors of offices, industrial and retail. This is illustrated by the best
performing subsector, south east industrial, enjoying a capital value increase
of 10.9%, compared with shopping centres as the worst sub-sector which
experienced a -9.8% capital value decline. Whilst polarisation in performance
is expected to continue, the divergence is likely to narrow and capital values
are starting to recover. By the end of September 2020, overall UK commercial
real estate had seen negative capital growth for 23 consecutive months. Since
then, the market has seen positive capital growth for seven consecutive months.
By the end of April 2021 (the latest available data point) the rolling
three-month capital growth of 1.5% was the highest the market had seen since
February 2018. All three main sectors of offices, industrial and retail
delivered a positive total return during the quarter to March 2021.
Whilst unprecedented Government and central bank policy support has kept
interest rates low and supported real estate values and asset prices more
generally, Government intervention has enabled tenants to withhold rental
payments and diluted income returns. This has been accompanied by corporate
insolvency measures enabling tenants to restructure landlord liabilities. The
retail and leisure sectors have been most adversely impacted by the pandemic,
to which the Company has a low weighting. It is important that as measures to
protect tenants are lifted, any proposals relating to the treatment of historic
arrears fairly treats the interests of both landlords and tenants.
Assuming the successful completion of the vaccine rollout programme and a
reopening of the economy, UK GDP should return to its pre-virus level in the
second half of 2022. The main driver will be consumer spending, with consumers
accumulating an extra £150 billion in savings during lockdown. In addition,
2021 should see a recovery in business investment and the Chancellor has
postponed tax rises until 2022. The rebound in energy and food prices means
that inflation is likely to accelerate to 2.5% in the next few months, before
easing to 1.5% next year. Higher unemployment as the furlough scheme ends
should limit inflationary pressures, with base rates remaining at 0.1% until
the end of 2022.
The pandemic response will change Government policy in a number of areas,
notably with greater emphasis on 'levelling up', which came to prominence after
the 2019 general election. In its broadest terms, levelling up is a commitment
to address regional inequalities with a focus on visible infrastructure
projects such as road-building and high-street regeneration. Whilst this will
benefit poorer areas of the UK, the £4.8 billion fund will also be targeted at
higher multiplier industries which is likely to benefit stronger regional
cities such as Manchester and Leeds, where the Company has significant
investments.
The biggest beneficiary of the acceleration in structural trends during the
pandemic was the industrial sector, with record demand for warehousing due to
on-line sales growth and stockpiling ahead of a possible no-deal Brexit. While
the latter will unwind, demand from Amazon, traditional retailers and parcels
companies has remained strong in 2021. This year should see a recovery in
demand from manufacturers as the economy improves and the Government's
announcement of eight new freeports could attract more inward investment over
the long term. We expect industrial rental growth to average 2% per annum over
the next three years, with multi-let estates seeing faster growth than regional
distribution and big box warehouses, because of more constraints on new
development. Following recent acquisitions in Manchester and Chippenham, the
Company's largest sector exposure is to multi-let industrial estates, which
offer significant potential for income and capital growth from asset
management, refurbishment and development.
The shift to online retailing during the pandemic means that in-store retail
sales are unlikely to return to pre-virus levels. At the same time, retailer
insolvencies and the closure of stores by John Lewis, banks and restaurant
chains have reduced the attractiveness of many retail destinations. 15% of
retail units across the UK were empty at the end of 2020, and vacancy in many
less affluent towns was over 20%, reflecting fewer independent retailers and
the fact that house prices and commercial values are too low to make
redevelopment viable. Shopping centre rental values could fall by a further 20%
over the next three years, and the Company will continue to benefit from having
no exposure to this segment of the market. More interestingly, sentiment
towards retail warehousing is improving, particularly bulky goods retail parks
that have been preferred by shoppers during the pandemic. These parks are
expected to be more resilient due to lower rental levels and the ability to
support multi-channel retailing through click and collect as well as last mile
delivery. The majority of the Company's remaining single use retail exposure
comprises retail warehousing with these characteristics in good locations such
as Bedford, Salisbury and Chester.
The office market continues to assess the relative merits of being in the
office and working from home with little consensus. While occupiers such as BP
and HSBC have decided to cut their office space, others such as BT, Goldman
Sachs, Google and major law firms have signed new leases or re-affirmed their
commitment to their existing offices. In the short-term, demand will remain
subdued with an increase in sub-let space suppressing rental values. However,
demand is polarising and we expect rents on well specified, modern offices in
city centres and close to leading universities to recover from 2022 onwards.
The key driver will be an increase in employment in IT, life sciences, media
and professional services. A low volume of new office buildings will also be
supportive but we expect tenants to require greater flexibility as the economy
recovers. By contrast, rents on older, out of town offices and back office
space will continue to decline as administrative functions such as call centres
are disrupted by changing working patterns and technology. The Company's office
weighting now represents 34.4% of portfolio value with a focus on assets
offering the above mentioned strong fundamentals in London and stronger
regional centres including, Manchester, Edinburgh and Leeds.
Future strategy
Whilst there remain risks and uncertainties relating to the pandemic, the
Company has a good quality, diversified portfolio that is weighted towards
higher growth parts of the UK real estate market. The Company's cash and
undrawn credit facilities also provide balance sheet capacity to make further
investments and deliver capital expenditure initiatives to enhance total
returns.
Whilst the Company is therefore well placed, the pandemic has provided an
opportunity to reassess the strategy in light of the acceleration in structural
changes and emerging occupier trends. This will lead to greater focus on the
four areas below:
1. Environmental, Social and Governance ('ESG') leadership
While the Company has made significant progress delivering sustainability
performance over recent years, the pandemic has increased focus on climate
change and the requirement to act on net zero commitments and evidence positive
social impact. The Company came first in its peer group of UK Diversified
Listed Companies in the 2020 GRESB rating and has an opportunity to consolidate
its leadership in this area which should enhance long-term returns for
shareholders, and deliver a positive impact to the environment and the
communities where the Company is investing. Alongside continued participation
in GRESB, a range of ESG-related objectives have been agreed with the Board
which include the Company issuing its own net zero pathway and alignment with
more demanding regulations that are set out in more detail below. The Company
benefits from the Manager's dedicated Sustainability team and broader Schroders
Group infrastructure and will continue to leverage this resource and
thought-leadership to support the management and sector specialist teams.
2. Hospitality mindset and operational excellence
The pandemic has accelerated pre-existing trends such as the growth of
e-commerce and changed occupier behaviour. Examples include altered working
habits driving growth in flexible working concepts, changing health
considerations affecting user-density and ESG regulation impacting building
development, operation and reporting requirements. In response to these trends,
real estate owners must adapt and innovate in order to attract and retain
tenants. An active management approach has driven the Company's long-term
outperformance but, looking forward, an increasingly hospitality-driven
approach will be required which optimises the building services to cater to the
tenant's business model and sustainability objectives. The level of flexibility
and services required will, in turn, govern the contractual terms between
landlord and tenant.
The sharing of cost and data with tenants will be key to delivering operational
excellence and facilitate improvements such as ensuring the optimal usage of
space and minimising the scarce use of resources like electricity and water.
This will require more specialist real estate resource to drive operational
performance, closer management of supply chains and investment in new
technologies. Schroders as Manager is increasing investment in these areas and
adapting business plans to provide greater levels of flexibility and service,
best illustrated by the Elevate concept at City Tower in Manchester, explained
in more detail in the case study below.
3. Reinvestment into larger assets offering more sustainable income and
total returns
The Company's top ten assets represent 66% of portfolio value and offer strong
fundamentals in terms of location and specification, with opportunities to add
value through active management. The balance of the portfolio comprises 29
assets, of which 15 are valued at below £5 million.
Whilst these smaller assets provide diversification benefits, the Company's
larger assets, often with multiple competing uses, typically offer higher
returns from active management due to being multi-let with a range of lease
expiries. These assets are more likely to include corporate occupiers demanding
higher service levels and sustainability performance, creating more
opportunities to improve assets and deliver sustainable earnings growth.
For example, during the financial year the Company sold two office and retail
assets for £6.6 million and increased its industrial weighting through two
attractively priced acquisitions totalling £36.5 million in the multi-let
industrial sector with significant asset management potential. The Company
delivered outperformance from its larger multi-let estates by implementing
phased refurbishments and new developments. This is reflected in the
performance of the Company's industrial assets over the financial year which
generated a total return of 14.9%, including the dilutive impact of acquisition
costs, compared with the Benchmark's industrial average of 14.2%.
A more active approach to selling smaller, non-core assets on completion of
business plans, with proceeds reinvested into larger, more resilient assets in
higher growth sectors which offer a high standard of operational and
sustainability performance, should deliver more sustainable income and total
returns over the long term.
4. Balanced portfolio, specialist capabilities
Looking forward, whilst the industrial portfolio should continue to deliver
attractive returns, the divergence in performance between the main sectors is
expected to narrow and create opportunities to invest in sectors that are
currently out of favour. This should present an opportunity for the Company
which, as a diversified strategy, can invest across all parts of the UK market
to maximise returns through the cycle. Applying Schroders' sector specialist
resources, who have a deep understanding of their respective investment and
occupier markets to larger assets has, and should continue to, drive the long
term outperformance of the underlying portfolio.
These four areas highlighted represent an evolution of the current strategy
which, whilst remaining income focussed, will place greater emphasis on
sustainable total returns. This, together with the Company's other strategy
objectives, are set out below:
- Deliver a progressive dividend policy together with attractive and
sustainable total returns;
- Maintain the long-term track record of outperformance of the underlying
portfolio;
- Increase exposure to assets with strong fundamentals in higher growth
locations;
- Actively manage the Company and its assets to maximise shareholder
returns;
- Provide climate change leadership with ESG fully integrated and
relevant to the strategy;
- Evolve the Company's active asset management approach to include a
hospitality mindset and operational excellence; and
- Maintain a strong balance sheet.
Real estate portfolio
As at 31 March 2021 the portfolio comprised 39 properties valued at £438.8
million. This includes the Company's share of joint venture properties at City
Tower in Manchester (25% share) and Store Street in Bloomsbury, London (50%
share).
The portfolio produces an annualised rental income of £28.3 million per annum,
reflecting a net initial income yield of 6.0% which compares with the MSCI
Benchmark (the 'Benchmark') at 4.4%. The portfolio also benefits from fixed
contractual annual rental uplifts of £1.8 million over the next 24 months. The
independent valuers' estimate that the current rental value of the portfolio is
£31.2 million per annum, reflecting a reversionary income yield of 7.1%, which
compares with the Benchmark at 5.2%. The Company's void rate is 4.8%,
calculated as a percentage on estimated rental value, with a weighted average
lease length to the earlier of lease expiry or break of 5.3 years.
The data tables below summarise the portfolio information as at 31 March 2021:
Weighting (% of portfolio)
Sector weightings by value SREIT Benchmark
South Eastern 11.3 17.9
Industrial Rest of UK 27.5 10.2
Industrial 38.8 28.1
City 0.0 3.7
Mid-town and West End 9.0 7.2
Rest South East 6.2 8.7
Office Rest of UK 19.2 7.7
Offices 34.4 27.3
South East 0.9 7.9
Rest of UK 7.8 4.3
Shopping centres 0.0 3.2
Retail warehouse 11.3 9.2
Retail 20.0 24.6
Other 6.8 20.0
Weighting (% of portfolio)
Regional weightings by value SREIT Benchmark
Central London[29] 9.0 21.1
South East excluding Central London 20.3 33.3
Rest of South 11.8 14.5
Midlands and Wales 23.7 12.4
North 32.6 13.8
Scotland 2.6 4.5
Northern Ireland 0.0 0.2
The top ten properties, including the share of the joint venture properties at
City Tower in Manchester and Store Street in Bloomsbury, are set out below and
comprise 66% of the portfolio value:
Top ten properties Sector Value (£m) (% of
portfolio)
1 Milton Keynes, Stacey Bushes Industrial Industrial 46.0 10.5
Estate
2 Leeds, Millshaw Industrial Estate Industrial 41.8 9.5
3 Manchester, City Tower (25% share) Office/ 40.2 9.2
mixed-use
4 London, Store Street, Bloomsbury (50% Office 39.4 9.0
share)
5 Bedford, St. John's Retail Park Retail 26.6 6.1
warehouse
6 Leeds, Headingley Central Mixed-use 24.0 5.5
7 Chippenham, Langley Park Industrial Industrial 19.8 4.5
Estate
8 Norwich, Union Park Industrial Estate Industrial 18.9 4.3
9 Cheadle, Stanley Green Trading Estate Industrial 18.0 4.1
10 Uxbridge, 106 Oxford Road Office 16.0 3.6
Total as at 31 March 2021 290.7 66.3
The Company's income is diverse with 299 tenants of which the top twenty
tenants represent 41.2% of the portfolio as a percentage of annual rent:
Top twenty tenants Rent p.a. (£m) (% of
portfolio)
1 University of Law Limited 2.00 7.1
2 Buckinghamshire New University 1.15 4.1
3 Siemens Mobility Limited 0.97 3.4
4 The Secretary of State 0.88 3.1
5 Matalan Retail Limited 0.57 2.0
6 Express Bi Folding Doors Limited 0.53 1.9
7 TJX UK Limited (T/A Homesense) 0.51 1.8
8 Jupiter Hotels Limited (T/A Mercure) 0.46 1.6
9 Premier Inn Hotels Limited 0.42 1.5
10 Lidl 0.42 1.5
11 Geldards LLP 0.41 1.5
12 Schneider Electric Limited 0.41 1.4
13 Wickes Building Supplies Limited 0.40 1.4
14 Sportsdirect.Com Retail Limited 0.40 1.4
15 Morgan Sindall Construction & 0.38 1.3
Infrastructure Limited
16 Cineworld Cinema Properties Limited 0.37 1.3
17 The Gym Limited 0.36 1.3
18 IXYS UK Limited 0.36 1.3
19 Lloyds Banking Group 0.35 1.2
20 Pilgrim's Pride Limited 0.34 1.2
Total as at 31 March 2021 11.69 41.2
Portfolio performance
A high level of asset management has led to continued outperformance of the
underlying property portfolio compared with the MSCI Benchmark Index. The table
below shows the performance to 31 March 2021 with the portfolio ranked on the
13th percentile of the Benchmark since IPO in 2004:
SREIT total return p.a. (%) MSCI Benchmark Index Relative p.a. (%)
total return p.a. (%)
Period to One year Three Since One year Three Since IPO One year Three Since
31 March years IPO [30] years years IPO
2021
Office 3.6 5.2 7.8 -0.5 3.0 7.1 4.1 2.2 0.6
Industrial 14.9 14.0 9.9 14.2 11.1 9.0 0.6 2.6 0.8
Retail -5.1 -5.7 3.8 -6.7 -6.0 3.2 1.7 0.3 0.6
Other -11.8 -5.0 1.9 -0.6 3.1 7.3 -11.2 -7.9 -5.1
All sectors 4.6 4.6 7.2 1.8 2.2 6.0 2.8 2.4 1.1
Transactions
During the financial year the Company sold two non-core assets for £6.6 million
which generated a small profit of £0.1 million, after adjusting for disposals
costs. Following a more cautious investment approach during the initial stage
of the pandemic, two significant new industrial acquisitions were completed in
December 2020 that are summarised below. Over the next twelve to twenty-four
months the Company intends to continue to actively recycle smaller non-core
assets into larger assets in growth sectors and regions with strong
sustainability credentials.
Manchester, Cheadle, Stanley Green Trading Estate (Industrial)
On 17 December 2020 the Company acquired Stanley Green Trading Estate ('the
Estate') together with an adjoining development site ('the Site') in Cheadle,
South Manchester, for a total consideration of £17.25 million, reflecting a
blended net initial yield of 5.2%. As at 31 March 2021 the asset is
independently valued at £18 million.
Asset overview
The freehold Estate and Site are located in a prime South Manchester location
at the junction of the A34 and the A555 which is the recently upgraded
Manchester Airport Eastern Link Road (Ringway Road). This provides a direct
link to Manchester city centre, Manchester Airport, and the M60 orbital
motorway. The local road network also connects to affluent suburbs such as
Cheadle, Bramhall, Wilmslow and Alderley Edge. The Estate is located close to
established major grocery stores and retail parks.
The Estate comprises approximately 150,000 sq ft of warehouse accommodation
across 14 units on a nine acre site and is fully let to thirteen tenants
generating a total contracted rent of £960,000 per annum or an average rent of
£6.55 per sq ft. The estimated market rental value ('ERV') is approximately £
1.1 million per annum. The average unexpired lease term, assuming all tenant
breaks are exercised, is three years. 100% of the rent due during the financial
year has been collected reflecting the resilience of the occupier base. The
apportioned price for the Estate of £14.4 million reflected a net initial yield
of 6.3% and a reversionary yield, based on the acquisition ERV, of 7.1%.
The Estate has a strong tenant line up of local, regional and national trade
occupiers including Apex Self Storage Limited (19% of rental income), Howden
Joinery Properties Limited (9.4% of rental income), Screwfix Direct Limited
(7.3% of rental income) and Toolstation Limited (7.1% of rental income).
The site comprises a 3.4 acre, regular shaped and serviced plot which is
currently non-income producing. The apportioned site price was £2.85 million.
The site has a historic planning consent for 48,000 sq ft of trade counter and
warehouse space and is allocated for industrial development in the local
development plan.
Asset strategy
The strategy identified on acquisition for the existing Estate was to work
closely with the occupiers to align their occupation with various estate
management improvements. The strategy for the site is to obtain an improved
planning consent and develop a high quality trade centre and warehouse units
during 2021.
Key activity
- Submitted a planning application for a reconfigured, 85,000 sq ft
operational net zero carbon ('NZC') warehouse scheme with a decision expected
in July 2021. This will be the first operational NZC in the north west.
- Scheme fully designed and tendered with estimated construction costs of
approximately £8 million.
- Subject to planning consent being achieved, the intention is to start
on site in the summer and deliver a completed scheme during mid-2022.
- Target rent for the new scheme of approximately £950,000 per annum with
marketing to commence for pre-lets once work starts on site. This could
generate an attractive yield on cost, including the apportioned site price, of
approximately 7.5%.
- Progressing re-gear discussions on the existing Estate which may lead
to phased refurbishments to deliver higher rents.
Chippenham, Langley Park Industrial Estate (Industrial)
On 18 December 2020 the Company acquired Langley Park Industrial Estate in
Chippenham for £19.25 million, reflecting an attractive net initial yield of
8.2%. As at 31 March 2021 the asset is independently valued at £19.75 million.
Asset overview
The asset is located in Chippenham town centre close to the railway station and
four miles south of junction 17 of the M4 motorway. It is near to the cities of
Bristol and Bath and serves both metropolitan areas. The estate comprises
approximately 400,000 sq ft of warehouse and ancillary office accommodation on
a 28 acre site, equating to a low site cover of approximately 30%. Langley Park
is let to five tenants generating a total net rent of £1.68 million per annum
or an average rent of £4.21 per sq ft. 100% of the rent due during the Covid-19
pandemic has been collected. The estimated market rental value is approximately
£1.8 million per annum. The average unexpired lease term, assuming all tenant
breaks are exercised, is four years.
The largest tenant is Siemens Mobility Limited, representing 53% of the rental
income, which employs approximately 800 people at the site. Langley Park is the
global headquarters for Siemens Mobility who, through corporate acquisitions,
have occupied the site for over 85 years as a facility for manufacturing and
servicing rail technology and traffic systems. Siemens pays a net rent of £
965,000 per annum with a lease expiry in June 2026. Other tenants include a UK
subsidiary of Littlefuse Inc., a global manufacturer of power systems for the
transport industry (20% of rental income), Schneider Electric Limited (11% of
rental income) and NHS Property Services Limited (8% of rental income).
Asset strategy
The strategy identified on acquisition was to work closely with the occupiers
to align their occupation with various estate management improvements. The
current low site density also supported the creation of new accommodation.
Longer term, it was considered that several large-scale infrastructure and
related investments in Chippenham, including rail improvements and additional
housing allocations, should support alternative use values and improve the
desirability of the surrounding area.
Key activity
- Targeting lease re-gear opportunities to rationalise investment and
improvements to the existing quality of accommodation.
- Ongoing discussions with Siemens and Littlefuse regarding lease re-gears
in return for carrying out building and energy efficiency improvements.
- Carrying out initial viability studies of development options to
increase massing and potentially provide a small unit warehouse scheme. Part of
the site could also be reconfigured for alternative uses.
- Exploring the installation of additional photo-voltaic ('PV') panels and
electric vehicle charging points to enhance the overall quality of the estate
from a sustainability perspective.
Asset Management
Leeds, Millshaw Industrial Estate (Industrial)
Asset strategy
The strategy over the year was to refurbish units to drive a higher rental
income return and explore the potential for acquiring adjoining interests and
change of use over the longer term.
Asset overview and performance
463,400 sq ft multi-let industrial estate in a prominent location comprising 27
units strategically located south of Leeds city centre close to the M62 and
M621 motorways. The estate is the largest, single-owned industrial estate in
Leeds with a range of unit sizes from 2,000 to 50,000 sq ft and a low site
cover of only 37%. As at 31 March 2021, the asset was valued at £41.8 million
reflecting a net initial income yield of 5.1% and a reversionary yield of
5.5%. During the year to 31 March 2021, the property delivered a 24.5% total
return comprising an income return of 5.7% and capital growth of 17.9%.
Key activity
- Re-letting of the refurbished units to set a higher rental tone has
boosted returns and ensured Millshaw remains the dominant multi-let industrial
estate in Leeds.
- 8 leasing transactions completed since March 2020 at rents up to £7 per
sq ft, which compares with the average rent and rental value as at March 2021
of £4.92 psf and £5.25 per sq ft respectively. This contributed to strong
rental growth of 18.7% over the financial year which compared with the MSCI
Benchmark industrial average of 9.6%.
- 34,446 sq ft unit under refurbishment and being marketed. There is
strong interest and targeting a rent of £207,000 per annum which compares with
the March 2021 rental value of £155,000 per annum.
- LED lighting has been incorporated into refurbishments and there is
potential to increase the number of EV charging points across the estate.
London, University of Law (Office, 50% share)
Asset strategy
The strategy over the year was to agree the outstanding rent review from
December 2019 and develop a feasibility study for a future redevelopment.
Asset overview and performance
86,000 sq ft of educational space across two freehold buildings that are let to
The University of Law on a lease expiring December 2026. The buildings are
located in an area of Central London benefitting from Crossrail and surrounding
developments at Tottenham Court Road, as well as public realm improvements as
part of the West End Project. As at 31 March 2021, the Company's share of the
asset was valued at £39.4 million reflecting a net initial income yield of 4.4%
and a reversionary yield of 4.7%. During the year to 31 March 2021, the
property delivered an 11.6% total return comprising an income return of 4.8%
and capital growth of 6.5%.
Key activity
- The rent review with the University of Law completed at a new rent of £
1.85 million per annum or £42 per sq ft delivering a £415,500 or 30% increase
(the Company's 50% share); and
- The feasibility study also commenced with the appointment of a design
team. There is also continued engagement with the adjoining building owners to
explore the opportunities for a wider site assembly.
Manchester, City Tower (Office and Mixed-Use, 25% share)
Asset strategy
The office strategy over the year was to refurbish and re-let vacant office
space on conventional leases as well as explore a more flexible, hybrid leasing
strategy. The retail, hotel and leisure strategy remains focussed on
repositioning the ground floor space to attract more complementary operators.
Asset overview and performance
City Tower comprises a 610,000 sq ft mixed-use office, convenience retail and
hotel asset on a three-acre site in the Manchester city centre. As at 31 March
2021, the Company's share of the asset was valued at £40.2 million reflecting a
net initial income yield of 5.5% and a reversionary yield of 7.0%. During the
year to 31 March 2021 the property delivered a 2.8% total return comprising an
income return of 5.9% and capital growth of -2.9%.
Key activity
- Launch of Elevate, a Schroder-managed 'plug-and-play' flexible office
strategy, which includes a tenant lounge, event space and meeting rooms on the
28th floor. The first phase of Elevate has been completed with 12,400 sq ft
delivered and 8,400 sq ft let or under offer;
- Ground floor retail line-up being improved to provide mix of leisure and
retail operators more suited to the current office tenant requirements;
- Negotiations underway with Jupiter Hotels for a lease extension which
may support a refurbishment programme and hotel rebrand. A lease extension
could involve Jupiter taking additional space on the ground floor for a new
reception and the basement to create a new wellness facility;
- As the largest energy consuming asset in the Company's portfolio,
sustainability objectives are focussed on identifying ways to save energy. This
is done by ensuring refurbishment works fully incorporate energy saving
technologies, continued engagement with tenants and ongoing upgrade of energy
metering infrastructure;
- Tenants are encouraged to travel in a green and active way. A new cycle
facility was recently opened which provides upgraded cycle storage, showers and
changing facilities; and
- City Tower achieved a BREEAM In-Use certification of Good for Part 2
Building Management and is rated Wiredscore Platinum.
Bedford, St. John's Retail Park
Asset strategy
The strategy over the year was to improve the retailer mix and to negotiate new
longer leases in order to preserve the rental income and manage void risk. A
key element of the continuing strategy was to work with existing tenants to
minimise the impact of Covid-19 and to ensure continued income generation.
Asset overview and performance
St. John's Retail Park comprises a 130,000 sq ft retail warehouse park 1.5
miles from the town centre underpinned by income from strong covenants
including Lidl, Home Bargains, Costa and TK Maxx. As at 31 March 2021, the
asset was valued at £26.6 million reflecting a net initial income yield of 5.1%
and a reversionary yield of 6.6%. During the year to 31 March 2021, the
property delivered a -3.7% total return comprising an income return of 5.3% and
capital growth of -8.5%.
Key activity
- Completed new 15 year leases with Lidl (£335,000 per annum/£15.50 per
sq ft) and Home Bargains (£190,000 per annum or £13.62 per sq ft) in September
2020. Sustainability factors were included in the Landlord's shell works for
these tenants' units; and
- Simultaneously surrendered the Majestic Wine lease and completed a new
10 year letting to Easy Bathrooms at the existing passing rent of £64,200 per
annum or £22.00 per sq ft.
Sustainability and Responsible Investment
Sustainability and responsible investment are integral to Schroder Real Estate
Investment Management's investment process. We believe that by understanding,
managing and measuring the impact of Environmental, Social and Governance
('ESG') considerations, we will deliver enhanced long term returns for
shareholders as well as deliver a positive impact to the environment and the
communities where the Company is investing.
In November 2020, the Company issued a Sustainability Guide which sets out how
sustainability considerations, risks and opportunities are integrated within
the investment process. This was followed in December 2020 by Schroders
publishing its own Pathway to Net Zero Carbon by 2050.
Good progress has been made during the financial year with the Company
achieving a three star rating in the GRESB sustainability survey, which placed
it top in its GRESB peer group of UK Diversified Listed Companies. The Company
also achieved a GRESB Public Disclosure A Rating and the EPRA Best Practice
Sustainability Reporting Gold Award for the third consecutive year.
The Board and Manager have agreed updated sustainability objectives for the
Company during the current financial year, which are set out in the table
below. These are summarised below together with the strategy for delivering the
objectives and details of how performance will be monitored.
Objective Management Strategy Initial Reporting Metrics
Governance The Manager's process includes - Manager's Investment Risk Report
and oversight on sustainability by its - Annual Report
Oversight Investment Committee and Group - Number of assets where health &
Investment Risk Committee. safety impacts assessed/reviewed/
The Board reviews the objectives and improved
progress of the sustainability - Number of incidents of non-compliance
programme at least annually. with regulations and/or voluntary codes
This includes maintaining good health & identified
safety and managing compliance with - Compliance assurance from Property
regulations. Managers at building level
Net Zero Determine portfolio alignment with NZC - % of assets under management Paris
Carbon and Paris Agreement to limit climate Aligned
('NZC') change to 1.5C. Asset analysis to - Energy and carbon targets set for
determine energy/carbon targets and assets and portfolio
offsetting. - Investment in energy efficiency
Determine new energy and carbon targets initiatives
to 2022, 2025 and 2030 through Impact - Energy intensity (kWh/m2/yr)
and Sustainability Action Plans (ISAPs) - Carbon intensity (CO2e/m2/yr)
for buildings to assess understanding - % of occupied occupier space with
of improvement and opportunities and green lease clauses (by floor area)
Net Zero analysis to enable target - % of occupied occupier space with
setting. data
Improve collaboration with occupiers to - kgCO2e/m2/year modelled during design
support whole building performance. - kWh/m2/year modelled during design
Assess 'whole life carbon' on major - kgCO2e/m2/year achieved during early
projects. Use Schroders Refurbishment operation
and Development brief on projects to - kWh/m2/year achieved during early
set and manage ambitions. Use NABERS UK operation
Design for Performance to support - % kWh landlord-procured electricity
improved operational in-use outcomes. from green tariff
Procure 100% landlord-controlled - kWh onsite renewable energy generated
electricity on certified green tariffs - tCO2e offset
by 2022 (December 2020 at 97%). - £ or ?/tCO2e unit cost per offset
Assess potential for onsite renewable
energy generation.
Purchase independently verified offsets
that align with best practice industry
guidance. Reduce the use of offsets to
zero over appropriate time frame.
Third Party GRESB - Continue to target - GRESB star rating and % score
Verification opportunities to improve the GRESB achieved
score year on year. - % data assured
Data Assurance - Continue to obtain - % portfolio certified through third
third party assurance of sustainability party scheme
data in line with the independent - EPRA Gold Award
assurance process. - Annual report SDG aligned
Asset Certification - Obtain third
party certification to validate Net
Zero Carbon or related energy/carbon
efficiency claims or health and
wellbeing.
EPRA Reporting - Maintain EPRA Gold
Sustainability Best Practice Reporting
Award.
SDG alignment - Integrate into annual
reporting for 2022 by mapping social
and environmental contributions to the
Schroder Real Estate Investment
Management Limited ('SREIM') Pillars of
Impact and UN SDGs and set targets for
improvement.
Climate Risk Determine a climate risk profile, - Portfolio climate risk profile
and TCFD adaptation strategy and reporting in
line with TCFD through asset and
portfolio scenario analysis.
Operational Set standards for operational - Net Promoter Score
excellence excellence for managed assets - Occupier satisfaction surveys
incorporating the hospitality mindset - % assets with BIU certification
in our strategy at each asset. - % assets with Good/Very Good/
Improve BREEAM In-Use ('BIU') Excellent ratings
certification across the portfolio to - % assets with EPCs
support improvement across nine - % assets with A to E ratings
aspects: Management, Health and - % assets where IEQ assessed
Wellbeing, Energy, Transport, Water - % assets with good bicycle provisions
Resources, Resilience, Land Use and (storage, repair stations, electric
Ecology and Pollution. charging)
Improve the EPC profile of the - % assets with electric vehicle
portfolio through asset management charging
including refurbishment. Potential to - % assets with green travel plan
adopt NABERS Energy for Offices which - Water consumed by assets managed by
rates base building actual energy the Company m3 per year
efficiency. - Tonnes waste produced per year
Assess the approach to monitor indoor - % waste recycled per year
environment quality (IEQ) and set new - % of schemes with waste management
standard. plans
Promote and facilitate our occupiers' - % of schemes with waste storage and
use of bicycles, buses and electric separation site
vehicles as transport methods to our - % of schemes with green space
assets. available to occupiers, on site and in
Minimise water demand in line with best close proximity
practice industry benchmarks. - % of schemes with green space
Provide dedicated space for waste/ available to occupiers, on site and in
recycling segregation and storage. close proximity
Integrate biophilic design into assets.
Finance
The Company has two loan facilities, a £129.6 million term loan with Canada
Life and a £52.5 million revolving credit facility ('RCF') with Royal Bank of
Scotland International ('RBSI'), of which £24.5 million was drawn at 31 March
2021. In addition to the properties secured against the Canada Life and RBSI
loan facilities, the Company has unsecured properties with a value of £39.4
million and cash at 31 March 2021 of £12.2 million. This results in a Loan to
Value ratio, net of cash, of 32.3% at an average interest cost of 2.4%, and a
long weighted maturity profile of 13 years.
£129.6 million term loan with Canada Life
The loan is fully compliant with all covenants as summarised below:
Lender Loan Maturity Total Asset Loan to LTV Interest ICR Projected Projected
(£m) Interest Value Value ratio cover ratio Interest ICR
rate (£m) ('LTV') covenant ratio covenant cover ratio
(%) ratio[1] (%) ('ICR') (%) ratio covenant
(%) (%)[2] (%)[3] (%)
Canada 129.6 50%: 15/ 2.5[4] 273.6 47.4 65 562 185 423 185
Life 10/2032 (47.4 net
50%: of cash
15/10/ in
2039 facility)
[1] Loan balance divided by property value as at 31 March 2021.
[2] For the quarter preceding the Interest Payment Date ('IPD'), ((rental
income received - void rates, void service charge and void insurance)/interest
paid).
[3] The projected ICR covenant for contracted the four quarters following the
IPD deducting assumed non-recoverable costs (void rates, void service charge
and void insurance)/interest paid) based on average of the past four quarters
[4] Fixed total interest rate for the loan term.
The Company has significant headroom with its LTV and ICR covenants summarised
below:
· The net Loan to Value on the secured assets against this loan is 47.4%.
On this basis the properties charged to Canada Life could fall in value by 27%
prior to the 65% LTV covenant being reached;
· The interest cover ratio is 562% based on actual net rents for the
quarter to March 2021. A 67% 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 42% and 74% respectively prior to either the
LTV or interest cover ratio covenants being breached.
£52.5 million RCF with RBSI
The RCF is an efficient source of funding that can be repaid and redrawn as
often as required. At 31 March 2021, £24.5 million was drawn of the £52.5
million RCF. The loan is fully compliant with its covenants as summarised
below:
Lender Loan Maturity Total Asset Loan to LTV Interest ICR Projected Projected
(£m) Interest Value Value ratio cover ratio Interest ICR
rate (£m) ('LTV') covenant ratio covenant cover ratio
(%) ratio (%) ('ICR') (%) ratio covenant
[1] (%)[2] (%)[3] (%)
(%)
RBS 24.5 03/07/ 1.7[5] 125.9 19.5 65[6] 1,151 185 864 250
RCF [4] 2023
[1] Loan balance divided by property value as at 31 March 2021.
[2] For the quarter preceding the Interest Payment Date ('IPD'), ((rental
income received - void rates, void service charge and void insurance)/interest
paid).
[3] The projected ICR covenant for contracted the four quarters following the
IPD deducting assumed non-recoverable costs (void rates, void service charge
and void insurance)/interest paid) based on average of the past four quarters
[4] Facility drawn at 31 March 2021 from a total available facility of £52.5
million.
[5] Total interest rate as at 31 March 2021 comprising 3 months LIBOR of 0.09%
and the margin of 1.6% at an LTV below 60% and a margin of 1.90% above 60% LTV.
[6] This covenant drops to 60% after year three of the five-year term.
The Company has significant headroom within its LTV and ICR covenants. This is
summarised below:
· Net Loan to Value on the secured assets against this loan is 19.5%. On
this basis the properties charged to RBSI could fall in value by 70% prior to
the 65% LTV covenant being reached; and
· The interest cover ratio is 1,151% based on actual net rents for the
quarter to March 2021. A 78% fall in net income could be sustained prior to the
loan covenant of 185% being breached.
Outlook
Whilst uncertainty relating to the pandemic will continue, the efficient
vaccine programme in the UK should lead to the economy successfully reopening
during 2021. This should lead to a surge in consumer spending and business
investment which will support a strong economic recovery. Whilst inflationary
pressures are building, fiscal and monetary policy should support real asset
prices and we expect average real estate values to continue their current
trajectory and increase over the current financial year.
Other trends include real estate becoming increasingly operational, with
technology arguably increasing a building's physical life whilst limiting its
economic life. This could increase obsolescence and therefore favour buildings
in mixed-use, densely populated urban areas that can be adapted to new
technologies and changing occupier trends. Occupiers will also require more
personalised service levels and increased engagement with landlords so that
both can deliver their sustainability objectives. The Manager is seeking to
further position the Company's portfolio to benefit from these trends.
Performance between the main sectors is likely to remain polarised over the
short term, with industrial expected to be the best performing of the three
main sectors and retail the weakest. However, the divergence will narrow.
Regional offices are benefiting from a phased return to work and Government
policy seeking to address imbalances through the levelling up agenda. There is
also a nascent recovery in more resilient parts of the retail market, most
notably retail warehousing. The Company is therefore well positioned in this
context and further recycling of smaller properties into larger, mixed-use
assets in Winning Cities and Regions will further support the resilience of the
portfolio.
Nick Montgomery
Fund Manager
Schroder Real Estate Investment Management Limited
1 June 2021
Sustainability Report
The Board and the Investment Manager believe that corporate social
responsibility is key to long-term future business success and 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.
The importance of environmental and social changes are investment factors that
the Board and Investment Manager must understand to protect Company assets from
depreciation and optimise the portfolio's value potential.
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.
Ignoring these issues when considering asset management and investments would
risk the erosion of income and value as well as missing opportunities to
enhance investment returns.
Through its construction, use and demolition, the built environment accounts
for more than one-third of global energy use and is the single largest source
of greenhouse gas emissions in many countries.
The industry's potential to cost-efficiently reduce emissions and the
consumption of depleting resources, combined with the political imperative to
tackle issues such as climate change, means the property sector will remain a
prime target for policy action. This presents new challenges and opportunities
for the real estate industry with profound implications for both owners and
occupiers.
The national lockdowns have had a direct impact on energy use and greenhouse
gas ('GHG') emissions, water consumption and waste performance, and has
resulted in significant reductions. Therefore 2020 environmental performance
should be evaluated in the context of the pandemic.
The Investment Manager has evolved its investment philosophy to incorporate
"positive impact" investing, which aims to proactively take action to improve
social and environment outcomes. Its four pillars of impact are referenced to
the UN Sustainable Development Goals and used to consider impacts for funds and
assets.
A good investment strategy must incorporate environmental, social and
governance factors alongside traditional economic considerations. The Board
and the Investment Manager believe a complete approach should be rewarded by
improved investment decisions and performance.
Further information on the Investment Manager's Sustainable Investment Real
Estate with Impact approach and its Sustainability Policy: Real Estate with
Impact can be found here:
https://www.schroders.com/en/uk/realestate/products--services/sustainability/
Environmental Management System
The Investment Manager operates an Environmental Management System ('EMS')
which in January 2021 achieved external certification in accordance with ISO
14001 for the asset management of direct real estate investments in the UK and
across Europe.
The EMS provides the framework for how sustainability principles (environmental
and social) are managed throughout all stages of its investment process
including acquisition due diligence, asset management, property management
provided by third parties, refurbishments and developments.
The Investment Manager reviews its Sustainability Policy annually and which is
approved by the Investment Committee. Key aspects of the Policy and its
objectives, and progress during 2020, as well as objectives and targets for the
year ahead, are set out below.
Schroders' investment management process requires annual fund strategy
statements and business plans to include sustainability considerations and an
Impact and Sustainability Action Plan to be prepared for all acquisitions.
Property Manager Sustainability Requirements
Property Managers play an integral role in supporting the sustainability
program. The Investment Manager has established a set of Sustainability
Requirements for Property Managers to adhere to in the course of delivering
their property management services. This includes a set of key performance
indicators (KPIs) to help improve the Property Manager's sustainability related
services to the Company and which are assessed on a six-monthly and annual
basis.
The Investment Manager is pleased to report that MAPP, its principal property
manager, performed well against the targets set for both the six-monthly and
annual indicators.
Objectives and Targets
Net Zero Carbon
Recognising the need for the real estate industry to address its carbon impact,
the Investment Manager joined other members of the Better Buildings Partnership
(BBP) in September 2019 to sign the Member Climate Change Commitment, and in
December 2020, published its 'Pathway to Net Zero Carbon' - which can be found
here:
https://www.schroders.com/en/sysglobalassets/email/uk/realestate/2020/
schroder-real-estate-net-zero-carbon-pathway-december-2020_1621372_v1.pdf
The Investment Manager's 'Pathway to Net Zero Carbon' includes a commitment to
net zero carbon by 2050 or sooner, in line with The Paris Agreement - to pursue
efforts to limit global warming to 1.5°C. The Pathway involves beginning to set
new energy and carbon targets during 2021 to include interim milestones, and to
replace existing targets which come to an end in March 2021. The pathway will
evolve over time as the Investment Manager and the wider industry develops its
understanding of how to address the carbon impact of real estate activities and
as regulatory initiatives develop. It is widely expected that policy
requirements will become more stringent and society will increasingly demand
all market participants to actively demonstrate their carbon responsibility to
support the delivery of a low carbon society.
Schroders Plc, in recognition of the importance of climate change and its
responsibilities as a global asset manager, became a founding member of the Net
Zero Asset Managers Initiative in December 2020. The initiative commits us to
working with asset owner clients, setting and regularly reviewing targets for
assets aligned with and ultimately achieving the goal of net zero greenhouse
gas emissions by 2050 or sooner, in line with global efforts to limit warming
to 1.5°C.
Impact Assessment
The Investment Manager evolved its investment philosophy to incorporate
"positive impact" investing, with the aim to proactively take action to improve
social and environmental outcomes, and established four pillars of impact:
people, place, planet and prosperity with key performance indicators for each
pillar. The pillars are referenced to the UN Sustainable Development Goals: 8
Decent work and Economic Growth, 11 Sustainable Cities and Communities and 13
Climate Action.
The Investment Manager has developed an impact measurement framework to assess
impacts within portfolios. This framework supports analysis of social aspects
for which examples include tenant satisfaction, selection of suppliers,
enhancements to amenities at and around buildings and community support and
involvement together with environmental aspects for example energy reduction
and use of renewables. This initial baselining exercise was completed in 2020
and the results reviewed to identify risks and opportunities in order to set
improvement targets for the Company. Progress against these targets will be
reviewed in 2021.
Energy and Greenhouse Gas Emissions
Active management of energy consumption and greenhouse gas emissions is a key
component of responsible asset and building management. Improving energy
efficiency and reducing energy consumption will benefit tenants' occupational
costs and may support tenant retention and attraction, in addition to
mitigating environmental impacts and helping to futureproof the portfolio
against future legislation. Therefore, where the landlord retains operational
control responsibilities, the Investment Manager monitors the Company's energy
usage and efficiency on a quarterly basis.
The Investment Manager has an energy and greenhouse gas emissions performance
reduction target to achieve an 18% reduction in landlord-controlled energy
consumption by 2020/21 (2015/16 baseline) across all UK-managed assets. This is
accompanied by a target of a 32% reduction in landlord-controlled greenhouse
gas (GHG) emissions by 2020/21 (2015/16 baseline); this target is inclusive of
decarbonisation of the UK electricity grid over recent years.
In support of achieving these targets and improving the efficiency of the
portfolio, the Investment Manager has continued to work with sustainability
consultants Evora Global and property manager MAPP to identify and deliver
energy and greenhouse gas emissions' reductions on a cost-effective basis. The
programme involves reviewing all managed assets within the Company and
identifying and implementing improvement initiatives, where viable.
The Investment Manager can report for the 2020 calendar year for the managed
assets held within the Company a reduction in landlord-procured energy
consumption of 20% on a like-for-like basis. This translates to a Scope 1 and
Scope 2 GHG emissions reduction of 26% on a like-for-like basis. Please note,
changes in occupancy and building operations during the COVID-19 period will
have had an impact on performance and so the 2020 reporting year is not
directly comparable to 2019. Energy performance improvement initiatives
continued to be considered across the portfolio. Initiatives undertaken during
the reporting year include replacement and upgrades to boilers and hot water
systems, wall and roof insulation upgrades, upgrades to Automatic Meter Readers
for improved energy monitoring, LED lighting upgrades and the installation of
lighting and ventilation occupancy sensors.
For detailed energy performance data covering the reporting period and the
prior year, please see the EPRA Sustainability Reporting Performance Measures.
Net Zero Carbon is a natural next step to our energy and carbon programme. The
Investment Manager's targets expired in March 2021 and new energy and carbon
targets will be set for the Company in the context of Net Zero Carbon.
The Investment Manager also has an objective to procure 100% renewable
electricity for landlord-controlled supplies by 2025. At December 2020, 97% of
the Company's landlord-controlled electricity was on renewable tariffs.
Energy Performance Certificates ("EPCs") for the portfolio are regularly
reviewed for alignment with the 2015 Minimum Energy Efficiency Standards
(England and Wales) legislation. The Investment Manager is actively managing
the potential risk of this legislation to the portfolio. This legislation
brought in a minimum EPC standard of "E" for new leases and renewals for
non-domestic buildings from 1 April 2018; this minimum standard applies to all
leases from 1 April 2023. The EPC profile for the portfolio is set out within
the EPRA Sustainability Reporting Performance Measures.
Water
Fresh water is a finite resource of increasing importance for the environment
and society and reductions in consumption can deliver operational cost
efficiencies. The Investment Manager monitors water consumption where the
landlord has supply responsibilities and encourages active management of
asset-level consumption. Where the Company had such responsibilities, a 28%
reduction in like-for-like water consumption is reported for the calendar year
2020 compared to the calendar year 2019. Please note, changes in occupancy and
building operations during the COVID-19 period will have had an impact on
performance and so the 2020 reporting year is not directly comparable to 2019.
Waste
Effective waste management decreases pollution and resource consumption, as
well as improving operational efficiency and associated costs. To this end,
waste should be minimised and disposal should be as sustainable as possible.
The Investment Manager therefore has set an objective to send zero waste
directly to landfill and to achieve optimal recycling. During 2020 the Company
sent zero waste directly to landfill, 53% of waste was recycled and 47%
incinerated with energy recovery. Please note, changes in occupancy and
building operations during the COVID-19 period will have had an impact on
performance and so the 2020 reporting year is not directly comparable to 2019.
Improvements, Refurbishments and Green Building Certifications
The Investment Manager seeks to deliver developments and refurbishments to
sustainable standards and deliver good performance against building
certifications, including EPCs and BREEAM (the Building Research Establishment
Environmental Assessment Methodology: an environmental assessment method and
rating system for buildings). Standards required are set for each project in
context for the asset and the Investment Manager's guiding principles.
BREEAM In-Use
BREEAM In-Use is a performance-based assessment method for the certification of
existing buildings. BREEAM In-Use helps assess operational performance against
nine categories: Management, Health & Wellbeing, Energy, Transport, Water,
Resources, Resilience, Land Use and Ecology, and Pollution. The framework
supports the overall sustainability programme for the Company with improvement
actions integrated into the responsibilities of the Investment Manager and
Property Managers.
During 2020, the Investment Manager commissioned two BREEAM In-Use assessments
for the Company.
Health Wellbeing and Productivity
The real estate industry has a good appreciation of the importance of the built
environment on human health and wellbeing. There has been considerable
development in understanding on what building aspects matter as well as how
certification schemes, including the Well Building and Fitwel Certifications,
can support landlords and tenants to address these. The Investment Manger has
developed a Health and Wellbeing Framework to identify improvements across
managed assets and within refurbishments and developments. This framework is
being applied to the Company assets with improvements incorporated into
property management plans.
Stakeholder Engagement and Community
The Investment Manager seeks active engagement with tenants to ensure a good
occupational experience to help retain and attract tenants. As the day-to-day
relationship is with the Property Manager, the Property Manager Sustainability
Requirements include a key performance indicator on tenant engagement. Tenant
engagement initiatives undertaken by the Property Manager include incorporating
sustainability as an agenda item during tenant meetings and where a tenant
handbook exists include information on sustainability. At City Tower,
Manchester the Property Manager held an Environmental Awareness Week to address
and engage with tenants on issues such as waste management, sustainable
transport, fair trade products and clothes recycling and hosted an
International Women's Day breakfast event with a guest speaker. At City Tower,
the Property Manager has also rolled out the interactive occupier and community
engagement platform 'Locale' to help deliver a best in class customer
experience.
SREIM believes in the importance of understanding a building's relationship
with the community and its contribution to the well-being of society.
Positively impacting on local communities helps create successful places that
foster community relationships, contribute to local prosperity, attract
building users and, ultimately, lead to better, more resilient investments.
SREIM looks to understand and develop the community relationship to ensure
investments provide sustainable social solutions for the long term.
Sustainability in Action (Case Studies)
The Promenade, Cheltenham
The Promenade is a 32,500 sq ft multi-let office located in a prime location in
Cheltenham town centre. Understanding the needs and expectations of existing
and prospective tenants is essential to maintaining occupiers and attracting
higher rental levels. A comprehensive review focusing on sustainability
credentials has been undertaken.
The review included building efficiencies in terms of electricity and water
usage, ventilation and tenant facilities. Identified improvements have been
implemented including:
- Promoting green behaviours: new shower facilities to promote green and
active travel.
- Energy efficiency: The decommissioning of two existing large floor
standing boilers which were oversized for the requirement and downsizing to
correctly sized efficient boilers and point-of-use solutions. Replacements and
upgrades to the boiler and hot water systems are estimated to produce savings
in excess of 25% on energy consumption. In addition, passive infrared sensors
('PIR') for lighting and ventilation and new LED fittings are being installed
throughout the toilet areas and to the new showers to reduce electricity
consumption.
- Water efficiency: non-concussive basin taps, dual toilet flushing
systems, solenoid water shut-off values and PIR sensor urinals with flushing
linked to usage to increase water usage efficiency.
- Disability facilities: revamped disabled access WC to improve the
facilities and accessibility. We continue to develop our understanding of the
tenants' sustainability experience to further improve the efficiency of the
building and sustainability credentials.
Headingley Central, Leeds
Headingley Central is a 125,000 sq ft multi-let hotel, retail, leisure and
office property located in a densely populated suburb of Leeds. Sustainability
and impact reviews form a key part of major capital expenditure projects. At
Headingley Central, 24,000 sq ft of office accommodation was converted into a
shell and core configuration suited to use by a gym operator, providing
additional amenity to the local community and complementary to the other
occupiers onsite including retail, restaurants, office and hotel uses.
This project incorporated various works to enhance the sustainability of the
unit and neighbouring parts of the property. These included:
- Energy efficiency: Insulation to thermal elements, including the
external walls and roof, was upgraded to a level that surpassed the
requirements of current building regulations. Where replaced, external lighting
comprise sensor controlled LED fixtures.
- Recycling: During the removal of the previous tenant's fit out by the
landlord, a deliberate focus was maintained on correctly segregating materials
for recycling, to minimise waste sent to landfill.
- Water efficiency: The works provided an opportunity in which inefficient
water pumps serving the adjoining office accommodation were replaced with
modern, lower consumption units.
- Repurposing and ethically sourcing: Where possible, components, such as
timber joists, were repurposed for use on-site and all new timber specified was
PEFC labelled, to help ensure sourcing from environmentally well managed
forests.
- Promoting green behaviours: A dozen electric vehicle charging points
have been introduced to the outdoor car park.
We continue to review sustainability and impact initiatives across major
capital expenditure projects to ensure the assets are performing to their best
ability and to identify any gaps where further progress on sustainability
credentials could be made.
Compliance with Legislation
The Investment Manager continues to monitor requirements and guidance in
relation to managing and reporting environmental matters and developments in
legislation at all stages of the investment lifecycle - from acquisition,
through ownership, to disposal. This process is supported by a legal register
within the EMS, as well as through appropriate devolution of responsibility to
key personnel involved in the day-to-day operation of buildings, including
asset, property and facilities' managers.
Streamlined Energy and Carbon Reporting (SECR)
An Energy and Carbon Report for the Company, aligned with the UK Streamlined
Energy and Carbon Reporting regulations, is included on page 121.
Energy Savings Opportunity Scheme
The Company did not qualify for participation in the 2015 Phase 1 of the Energy
Savings Opportunity Scheme and did not fall within scope of the Scheme's 2019
Phase 2 requirements.
Industry Initiatives
EPRA Sustainability Reporting Performance Measures
The Company Report includes environmental performance indicator data for the
portfolio. The disclosures are aligned with EPRA Best Practices Recommendations
on Sustainability Reporting 2017 and are included in the Company EPRA
Performance Measures report. The Company was awarded an EPRA Gold Award for
Sustainability Reporting in 2020, for the third consecutive year.
Sustainability Assurance Statement
Schroders' sustainability consultants, Evora Global, have prepared an Assurance
Statement in relation to the sustainability matters reported in this Annual
Report. The full statement can be found on the following link, please see the
Sustainability Page for full assurance statement:
https://www.schroders.com/en/uk/adviser/fund-centre/funds-in-focus/
investment-trusts/schroders-investment-trusts/
schroder-real-estate-investment-trust/sustainability/
Global Real Estate Sustainability Benchmark (GRESB)
The Investment Manager has participated in GRESB, the dominant global standard
for assessing Environmental, Social and Governance (ESG) performance for real
estate funds and companies, since 2011. Through its annual questionnaire, GRESB
evaluates the sustainability performance of reporting entities against seven
sustainability aspects and contains approximately 50 indicators.
The Company has participated in GRESB for the past five years. In 2020 the
Company achieved a score of 71 (out of 100), came first in its peer group (1st
out of 9), secured a 3-star status (out of 5 stars) and maintained its Green
Star rating. A Green Star rating is achieved where the scores for the two
components of Management and Performance both score higher than 50% of the
points allocated to each component.
The Investment Manager intends to participate in the survey on behalf of the
Company in 2021 with the objective of continual improvement to its score, as
well as retaining its Green Star rating.
The Investment Manager continues to work with third party Property Management
providers to improve sustainability performance across all assets.
UN PRI (Principles for Responsible Investment)
Schroders plc has been a signatory to UN PRI since 2007 and intends to remain
an active and engaged member for the PRI and to meet its ongoing membership
commitments. Schroders achieved the highest possible ESG score of A+ in 2020,
for the sixth year running, for its overarching ESG approach from the
Principles for Responsible Investment. Schroders has completed the Direct
Property Segment for four years achieving an A rating in all four years.
Schroders' public UN PRI Transparency Report is available here: https://
www.unpri.org/signatory-directory/schroders/1746.article.
Industry Participation
Schroders supports, and collaborates with, several industry groups,
organisations and initiatives including the United Nations Global Compact and
Net Zero Asset Managers Initiative (for which it is a founding member). Further
details of Schroders' industry involvement are listed at pages 44 - 47 of
Schroders 2020 Annual Sustainable Investment Report:
(https://publications.schroders.com/view/1010922180/44/).
The Investment Manager is a member of several industry bodies including the
European Public Real Estate Association (EPRA), INREV (European Association for
Investors in Non-Listed Real Estate Vehicles), British Council for Offices and
the British Property Federation. It was a founding member of the UK Green
Building Council in 2007 and in 2017 became a member of the Better Buildings
Partnership and a Fund Manager Member of GRESB.
Employee Policies and Corporate Responsibility
Employees
The Company is an externally-managed real estate investment trust and has no
direct employees. The Investment Manager is part of Schroders PLC which has
responsibility for the employees that support the Company. Schroders believes
diversity of thought and an inclusive workplace are key to creating a positive
environment for their people. The Investment Manager's real estate team have a
sustainability objective within their annual objectives.
Further information on Schroders' principles in relation to people including
diversity and inclusion, gender pay gap, values, employee satisfaction survey,
well-being and retention can be found on the dedicated Schroders webpage here:
https://www.schroders.com/en/working-here/our-people/.
Corporate Responsibility
Schroders' commitment to corporate responsibility is to ensure that its
commitment to act responsibly, support clients, deliver value to shareholders
and make a wider contribution to society is embedded across its business in all
that it does.
Full information about Schroder's Corporate Responsibility approach including
its economic contribution, environmental impacts and community involvement, can
be found here:
https://www.schroders.com/en/sustainability/corporate-responsibility/.
Slavery and Human Trafficking Statement
The Company is not required to produce a statement on slavery and human
trafficking pursuant to the Modern Slavery Act 2015 as it does not satisfy all
the relevant triggers under that Act that require such a statement.
SREIM, the Investment Manager to the Company, is part of Schroders PLC, whose
statement on Slavery and Human Trafficking has been published in accordance
with the Modern Slavery Act 2015 (the 'Act'). It sets out the steps that
Schroders PLC and other relevant group companies ('Schroders' or the 'Group')
has made during 2020 and plans for 2021 to prevent any form of modern slavery
and human trafficking from taking place in our business, supply chain and
investments. SREIM is part of the Schroders Group.
Schroders' Slavery and Human Trafficking Statement can be found here:
https://www.schroders.com/en/sustainability/corporate-responsibility/
slavery-and-human-trafficking-statement/.
Task Force for Climate-Related Financial Disclosure (TCFD)
The Task Force on Climate-related Financial Disclosure (TCFD) aims to
mainstream reporting on climate-related risks and opportunities in an
organisations' annual financial filings. Launched in 2017, TCFD has so far been
a voluntary framework. However, it becomes mandatory in the UK across a range
of market participants on a phased timeline beginning in 2021. The Company is
expected to be captured by this regulation in the near future.
The TCFD recommendations are structured around four themes: Governance,
Strategy, Risk Management, and Metrics and Targets. Key concepts within the
framework include so-called 'transition' and 'physical' risks. The former
encapsulates the risks arising from society's transition to a low carbon
economy (changing regulation and market expectations, new technologies etc),
and the latter relates to the acute (storms, floods and wildfires etc) and
chronic (rising sea levels, increasing heat stress etc) physical effects of a
changing climate. Additional principles within TCFD include the importance of
the forward-looking assessment of climate-related risks and opportunities, and
'scenario analysis'. Scenario analysis is a process of identifying and
assessing the potential implications of a range of plausible future states
under conditions of uncertainty. The recommendations note that the scenario
analysis for climate-related issues is a relatively new concept and that
practices will evolve over time.
In 2020, the Investment Manager, SREIM, completed a review of its policies and
practices against TCFD criteria and developed a roadmap towards increased
alignment. Building on our established consideration of sustainability within
the investment process, Schroder's believes it will be important to further
integrate the assessment of climate-related risks and opportunities into
decision-making and reporting processes. The outcome of our review and progress
towards further alignment is set out below.
Governance
In investing for the long term, we recognise the increasing importance of both
a forward-looking assessment of the potential impacts of climate change and the
likely action necessary to support the assets and cities in which we invest
resilience as we transition to a low-carbon economy. In line with the
Schroders' Investing with Impact approach, we are also seeking to promote a
fair and socially conscious low-carbon transition, that supports social, as
well as economic and physical, resilience within local communities. As real
estate investment time horizons can be relatively long term, we have a
responsibility and opportunity to affect real change in preparing the Company
and its assets to build resilience to climate change.
Climate change is an established component of our sustainability programme.
Responsibility for the assessment and management of climate-related risk and
opportunity is delegated to key members of the Investment Management team,
supported by regular reporting to the Investment Committee. Schroder's Head of
Sustainability and Impact Investing recommends the Investment Manager's annual
Sustainability Policy and Objectives, which are reviewed and approved by the
Investment Committee. The Investment Manager incorporates climate-related
considerations into key stages of the investment process, including acquisition
proposals, annual Asset Business Plans and annual Fund Strategy Statements.
Each of these steps of the investment process requires approval by the
Investment Committee. The Investment Manager also prepares the annual report
and financial accounts for the Company, which include climate-related metrics
and supports the Investment Manager and Board's monitoring of performance and
progress towards climate-related goals and targets.
We are reviewing our approach to ensure climate-related metrics and targets are
sufficiently forward-looking and cover the full range and depth of
climate-related issues. For example, we are in the process of assessing all
managed assets against Paris Aligned 1.5oC carbon and energy intensity
performance benchmarks, to the year 2050 using the Carbon Risk Real Estate
Monitor (CRREM) tool[41] as well as physical climate risks to support a net
zero pathway for the Company.
We will continue to evolve our approach to ensure oversight and management of
exposure to material risks, together with identifying opportunities, across the
asset life cycle to support resilient long-term returns.
Strategy
Our investment philosophy and process is underpinned by fundamental research
and an analytical approach that considers economic, demographic and structural
influences on the market. We are considering how climate change may impact on
these factors over time, as well as how government policies may enable
mitigation of and adaption to climate change.
In the short term, energy and carbon emissions performance of our assets is a
critical climate-related strategic issue. We recognise the need and opportunity
presented by climate change to improve operational efficiency, maintenance
costs and generate new income streams (e.g. onsite energy) and which all
support asset values. These actions also support the Company with increasing
investor expectations in relation to climate action and preparing portfolio
assets for new and emerging energy efficiency regulations, increases in energy
costs, carbon taxes, changing tenant preferences and valuation considerations.
In the short, medium and longer term, the physical effects of changing climate
also present potential material financial impacts to the Company, for example
in relation to heating or cooling buildings in changing climates, weather
events and availability of water.
Since 2016, assets of the Company have been included in the Investment
Manager's UK energy consumption and carbon emission reduction targets for
assets where landlord operational control is retained. As signatories of the
Better Buildings Partnership (BBP)[42] Member Climate Change Commitment, the
Investment Manager has committed to achieving net zero carbon by 2050 at the
latest. Schroder Real Estate published its pathway to Net Zero Carbon in 2020,
which is available here:
https://www.schroders.com/en/sysglobalassets/email/uk/realestate/2020/
schroder-real-estate-net-zero-carbon-pathway-december-2020_1621372_v1.pdf.
As part of implementing the Net Zero Carbon strategy, the Investment Manager is
working to set new portfolio and asset energy and carbon emissions targets to
align with 'science-based' Paris Aligned benchmarks using the CRREM tool1.
The Investment Manager's acquisition and asset business planning processes
include consideration of climate-related issues, and will include a
forward-looking assessment of asset alignment to Paris Aligned energy and
carbon performance benchmarks, where information permits. We are also reviewing
our existing processes for screening acquisitions and standing investments for
climate-related physical risks (e.g. flooding).
Engaging tenants to collaborate to reduce building energy and carbon emissions
is an increasingly important element of our sustainability and business
strategy. We have green lease provisions within our standard lease agreement
and in 2020 launched Schroders Sustainable Occupier and Fit Out Guides for
tenants.
Scenario analysis has begun to feature in our energy and carbon performance
analyses through use of the 1.5oC reduction pathways set out in the CRREM tool.
Risk Management
The existing portfolio-wide sustainability programme covers the life cycle of
assets and enables systematic and continual appraisal of potentially material
climate related risks. Risk criteria assessed within acquisition due diligence
inform our investment decisions (e.g. Energy Performance Certificates and Flood
Risk), as well as featuring in business and sustainability plans such as
building technology upgrades. Pre-acquisition assessment of Paris Alignment
using the CRREM tool, where information permits, will also support
consideration of so called 'stranding risk' from increasing energy efficiency
regulation and changing market expectations.
For existing investments, potential climate-related risks are tracked and
managed through ongoing monitoring (e.g. energy and greenhouse emissions
trends), action plans (e.g. energy efficiency improvement measures),
certification programmes (e.g. Energy Performance Certificates) and technical
energy audits. Impact and Sustainability Action Plans also promote and track
initiatives relating to climate opportunities (e.g. on site renewables and
electric vehicle charging provision). Applying an assessment of the Paris
Alignment using the CRREM tool as part of our Net Zero Pathway enables
consideration of 'stranding risk' which will also feed into our asset action
plans for managed standing investments.
Schroder's environmental management system (EMS) is certified to ISO 14001 and
applies to the asset management of the Company's real estate assets. Key
components of the EMS include a detailed materiality assessment of risks and
opportunities, and a register to monitor existing and emerging regulatory
requirements related to energy and carbon emissions.
On physical risk, Schroders has licenced a proprietary physical risk database
through a third-party provider. The tool assesses vulnerability to physical
risk hazards, including those related to climate change. The strategy will be
to use this database to screen acquisitions, assess standing investment
portfolios and identify required risk mitigation (i.e. enhanced defences,
divestment), adaptation, or transfer (i.e. revised insurance policies)
strategies.
Our understanding of the future potential impacts and risks from climate change
is constantly evolving. Therefore, we are seeking to further embed the
forward-looking identification and assessment of climate related issues into
our research process. This will support ongoing monitoring of emerging risks
and identify possible enhancements to core components of our investment
process, such as our risk assessment and management framework.
Metrics & Targets
In the 'EPRA Sustainability Reporting Performance Measures (unaudited)' and the
'Streamlined Energy and Carbon Reporting' sections of this report, we report
detailed performance trend data, intensity ratios and assessment methodologies
covering energy consumption, GHG emissions, water consumption and waste
generation. Measuring energy, GHG emissions, water and waste supports our
assessment and management of risks from transitioning to a low carbon economy
(e.g. efficiency regulation) and to a new climate (e.g. increased water
scarcity).
As also referenced in 'EPRA Sustainability Reporting Performance Measures
(unaudited)' section of this report, we have ambitious energy and GHG emissions
reduction targets against which we have made good progress. These targets
expired in March 2021 and we are assessing the outcomes of these targets,
noting that COVID-19 has had an impact on our ability to properly identify
improvements in building performance due to interruptions to building operation
and occupation. During 2021, we will use the science based CRREM analysis to
develop asset level Paris Aligned targets to 2025 and 2030. These asset-level
targets will then be compiled to create portfolio reduction targets for the
Company.
Historically we have focussed on monitoring and targeting reductions where we
have operational control - i.e. landlord-procured energy consumption only (so
called 'Scope 1 and 2' GHG emissions). As the transition to a low carbon
economy presents risks and opportunities for entire assets - i.e. landlord and
tenant-controlled areas - we are reviewing how we may also support performance
improvement in tenant-controlled areas (so called 'Scope 3' GHG emissions).
Similarly, we are exploring opportunities to reduce GHG emissions associated
with building materials consumed during construction and fit-out (so called
'embodied' 'Scope 3' GHG emissions).
All investment staff of the Investment Manager are required to have ESG-related
performance objectives.
Business Model
Company's business
The Company is a real estate investment company with a premium listing on the
Official List of the Financial Conduct Authority and whose shares are traded on
the premium segment of the Main Market of the London Stock Exchange. On 1 May
2015 the Company converted to a Real Estate Investment Trust ('REIT') which
means that it is able to benefit from exemptions from UK tax on profits and
gains in respect of certain qualifying property rental business activities. The
Company continues to be an authorised closed-ended investment scheme registered
in Guernsey.
The Board
The Board of Directors is responsible for the overall stewardship of the
Company, including investment and dividend policies, corporate strategy,
gearing, corporate governance and risk management.
The Company has no executive directors or employees.
Investment objective and purpose
The investment objective and purpose of the Company is to provide shareholders
with an attractive level of income together with the potential for income and
capital growth from owning and actively managing a diversified portfolio of
real estate. Corporate social responsibility is deemed to be key to long-term
business success together with overseeing positive stakeholder relationships.
The portfolio is principally invested in the three main UK commercial real
estate sectors of office, industrial and retail, and may also invest in other
sectors including office, retail, and industrial and will also invest in other
sectors including mixed use, residential, hotels, healthcare and leisure. Over
the real estate market cycle the portfolio aims to generate an above average
income return with a diverse spread of lease expiries.
Relatively low levels of debt are used to enhance returns for shareholders with
the level of debt dependent on the real estate cycle and the outlook for future
returns.
Investment strategy
The current investment strategy is to grow income and enhance shareholder
returns through proactive asset management by our specialist teams, and
selective acquisitions and disposals. and selling smaller properties on
completion of the asset business plan.
Our objective is to own a portfolio of larger properties in Winning Cities and
Regions with high growth, diversified local economies, sustainable occupational
demand and favourable supply and demand characteristics. These properties
should offer good long-term fundamentals in terms of location and
specification, be let at affordable rents with the potential for income and
capital growth from good stock selection and asset management, and offer a high
standard of operational and sustainability performance. The issuance of new
shares will also be considered if this is consistent with the strategy.
The Board has delegated investment management and accounting services to the
Investment Manager with the aim of delivering the Company's investment
objective and strategy. Details of the Investment Manager's investment
approach, along with other factors that have affected performance during the
year, are set out in the Investment Manager's Report.
Diversification and asset allocation
The Board believes that in order to maximise the stability of the Group's
income, the optimal strategy for the Group is to invest in a portfolio of
assets diversified by location, sector, asset size and tenant exposure with low
vacancy rates and creditworthy tenants. The value of any individual asset at
the date of its acquisition may not exceed 15% of gross assets and the
proportion of rental income deriving from a single tenant may not exceed 10%.
From time to time the Board may also impose limits on sector, location and
tenant types together with other activity such as development.
The Company's portfolio will be invested and managed in accordance with the
Listing Rules of the Financial Conduct Authority ('Listing Rules' and 'FCA'
respectively) taking into account the Company's investment objectives, policies
and restrictions.
Borrowings
The Board has established a gearing guideline for the Investment Manager, which
seeks to limit on-balance-sheet debt, net of cash, to 35% of on-balance-sheet
assets while recognising that this may be exceeded in the short term from time
to time. It should be noted that the Company's Articles limit borrowings to 65%
of the Group's gross assets, calculated as at the time of borrowing. The Board
keeps this guideline under review and the Directors may require the Investment
Manager to manage the Group's assets with the objective of bringing borrowings
within the appropriate limit while taking due account of the interests of
shareholders. Accordingly, corrective measures may not have to be taken
immediately if this would be detrimental to shareholder interests.
Interest rate exposure
It is the Board's policy to minimise interest rate risk, either by ensuring
that borrowings are on a fixed rate basis, or through the use of interest rate
swaps/derivatives used solely for hedging purposes.
Investment restrictions
As the Company is a closed-ended investment fund for the purposes of the
Listing Rules, the Group will adhere to the Listing Rules applicable to
closed-ended investment funds. The Company and, where relevant, its
subsidiaries will observe the following restrictions applicable to closed-ended
investment funds in compliance with the current Listing Rules:
- Neither the Company nor any subsidiary will conduct a trading activity
which is significant in the context of the Group as a whole and the Group will
not invest in other listed investment companies; and
- Where amendments are made to the Listing Rules, the restrictions
applying to the Company will be amended so as to reflect the new Listing Rules
In addition, the Board will ensure compliance with the UK REIT regime
requirements.
Performance
The Board uses principal financial Key Performance Indicators ('KPIs') to
monitor and assess the performance of the Company being the net asset value
('NAV') total return, the performance of the Company's underlying property
portfolio relative to its MSCI Benchmark Index and the share price:
1. NAV total return
For the year to 31 March 2021 the Company delivered a NAV total return of 3.9%
(-1.5%[43] for the year to 31 March 2020).
2. Underlying property portfolio performance relative to peer group
Benchmark
The performance of the Company's property portfolio is measured against a
specific Benchmark defined as the MSCI (formerly Investment Property Databank)
UK Balanced Portfolios Quarterly Property Index (the 'Benchmark'). As at 31
March 2021 the Benchmark Index comprised 183 member funds.
Underlying property portfolio performance
Total return for 12 months to 31 March Total return for 12 months to 31 March
2021 2020
SREIT (%) MSCI Benchmark (%) SREIT (%) MSCI Benchmark (%)
4.6% 1.8% 1.9% 0.2%
The analysis above has been prepared by MSCI and takes account of all direct
property-related transaction costs.
3. Share price performance
The Board monitors the level of the share price compared to the NAV. As at 31
March 2021, the share price of 39.9p was at a 33.9% discount to the NAV of 60.4
pps. Where appropriate on investment grounds, the Company may from time to time
repurchase its own shares, but the Board recognises that movements in the share
price premium or discount are driven by numerous factors, including investment
performance, gearing and market sentiment. Accordingly, we focus our efforts
principally on addressing the sources of risk and return as the most effective
way of producing long-term value for shareholders.
Our stakeholders
Section 172 statement
Although the Company is registered in Guernsey, in accordance with the guidance
set out in the AIC code a Section 172 statement is required. Section 172 of the
Companies Act 2006 requires a Director of a company to act in the way he or she
considers, in good faith, would be most likely to promote the success of the
company for the benefit of its members as a whole. In doing this, section 172
requires a Director to have regard, among other matters, to: the likely
consequences of any decision in the long term; the interests of the company's
employees; the need to foster the company's business relationships with
suppliers, customers and others; the impact of the company's operations on the
community and the environment; the desirability of the company maintaining a
reputation for high standards of business conduct; and the need to act fairly
with members of the company. The Directors give careful consideration to the
factors set out above in discharging their duties under section 172.
The Board is focused on ensuring that the Company delivers on its strategic
objectives, while taking into account the impact on its stakeholders as a
whole. It is our firm belief that prioritising positive stakeholder
relationships is central to delivering long-term, sustainable returns. The
Board is focused on ensuring that it understands its stakeholders' needs.
Shareholders
The Board is committed to maintaining high standards of corporate governance in
order to protect shareholder interests. The Manager undertakes an active
investor relations schedule in London and the regions throughout the year,
which includes one-on-one and group meetings with shareholders, site visits to
key assets as well regular presentations to the sell-side analyst community.
Shareholder feedback is encouraged either through the broker or directly to the
Manager or Board.
Occupiers
The Company has a diverse range of tenants occupying space across the
portfolio. This includes a wide range of businesses who operate out of our
office or industrial space and the retailers and shoppers who work at or visit
our retail and leisure properties. Active and constant engagement with these
groups, either directly or through property managers or agents, is required to
gather intelligence as to what is important to them. Understanding changing
needs, both at an individual company level, as well as on a sectoral and
broader economic level, is a key tenet informing both our individual asset
management investment decisions as well as the longer-term strategic direction
of the Company.
Communities
Our assets are located across the UK in range of urban environments. The
buildings and their occupiers are part of the fabric of local communities. The
Company works hard to ensure that it is engaging with local communities,
councils and individuals and that our asset strategies are sensitive to the
unique heritage of each location.
Environment
The built environment is generally accepted to be responsible for 40% of global
carbon emissions, which places great responsibility on those companies that are
direct or indirect contributors. The Board is sensitive to the Company's role
and is committed to continually improving and protecting the environment by
using resources such as energy, water and materials in a sustainable manner for
the prevention of greenhouse gas emissions and climate change mitigation.
Environmental, Social and Governance ('ESG') considerations are integrated into
the Company's investment processes and each individual asset benefits from
specific ESG-related objectives. The Board constantly reviews its approach to
sustainable investing and believes that this is integral in delivering better
long-term returns for our investors and for safeguarding the future of
the environment that we live and work in.
Service providers
As an externally managed real estate investment trust, the Board is reliant on
a range of service providers who have a direct working or contractual
relationship or share a mutual interest with the Company. This includes, but is
not limited to, the Manager, property managers, company secretary and
administrator, depositary, auditor, tax advisers, solicitors, property valuers
and banks. The Company regularly reviews these relationships as part of its
commitment to transparency and corporate best practice.
Lenders
Borrowing allows the Company's shareholders to increase exposure to assets
consistent with the strategy and generate enhanced returns in at a low cost.
These lenders have a financial interest in the success of the Company.
Decision making
The Board makes decisions on, among other things, the principal matters set out
under the paragraph above headed 'Role of the Board' on page 59.
Risk and Uncertainties
The Board is responsible for the Company's system of risk management and
internal control and for reviewing its effectiveness. The Board has carried out
a robust assessment of the principal risks and emerging risks facing the
Company including those that would threaten its business model, future
performance, solvency or liquidity. A framework of internal controls has been
designed and established to monitor and manage those risks. This internal
control framework provides a system to enable the Directors to mitigate these
risks as far as possible, which assists in determining the nature and extent of
the significant risks the Board is willing to take in achieving its strategic
objectives.
Although the Board believes that it has a robust framework of internal controls
in place this can provide only reasonable, and not absolute, assurance against
material financial misstatement or loss and is designed to manage, not
eliminate, risk.
A summary of the principal risks and uncertainties faced by the Company, many
of which have remained unchanged throughout the year ended 31 March 2021, and
actions taken by the Board to manage and mitigate these risks and
uncertainties, are set out below.
Key risks Mitigation of risk
Investment policy and strategy
An inappropriate investment strategy, The Board seeks to mitigate these risks by:
or failure to implement the strategy, - Diversification of its property
could lead to underperformance and portfolio through its investment
the share price being at a larger restrictions and guidelines which are
discount, or smaller premium, to NAV monitored and reported on by the Investment
than the property market generally. Manager.
This under performance could be - Determining a borrowing policy and the
caused by incorrect sector and Investment Manager operates within borrowing
geographic weightings or a loss of restrictions and guidelines.
income through tenant failure, both - Receiving from the Investment Manager
of which could lead to a fall in the timely and accurate management information
value of the underlying portfolio. including performance data, attribution
This fall in values would be analysis, property level business plans and
amplified by the Company's external financial projections.
borrowings. - Monitoring the implementation and
results of the investment process with the
Investment Manager with a separate meeting
devoted to strategy each year.
Investment management
The Investment Manager's investment Review of the Investment Manager's
strategy, if inappropriate, may compliance with the agreed investment
result in the Company underperforming restrictions, investment performance and
the market and/or peer group risk against investment objectives and
companies, leading to the Company and strategy; relative performance; the
its objectives becoming unattractive portfolio's risk profile; and appropriate
to investors. strategies employed to mitigate any negative
impact of substantial changes in markets,
including any potential disruption to
capital markets.
Economic and property market risk
The performance of the Company could The Board considers economic conditions and
be affected by economic and property the uncertainty around political events when
market risk. In the wider economy making investment decisions. The Board
this could include inflation or mitigates property market risk through the
deflation, economic recessions, review of the Group's strategy on a regular
movements in interest rates, Brexit basis and discussions are held to ensure the
impact or other external shocks. The strategy is still appropriate or if it needs
performance of the underlying updating.
property portfolio could also be
affected by structural or cyclical
factors impacting particular sectors
or regions of the property market.
Covid-19 and emerging risks
The global pandemic has accentuated The Investment Manager is in close contact
the economic and property market with all the property managers and tenants
risks, highlighted above. with a continued focus on rent collection,
reducing risk and implementing new property
management procedures to ensure tenants can
return safely to our buildings.
Gearing and leverage
The Company utilises credit Gearing is monitored and strict restrictions
facilities. These arrangements on borrowings have been imposed.
increase the funds available for
investment through borrowing. While
this has the potential to enhance
investment returns in rising markets,
in falling markets the impact could
be detrimental to performance.
Accounting, legal and regulatory
The risk that the NAV and financial The Investment Manager has robust processes
statements could be inaccurate. in place to ensure that accurate accounting
records are maintained and that evidence to
support the financial statements is
available to the Board and the auditors. The
Investment Manager operates established
property accounting systems and has
procedures in place to ensure that the
quarterly NAV and Gross Asset Value are
calculated accurately.
The Board has appointed the Investment
Manager as Alternative Investment Fund
Manager (AIFM) in accordance with the
Alternative Investment Fund Managers
Directive (AIFMD).
The quarterly and annual NAV has numerous
levels of reviews including by the Board.
Additional support is produced by the Fund
Accountants to ensure financial data is
complete and accurate.
An internal controls review is performed by
Ernst & Young in accordance with ISAE 3402
annually to provide assurance on Schroders'
service organisations' control procedures
and an external audit is completed to
provide an opinion on the financial
statements which have been reviewed by the
board of directors.
The Administrator monitors legal
requirements to ensure that adequate
procedures and reminders are in place to
meet the Company's legal requirements and
obligations. The Investment Manager
undertakes full legal due diligence with
advisors when transacting and managing the
Company's assets. All contracts entered into
by the Company are reviewed by the Company's
legal and other advisors.
Processes are in place to ensure that the
Company complies with the conditions
applicable to property investment companies
set out in the Listing Rules. The
Administrator attends all Board meetings to
be aware of all announcements that need to
be made and the Company's advisors are aware
of their obligations to advise the
Administrator and, where relevant, the Board
of any notifiable events. Finally, the Board
is satisfied that the Investment Manager and
Administrator have adequate procedures in
place to ensure continued compliance with
the regulatory requirements of the FCA and
the Guernsey Financial Services Commission.
Valuation risk
Property valuations are inherently External valuers provide independent
subjective and uncertain. This valuation of all assets.
uncertainty is heightened due to the Members of the Audit Committee meet with the
Covid-19 pandemic. external valuers to discuss the basis of
their valuations and their quality control
processes.
Tax risk
The Group is exposed to changes in We regularly monitor proposed and actual
the tax regime affecting the cost of changes in tax legislation with the help of
corporate tax, VAT, Stamp Duty and Deloitte, and through direct liaison with
Stamp Duty Land Tax. HMRC, to understand and, if possible,
mitigate their impact.
The UK's exit from the EU creates HMRC has designated the Group as having a
uncertainty over the future UK tax low-risk tax status, and we hold regular
and regulatory environment. meetings with them. We carry out detailed
planning ahead of any future regulatory and
The Group is exposed to potential tax tax changes using Deloitte as our tax
penalties, or loss of its REIT advisors.
status, by failing to comply with the
REIT legislation. The Group has internal monitoring procedures
in place to ensure that the appropriate REIT
rules and legislation are complied with. To
date, all REIT regulations have been
complied with, including projected tests.
Service providers
The Company has no employees and has Service providers are appointed subject to
delegated certain functions to a regular reviews and with clearly documented
number of service providers. Failure contractual arrangements detailing service
of controls and poor performance of expectations.
any service provider could lead to Regular reporting by key service providers
disruption, reputational damage or and monitoring of the quality of services
loss. provided.
Review of internal controls reports from key
service providers, including confirmation of
business continuity and cyber security
arrangements.
Governance Report
Board of Directors
Lorraine Baldry (Chairman)
Status: Independent Non-Executive Director
Date of appointment: 13 January 2014
Aged 72, Lorraine is Chair of Hydroxyl Technologies Limited and Inventa
Partners Limited. She has also been the Chair of London & Continental Railways
and Sellafield Limited, a Governor at The University of the Arts London and a
Director of Thames Water Utilities Limited. She was Chief Executive of
Chesterton International plc and prior to that held various senior positions at
Prudential Corporation, Morgan Stanley and Regus. She is also an Honorary
Member of the Royal Institution of Chartered Surveyors and a Past President of
the British Property Federation.
Current remuneration: £50,000 per annum
Material interests in any contract which is significant to the Company's
business: None
Graham Basham
Status: Independent Non-Executive Director
Date of appointment: 11 September 2015
Aged 63, Graham is a director of a number of Investment and Fiduciary regulated
companies in Guernsey. He also sits on the boards of the SREIT subsidiaries, a
position he has held for more than ten years. He has more than 40 years'
experience in fiduciary and fund work, most of these spent in several offshore
locations. He was Group partner and Head of Guernsey for Aspida Group Limited,
prior to retiring in May 2021. He holds a Trustee Diploma as an Associate of
Chartered Institute of Banks and is a member of both the Society of Trust and
Estate Practitioners and the Institute of Directors.
Current remuneration: £30,000 per annum
Material interests in any contract which is significant to the Company's
business: Was a Director of Computershare Services (Guernsey) Ltd, which acts
as Registrar to the Fund, resigning in May 2021.
Stephen Bligh (Chairman of the Audit Committee)
Status: Independent Non-Executive Director
Date of appointment: 28 April 2015
Aged 64, Stephen was previously with KPMG for 34 years, specialising in the
audit of FTSE 350 companies in property and construction. He is a fellow of the
Institute of Chartered Accountants in England & Wales and was previously a
non-executive Board Member of the Department of Business, Innovation & Skills.
Current remuneration: £35,000 per annum
Material interests in any contract which is significant to the Company's
business: None
Alastair Hughes (Senior Independent Director)
Status: Independent Non-Executive Director
Date of appointment: 26 April 2017
Aged 55, Alastair has over 25 years of experience in real estate markets and
currently holds Directorships with British Land PLC, Tritax Big Box and Quad
Real Property Group. He was previously the Managing Director of Jones Lang
LaSalle (JLL) in the UK before becoming the CEO for Europe, Middle East and
Africa and then latterly becoming the CEO for Asia Pacific. Alastair is a
Chartered Surveyor and sat on the Global Executive Board of JLL.
Current remuneration: £35,000 per annum
Material interests in any contract which is significant to the Company's
business: None
No Director has any entitlement to pensions and the Company has not awarded any
share options or long-term performance incentives to any of them. No element of
Directors' remuneration is performance-related. There were no payments to
Directors for loss of office.
No Director has a service contract with the Company. However, each of the
Directors has a letter of appointment with the Company. The Directors' letters
of appointment, which set out the terms of their appointments, are available
for inspection at the Company's registered office address during normal
business hours and will be available for inspection at the AGM.
Report of the Directors
The Directors of the Company and its subsidiaries, together the 'Group',
present the annual report and audited consolidated financial statements of the
Group for the year ended 31 March 2021 (the 'Annual Report and Consolidated
Financial Statements'). The Company is incorporated in Guernsey, the Channel
Islands under The Companies (Guernsey) Law, 2008 (the 'Companies Law').
Results and dividends
The results for the year under review are set out in the attached financial
statements.
During the year the Company has declared and paid the following interim
dividends to its shareholders in accordance with the solvency test (contained
in the Companies Law):
Dividend for quarter ended Date Paid Rate
30 June 2020 18 August 2020 0.38575 pence per share
30 September 2020 11 December 2020 0.575 pence per share
31 December 2020 12 March 2021 0.625 pence per share
Subject to the solvency test provided for in the Companies Law being satisfied,
all dividends were declared and paid as interim dividends. The Directors
recommend a final dividend for the year ended 31 March 2021 of 0.656 pence per
share.
All dividends paid during the year were allocated and paid as Property Income
Distributions (PIDs).
Share capital
As at 31 March 2021 the Company had 565,664,749 (2020: 565,664,749) Ordinary
Shares in issue of which 74,246,108 Ordinary Shares (representing 13.1% of the
Company's total issued share capital) were held in treasury (2020: 47,151,340).
Further to the share buyback programme which commenced in September 2020, the
total number of voting rights of the Company was 491,418,641 at the year end
(2020: 518,513,409) and this figure may be used by shareholders as the
denominator for the calculations by which they will determine if they were
required to notify their interest in, or a change in their interest of, the
Company, under the Disclosure Guidance and Transparency Rules as at the year
end.
Key services providers
The Board has adopted an outsourced business model and has appointed the
following key service providers:
Investment Manager
The Board reviews the Investment Manager's performance at its quarterly Board
meetings. In addition, the Board conducted its annual strategic review with the
Investment Manager in May 2021 to consider the portfolio strategy and the
Investment Manager's capabilities in more depth. Subsequently, the Directors
formally discussed the performance of the Investment Manager at a meeting of
the Management Engagement Committee.
On the basis of this review, the Board remains satisfied that the Investment
Manager has the appropriate capabilities required to support the Company and
believes that the continuing appointment of the Investment Manager under the
terms of the current investment management agreement, the details of which are
set out below, is in the interest of shareholders.
The Investment Manager received a fee of 1.1% per annum of the Company's NAV
during the financial year for providing investment management and accounting
services. The fee is payable monthly in arrears. There is no performance fee.
The Investment Management Agreement can be terminated by either party on not
less than nine months' written notice or on immediate notice in the event of
certain breaches of its terms or the insolvency of either party.
The Management Engagement Committee has agreed a revision to the Investment
Management Agreement, whereby the Investment Manager has reduced its fee to
0.9% on NAV up to £500 million, 0.8% on NAV between £500 million to £1 billion
and 0.7% on NAV over £1 billion. The termination notice period has increased
from nine to twelve months, with effect from 1 July 2021.
The Company has appointed the Investment Manager as its AIFM under the AIFM
Directive. There is no additional fee paid to the Investment Manager for this
service.
Administration
The Board appointed Northern Trust International Fund Administration Services
(Guernsey) Limited as the administrator to the Company (the 'Administrator').
The Administrator is entitled to an annual fee of £120,000. Northern Trust
(Guernsey) Limited has been appointed by the Board to provide depositary
services, as required under the AIFM Directive, at an annual fee of £40,000.
Going concern
The Directors have examined significant areas of possible financial risk
including the non-collection of rent and service charges as a result of the
Covid-19 pandemic; considered potential falls in property valuations; 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.
Overall, after utilising available cash, excluding the cash balance undrawn
against the RBS facility, and uncharged properties and units in Joint Ventures,
and based on the reporting period to 31 March 2021, property valuations would
have to fall by 42% before the relevant Canada Life Loan to Value covenants
were breached, and actual net rental income would need to fall by 74% before
the interest cover covenants were breached. Furthermore, the properties
charged to RBSI could fall in value by 70% prior to the 65% LTV covenant being
reached and, based on actual net rents for the quarter to March 2021, a 78%
fall in net income could be sustained prior to the RBSI loan covenant of 185%
being breached.
As at the financial year end, the undrawn capacity of the RBS facility was £28
million. This facility is an efficient and flexible source of funding due to
the margin of 1.6% and its ability to be repaid and redrawn as often as
required. It is noted that this facility expires in July 2023.
The Board and Investment Manager continue to closely monitor the ongoing impact
that the Covid-19 pandemic may have on the Company's rental collection 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 period to 1
June 2022. ( In addition to the matters described above, in arriving at their
conclusion the Directors have also considered:
· The current cash balance at 1 June 2021 of £13.5 million;
· The nature and timing of the Company's income and expenses; and
· That the Investment Manager and Administrator have successfully invoked
their business continuity plans to help ensure the safety and well-being of
their staff thereby retaining the ability to maintain the Company's business
operations over the course of the financial year and to date.
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 financial statements.
Viability statement
The Board has assessed the viability of the Company, which considers the
Company's current position and principal risks and uncertainties together with
an assessment of future prospects.
The Board conducted this review over a five year time horizon which was deemed
appropriate as it matches the period over which the Board monitors and reviews
its financial performance and forecasting and the Investment Manager prepares
five year total return forecasts for the UK commercial real estate market. The
Investment Manager uses its forecasts as part of analysing acquisition
opportunities as well as for its annual asset level business planning process.
At the annual Strategic Review the Board receives an overview of the asset
level business plans which the Investment Manager uses to assess the
performance of the underlying portfolio and to therefore make investment
decisions such as disposals and investing in capital expenditure. The Company's
principal borrowings are for a weighted duration of 15 years and the average
unexpired lease term, assuming all tenants vacate at the earliest opportunity,
is 5.3 years.
The Board's assessment of viability considers the principal risks and
uncertainties faced by the Company and, in the current period specifically, the
additional risks arising as a result of Covid-19, as detailed on page 47 of the
Strategic Report, which could negatively impact its ability to deliver the
investment objective, strategy, liquidity and solvency of the Company. This
includes considering a cash flow model prepared by the Manager that analyses
the sustainability of the Company's cash flows, dividend cover, compliance with
bank covenants, REIT compliance and general liquidity requirements for the five
year period to 31 March 2026.
These metrics are subject to a sensitivity analysis which involves flexing a
number of the main assumptions including macroeconomic scenarios, delivery of
specific asset management initiatives, rental growth and void/re-letting
assumptions.
The Board has considered, and will continue to monitor, the downside risks
arising from the ongoing Covid-19 pandemic and expects to remain compliant with
all banking covenants throughout the viability period, assuming rental
collection rates return to their pre-Covid levels later in 2021. It is assumed
that the revolving debt facility, which is due to expire in 2023, will be
successfully renegotiated during the viability assessment period with the
calculation assuming the same covenant conditions as previously.
Based on its assessment, the Board has formed the reasonable expectation that
the Company will be able to continue in operation and meet its liabilities as
they fall due over the next five years.
Anti-bribery policy
The Company continues to be committed to carrying out its business fairly,
honestly and openly. Appropriate policies are considered to be in place to
ensure compliance with the Bribery Act.
Directors
The Directors of the Company, together with their beneficial interests in the
Company's ordinary share capital as at the date of this report, are given
below:
Director Number of ordinary shares Percentage (%)
Lorraine Baldry 100,597 Less than 0.1
Graham Basham - -
Stephen Bligh 100,000 Less than 0.1
Alastair Hughes 101,518 Less than 0.1
Substantial shareholdings
As at 31 March 2021, the Directors were aware that the following shareholders
each owned 3% or more of the issued Ordinary Shares of the Company.
Number of ordinary shares Percentage (%)
Investec Wealth & Investment (UK) 79,994,009 16.3
Schroders PLC 68,183,737 13.9
Witan Investment Trust (UK) 38,750,000 7.9
Embark Investment Services (UK) 34,207,624 7.0
Premier Miton Investors (UK) 25,889,263 5.3
BlackRock Inc 22,042,890 4.5
Hargreaves Lansdown Asset Management 15,640,577 3.2
(UK)
Independent auditors
Resolutions to reappoint Ernst & Young LLP, and to give the Directors authority
to determine the Auditor's remuneration for the coming year, will be put to
shareholders at the Annual General Meeting ('AGM') of the Company.
The Audit Committee's evaluation of the Auditors is described in the Report of
the Audit Committee on page 65.
Disclosure of information to auditors
The Directors who held office at the date of approval of this Directors' Report
confirm that, so far as they are each aware, there is no relevant audit
information of which the Company's Auditors are unaware and each Director has
taken all the steps that they ought to have taken as a Director to make
themselves aware of any relevant audit information and to establish that the
Company's Auditors are aware of that information.
Status for taxation
The Director of Income Tax in Guernsey has granted the Company exemption from
Guernsey income tax under the Income Tax (Exempt Bodies) (Guernsey) Ordinance,
1989 and the income of the Company may be distributed or accumulated without
deduction of Guernsey Income Tax. Exemption under the above-mentioned Ordinance
entails the payment by the Company of an annual fee of £1,200.
The Group's tax charge remains low because it has tax exempt status in the UK
as a UK Real Estate Investment Trust (REIT). The Group has been a UK REIT since
2015 and the Group's property income and gains are exempt from UK corporate
taxes provided a number of conditions in relation to the Group's activities are
met including, but not limited to, distributing at least 90% of the Group's UK
tax exempt profit as property income distributions (PIDs). As far as the
Directors are aware, the Group remains in full compliance with the REIT
requirements.
Shareholders who are in any doubt concerning the taxation implications of a
REIT should consult their own tax advisors.
Key information document
A Key Information Document ("KID") for the Company is published on at least an
annual basis, in accordance with the Packaged Retail and Insurance-Based
Investment Products Regulation ("PRIIPs"), and made available on the Company's
website. The calculation of figures and performance scenarios contained in the
KID are prescribed by PRIIPS and have neither been set nor endorsed by the
Board. In fact, the Board is of the opinion that PRIIPS has been inconsistently
applied by market participants and hence creates confusion amongst investors.
AIFMD remuneration disclosures for Schroder Real Estate Investment Management
Limited ('SREIM') for the year to 31 December 2020.
Quantitative remuneration disclosures to be made in this Annual Report in
accordance with FCA Handbook rule FUND 3.3.5 are published on the following
website:
https://www.schroders.com/en/investor-relations/results-and-reports/
annual-report-and-accounts-2020/
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report and Consolidated
Financial Statements in accordance with applicable law and regulations.
The Companies Law requires the Directors to prepare the Annual Report and
Consolidated Financial Statements for each financial year. Under the Companies
law the Directors have elected to prepare the Annual Report and Consolidated
Financial Statements in accordance with International Financial Reporting
Standards and applicable law.
The Annual Report and Consolidated Financial Statements are required by law to
give a true and fair view of the state of affairs of the Group and of the
profit or loss of the Group for the relevant period.
In preparing the Annual Report and Consolidated Financial Statements, the
Directors are required to:
- Select suitable accounting policies and then apply them consistently;
- Make judgements and estimates that are reasonable and prudent;
- State whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the financial
statements;
- Assess the Company's ability to continue as a going concern, disclosing
as applicable matters relating to going concern; and
- Use the going concern basis of preparation unless they intend to either
liquidate the Company or cease operations or have no realistic alternative to
do so.
The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Group and enable them to ensure that the Annual Report and Consolidated
Financial Statements comply with the Companies Law. They also have general
responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Company and to prevent and detect fraud, error and
non-compliance with law and regulations.
As part of the preparation of the Annual Report and Consolidated Financial
Statements, the Directors have received reports and information from the
Company's Administrator and Investment Manager. The Directors have considered,
reviewed and commented upon the Annual Report and Consolidated Financial
Statements throughout the drafting process in order to satisfy themselves in
respect of the content.
The Directors 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 the Annual Report and Consolidated
Financial Statements.
Legislation in Guernsey governing the preparation and dissemination of the
Consolidated Financial Statements may differ from legislation in other
jurisdictions.
Responsibility Statement of the Directors in respect of the Annual Report
We confirm to the best of our knowledge:
- The Consolidated Financial Statements, prepared in accordance with
International Financial Reporting Standards, give a true and fair view of the
assets, liabilities, financial position and profit of the Group and the
undertakings included in the consolidation taken as a whole and comply with the
Companies Law; and
- The Strategic Report on pages 11 to 48 and Governance Report on pages
49 to 67 include a fair review of the development and performance of the
business and the position of the Group and the undertakings included in the
consolidation taken as a whole, together with a description of the principal
risks and uncertainties it faces. The Directors consider that the Annual Report
and Consolidated Financial Statements, taken as a whole, are fair, balanced and
understandable and provides the information necessary for shareholders to
assess the Company's position and performance, business model and strategy.
By order of the Board
Lorraine Baldry, Chairman
1 June 2021
Resolutions at 2021 Annual General Meeting
THIS SECTION IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION.
If you are in any doubt about the contents of this section of the document or
the action you should take, you are recommended to seek immediately your own
personal financial advice from an appropriately qualified independent advisor
authorised pursuant to the Financial Services and Markets Act 2000 (as
amended).
If you have sold or otherwise transferred all your shares in the Company,
please send this document (including the Notice of AGM) and the accompanying
documents at once to the purchaser, transferee, or to the stockbroker, bank or
other person through whom the sale or transfer was effected for onward
transmission to the purchaser or transferee. However, such documents should not
be distributed, forwarded or transmitted in or into the United States, Canada,
Australia or Japan or into any other jurisdiction if to do so would constitute
a violation of applicable laws and regulations in such other jurisdiction.
The Notice of the Annual General Meeting of Shareholders is set out on pages
126 to 127. The following paragraphs explain the resolutions to be put to the
AGM.
Ordinary resolutions 1-8
Ordinary Resolutions 1-8 are being proposed to approve the ordinary business of
the Company to: (i) consider and approve the consolidated Annual Report and the
remuneration report of the Company for the year ended 31 March 2021; (ii)
re-elect the Directors; and (iii) appoint the Auditors and to authorise the
Directors to determine the Auditor's remuneration.
Ordinary Resolution 9: Approval of the Company's dividend policy
The Company's dividend policy is to pay a sustainable level of quarterly
dividends to shareholders (in arrears). It is intended that successful
execution of the Company's strategy will enable a progressive dividend policy.
The Company's objective and strategy, outlined in the Chairman's Statement and
Investment Manager's Report, is to deliver sustainable net income growth in due
course through active management of the underlying portfolio. Any future
decision to increase the dividend will be determined by factors including
whether it is sustainable over the long term, current and anticipated future
market conditions, rental values and the potential impact of any future debt
refinancing.
As the Company is a REIT, the Board must also ensure that dividends are paid in
accordance with the requirements of the UK REIT regime (pursuant to part 12 of
the UK Corporation Tax Act 2010) in order to maintain the Company's REIT
status. Shareholders should note that the dividend policy is not a profit
forecast and dividends will only be paid to the extent permitted in accordance
with the Companies Law and the UK REIT regime.
The Board acknowledges that the dividend policy is fundamental to shareholders'
income requirements as well as the Company's investment and financial planning.
Therefore, in accordance with the principles of good corporate governance and
best practice relating to the payment of interim dividends without the approval
of a final dividend by a company's shareholders, a resolution to approve the
Company's dividend policy will be proposed annually for approval.
Special Resolution 1: Authority to repurchase shares
The Board recognises that movements in the ordinary share price, premium or
discount, are driven by numerous factors, including investment performance,
gearing and market sentiment. Accordingly, it focuses its efforts principally
on addressing sources of risk and return as the most effective way of producing
long-term value for Shareholders.
However, the Directors may consider repurchasing ordinary shares if they
believe it to be in Shareholders' interests as a whole and as a means of
correcting any imbalance between supply and demand for the ordinary shares. The
making and timing of any repurchase of ordinary shares will be at the absolute
discretion of the Board, although the Board will have regard to the effects of
any such repurchase on long-term shareholders in exercising its discretion. Any
repurchase of ordinary shares will be subject to compliance with the Companies
law and within any guidelines established from time to time by the Board.
During the year ended 31 March 2021 the Company repurchased 27,094,768 shares
(5,713,017 were repurchased between 8 September 2020 and the date of the prior
AGM on 25 September 2020 and a further 21,381,751 shares were purchased between
26 September 2020 and 31 March 2021). Further details of the buyback, its
impact and rationale are disclosed on page 13.
Annually the Company passes a resolution granting the Directors general
authority to purchase in the market up to 14.99% of the number of shares in
issue. The Directors intend to seek a renewal of this authority from the
Shareholders at the AGM.
In the event that the Board decides to repurchase ordinary shares, purchases
will only be made through the market for cash at prices not exceeding the
prevailing NAV of the ordinary shares (as last calculated) where the Directors
believe such purchases will enhance shareholder value. Such purchases will also
only be made in accordance with the Listing Rules and the Disclosure Guidance
and Transparency Rules which provide that the maximum price to be paid for each
ordinary share must not be more than the higher of: (i) 5 per cent above the
average mid-market value of the ordinary shares for the five business days
before the purchase is made; and (ii) an amount equal to the higher of (a) the
price of the last independent trade; and (b) the highest current independent
bid for an ordinary share on the trading venues where the market purchases by
the Company pursuant to the authority conferred by that resolution will be
carried out. The Companies Law also provides, among other things, that any such
purchase is subject to the Company passing the solvency test contained in the
Companies Law at the relevant time. Any ordinary shares purchased under this
authority may be cancelled or held in treasury.
This authority will expire at the conclusion of the annual general meeting of
the Company to be held in 2022 unless varied, revoked or renewed prior to such
date by ordinary resolution of the Company.
Special Resolution 2: Authority to disapply pre-emption rights
The Directors require specific authority from shareholders before allotting new
ordinary shares for cash (or selling shares out of treasury for cash) without
first offering them to existing shareholders in proportion to their holdings.
Special Resolution 2 empowers the Directors to allot new ordinary shares for
cash or to sell ordinary shares held by the Company in treasury for cash,
otherwise than to existing shareholders on a pro rata basis, up to such number
of ordinary shares as is equal to 10% of the ordinary shares in issue
(including treasury shares) on the date the resolution is passed. No ordinary
shares will be issued without pre-emption rights for cash (or sold out of
treasury for cash) at a price less than the prevailing net asset value per
ordinary share at the time of issue or sale from treasury.
The Directors do not intend to allot or sell ordinary shares other than to take
advantage of opportunities in the market as they arise and will only do so if
they believe it to be advantageous to the Company's existing shareholders and
when it would not result in any dilution of the net asset value per ordinary
share (owing to the fact that no ordinary shares will be issued or sold out of
treasury for a price less than the prevailing net asset value per ordinary
share).
This authority will expire on the earlier of the conclusion of the annual
general meeting of the Company to be held in 2022 or on the expiry of 15 months
from the passing of this Special Resolution 2.
The Board considers that the resolutions to be proposed at the AGM are in the
best interests of the Company's shareholders as a whole. The Board therefore
recommends unanimously to shareholders that they vote in favour of each of the
resolutions, as they intend to do in respect of their own beneficial holdings.
Lorraine Baldry, Chairman
1 June 2021
Corporate Governance
The Directors are committed to maintaining high standards of corporate
governance. Insofar as the Directors believe it to be appropriate and relevant
to the Company, it is their intention that the Company should comply with best
practice standards for the business carried on by the Company.
The Guernsey Financial Services Commission (the 'GFSC') states in the Finance
Sector Code of Corporate Governance (the 'Code') that companies which report
against the UK Corporate Governance Code or the Association of Investment
Companies Code of Corporate Governance (the 'AIC Code') are deemed to meet the
Code, and need take no further action.
The Board has considered the principles and recommendations of the Association
of Investment Companies Code of Corporate Governance published in February 2019
( the 'AIC Code'), which applies to accounting periods beginning on or after 1
January 2019. The AIC Code, addresses all the principles set out in the UK
Corporate Governance Code, as well as setting out additional principles and
recommendations on issues that are of specific relevance. A copy of the AIC
Code can be found at www.theaic.co.uk.
It is the Board's intention to continue to comply with the AIC Code and we will
continue to report the Company's compliance with the principles and
recommendations of the AIC Code, which has been endorsed by the Financial
Reporting Council ('FRC').
Statement of compliance
The Company has complied with the recommendations of the AIC Code and the
relevant provisions of the UK Corporate Governance Code, except as set out
below.
The UK Corporate Governance Code includes provisions relating to:
- The role of the chief executive;
- Executive directors' remuneration; and
- Internal audit function.
The Board considers that these provisions are not relevant to the Company,
being an externally managed investment company. In particular, all of the
Company's day-to-day management and administrative functions are outsourced to
third parties. As a result, the Company has no executive directors, employees
or internal operations. The provision in relation to the internal audit
function is referred to in the Audit Committee report. The Company has
therefore not reported further in respect of these provisions.
Role of the Board
The Board has determined that its role is to consider and determine the
following principal matters which it considers are of strategic importance to
the Company:
- The overall objectives of the Company, as described under the paragraph
above headed 'Investment Policy and Strategy' and the strategy for fulfilling
those objectives within an appropriate risk framework, in light of market
conditions prevailing from time to time;
- The capital structure of the Company, including consideration of an
appropriate policy for the use of borrowings both for the Company and in any
joint ventures in which the Company may invest from time to time;
- The appointment of the Investment Manager, Administrator and other
appropriately skilled service providers and to monitor their effectiveness
through regular reports and meetings; and
- The key elements of the Company's performance including NAV growth and
the payment of dividends.
Board decisions
The Board makes decisions on, among other things, the principal matters set out
under the paragraph above headed 'Role of the Board'. Issues associated with
implementing the Company's strategy are generally considered by the Board to be
non-strategic in nature and are delegated either to the Investment Manager or
the Administrator, unless the Board considers there will be implementation
matters significant enough to be of strategic importance to the Company and
should be reserved to the Board. Generally these are defined as:
- Large property decisions affecting 10% or more of the Company's assets;
- Large property decisions affecting 5% or more of the Company's rental
income; and
- Decisions affecting the Company's financial borrowings.
Evaluation of the Board and Audit Committee
In January 2020 the Board appointed Stogdale St James Limited to independently
oversee an external performance evaluation of the Board; there were no
conflicts of interest identified. The report findings were presented and
discussed with the Board. The composition of the Board, its dynamics, its
oversight of strategy and the management of the Board meetings were all highly
regarded.
In the spring of 2021 the Board carried out an internal evaluation of the Board
and its Chairman, which involved questionnaires being completed by
Non-Executive Directors, representatives of the Investment Manager and the
Company Secretary. It was concluded that the Board and its Chairman both
operate effectively and constructively. Ongoing consideration continues to be
given towards succession planning, relationships with key shareholders and the
format and length of board papers.
Non-Executive Directors, rotation of Directors and Directors' tenure
The UK Corporate Governance Code recommends that Directors should be appointed
for a specified period. The Board has resolved in this instance that Directors'
appointments need not comply with this requirement as all Directors are
non-executive and their respective appointments can be terminated at any time
without penalty. The Board has approved a policy that all Directors will stand
for re-election annually and it is the intention that no Director will serve
for more than nine years.
The appointment and replacement of Directors is governed by the Company's
Articles, the Companies Law, related legislations and the Listing Rules. The
Articles may only be amended by a special resolution of the shareholders. When
a vacancy arises the Board selects the best candidate taking into account the
skills and experience required, while taking into consideration board diversity
as part of a good corporate governance culture.
Board composition and diversity
The Board currently consists of four non-executive Directors. The Chairman is
Lorraine Baldry. Alastair Hughes is the Senior Independent Director. The
biography of each of these Directors is set out on page 49 of the report. The
Board considers each of the Directors to be independent.
The independence of each Director is considered on a continuing basis. The
Board has determined that all the Directors are independent of the Investment
Manager. The Board is satisfied that it is of sufficient size with an
appropriate balance of skills and experience, independence and knowledge of
both the Company and the wider investment company sector, to enable it to
discharge its respective duties and responsibilities effectively and that no
individual or group of individuals is, or has been, in a position to dominate
decision making. Accordingly the Board approves the nomination for re-election
of each of the Directors at the forthcoming annual general meeting.
Board committees
The Board has delegated certain of its responsibilities to its Audit,
Nomination, and Management Engagement Committees. Each of these committees has
formal terms of reference established by the Board which are available on the
Company's website. The Board believes that its committees have an appropriate
composition and blend of backgrounds, skills and experience to discharge their
duties effectively.
Audit committee
Details of the Audit Committee are set out in the Report of the Audit
Committee.
Nomination committee
The role of the Nomination Committee, chaired by Lorraine Baldry, is to
consider and make recommendations to the Board on its composition and with
regard to any adjustments that may be appropriate, including in connection with
the re-election of the Board, so as to maintain an appropriate balance of
skills, experience and diversity, including gender, and to ensure progressive
refreshing of the Board. On individual appointments, the Nomination Committee
leads the process and makes recommendations to the Board.
Before the appointment of a new director, the Nomination Committee prepares a
description of the role and capabilities required for a particular appointment.
While the Nomination Committee is dedicated to selecting the best person for
the role, it aims to promote diversification and the Board recognises the
importance of diversity. The Board agrees that its members should possess a
range of experience, knowledge, professional skills and personal qualities as
well as the independence necessary to provide effective oversight of the
affairs of the Company.
Remuneration committee
As all the Directors are non-executives, the Board has resolved that it is not
necessary to have a Remuneration Committee.
Management Engagement committee
A Management Engagement committee has been established to review the
performance and terms of engagement of, in particular, the Investment Manager,
as well as the Administrator, Depositary, Valuers and other service providers
(other than the Auditors, who are the responsibility of the Audit Committee).
Following discussions with the Investment Manager, the Investment Manager has
agreed to reduce its annual management fee from 1.1% of NAV to 0.9% up to £500m
of NAV, to 0.8% for NAV between £500m to £1bn and to 0.7% for NAV over £1bn.
The termination notice period has been extended from nine to twelve months,
with effect from 1 July 2021. Further details are disclosed on pages 99 and
100.
Board meetings and attendance
The Board meets at least four times each year. Additional meetings are also
arranged as required and regular contact between Directors, the Investment
Manager and the Administrator is maintained throughout the year.
Representatives of the Investment Manager and Company Secretary attend each
Board meeting and other advisors also attend when requested to do so by the
Board. At least once a year the Board carries out a site visit to properties
owned by the Company.
Attendance records for the four quarterly Board meetings and three Audit
Committee meetings during the year under review are set out in the table below.
Board Audit committee
Lorraine Baldry (Chairman) 4/4 3/3
Alastair Hughes 4/4 3/3
Graham Basham 4/4 3/3
Stephen Bligh 4/4 3/3
Number of meetings during the year 4 3
In addition to its regular quarterly meetings, the Board met on sixteen other
occasions during the year, attended by all or the majority of Directors.
Information flows
All Directors receive, in a timely manner, relevant management, regulatory and
financial information and are provided, on a regular basis, with key
information on the Company's policies, regulatory requirements and internal
controls. The Board receives and considers reports regularly from the
Investment Manager and other key advisors and ad hoc reports and information
are supplied to the Board as required.
Data protection and security
The Board has reviewed its systems and controls in light of the implementation
of the General Data Protection Regulation (EU Regulation 2016/679) (the "GDPR")
in 2018 to ensure that the Company is compliant with the requirements of the
GDPR. As part of that process the Board took steps to update its contracts and
policies accordingly and is comfortable that it meets its obligations as a
controller of personal data. The Board also requires its Investment Manager and
Administrator to have a robust information security and data protection
environment in place. This is reviewed with the Investment Manager at the
annual Manager's visit day. All Board communication of a confidential nature is
managed via a secure Board application. The Company's privacy notice is
available on its webpage.
Directors' and Officers' Liability Insurance
During the year, the Company has maintained insurance cover for its Directors
under a liability insurance policy.
Relations with shareholders
The Board believes that the maintenance of good relations with both
institutional and retail shareholders is important for the long-term prospects
of the Company. The Board receives feedback on the views of shareholders from
its corporate broker, the Investment Manager and from the Chairman. Through
this process the Board seeks to monitor the views of shareholders and to ensure
an effective communication programme.
The Board believes that the Annual General Meeting provides an appropriate
forum for investors to communicate with the Board and it encourages
participation. The Notice of the next Annual General Meeting on page 126 sets
out the business of the Annual General Meeting to be held on 9 September 2021.
Remuneration Report
The Company's Articles currently limit the aggregate fees payable to the Board
of Directors to a total of £250,000 per annum. Subject to this overall limit,
it is the Board's policy to determine the level of Directors' fees having
regard to the fees payable to non-executive directors in the industry
generally, the role that individual directors fulfil in respect of Board and
Committee responsibilities, and time committed to the Company's affairs.
Directors receive a base fee of £30,000 per annum, and the Chairman receives £
50,000 per annum. The Chairman of the Audit Committee and the Senior
Independent Director each receive an additional fee of £5,000 respectively. The
fees were reviewed by an external consultant during 2015, which led to the
recommendation adopted and the current level of fees taking effect from 1
October 2015.
No Director past or present has any entitlement to pensions and the Company has
not awarded any share options or long-term performance incentives to any of
them. No element of Directors' remuneration is performance-related.
The Board believes that the principles of Section D of the UK Corporate
Governance Code relating to remuneration do not apply to the Company, except as
outlined above, as the Company has no executive directors.
No Director has a service contract with the Company. However, each of the
Directors has a letter of appointment with the Company. The Directors' letters
of appointment, which set out the terms of their appointment, are available for
inspection at the Company's registered office address during normal business
hours and will be available for inspection at the AGM.
All Directors are appointed for an initial term covering the period from the
date of their appointment until the first AGM thereafter, at which they are
required to stand for re-election in accordance with the Articles. When
recommending whether an individual Director should seek re-election, the Board
will take into account the provisions of the UK Corporate Governance Code,
including the merits of refreshing the Board and its Committees.
The Board has approved a policy that all Directors will stand for re-election
annually.
Performance
The performance of the Company is described on page 42 in the Business Model
Report.
The following amounts were paid by the Company for services as non-executive
Directors:
Director 31 March 2021 (£) 31 March 2020 (£)
Lorraine Baldry (Chairman) 50,000 50,000
Stephen Bligh# 35,000 35,000
Graham Basham## 30,000 30,000
Alastair Hughes^ 35,000 35,000
Total 150,000 150,000
^ Senior Independent Director
# Chairman of the Audit Committee.
## Graham Basham remains a director of a majority of the subsidiary
companies, £23,000 was paid to his former employer, Aspida Group Limited, for
their provision of another director for the subsidiaries. Mr Basham owned 13%
of Aspida Group Limited during that time. However, this holding has now been
sold following his retirement.
Information to be disclosed in accordance with Listing Rule 9.8.4R
Listing Rule 9.8.4C requires the Company to include certain information about
the Company in a single identifiable section of this annual report or a cross
reference table indicating where the information required under Listing Rule
9.8.4 R is set out.
The Directors confirm that there are no disclosures to be made in this regard.
Lorraine Baldry, Chairman
1 June 2021
Report of the Audit Committee
Composition
The Audit Committee is chaired by Stephen Bligh with Graham Basham and Alastair
Hughes as members. The Board considers that Stephen Bligh's professional
experience makes him suitably qualified to chair the Audit Committee, and his
continuing professional commitments provide him with recent relevant financial
experience. The Company's Chairman is invited to attend all meetings.
Responsibilities
The Audit Committee ensures that the Company maintains the highest standards of
integrity in financial reporting and internal control. This includes
responsibility for reviewing the half-year and annual financial statements
before their submission to the Board. In addition, the Audit Committee is
specifically charged under its terms of reference to advise the Board, inter
alia, on the terms and scope of the appointment of the Auditors, including
their remuneration, independence, objectivity and reviewing with the Auditors
the results and effectiveness of the audit and the interim review.
Work of the Audit Committee
The Audit Committee meets no less than twice a year. If required, meetings are
also attended by the Investment Manager, the Administrator and the Auditor.
During the year under review, the Audit Committee met on three occasions to
consider:
- The contents of the interim and annual financial statements and to
consider whether, taken as a whole, they were fair, balanced and understandable
and provided the information necessary for shareholders to assess the Company's
performance, business model and strategy;
- The effectiveness of the Company's system of internal control;
- The external Auditor's terms of appointment, audit plan, half year
review findings and year end report;
- The management representation letters to the Auditors;
- The effectiveness of the audit process;
- The independence, effectiveness and objectivity of the external
Auditor;
- The risk assessment of the Company; and
- Compliance with the UK REIT regime.
As noted in the Corporate Governance report, an evaluation of the Audit
Committee was completed by Stogdale St James in early 2020, in which "the
overall performance of the Audit Committee was very highly rated". In 2021,
the Audit Committee performed an internal evaluation of its performance, which
it considers continues to be very satisfactory.
Significant matters considered by the Audit Committee in relation to the
financial statements
Matter Action
Property valuation
Property valuation is central The Audit Committee reviewed the outcomes of the
to the business and is a valuation process throughout the year and
significant area of judgement discussed the detail of each quarterly valuation
which is inherently subjective, with the Investment Manager at the Board meetings.
although the valuations are
performed by independent firms Members of the Audit Committee met with Knight
of valuers: Knight Frank LLP Frank LLP and BNP Paribas Real Estate UK to
and BNP Paribas Real Estate UK discuss the process, assumptions, independence and
for the two joint ventures. communication with the Investment Manager. Their
approach to the 31 March 2021 valuations in light
Errors in valuation could have of the current Covid-19 pandemic was also
a material impact on the discussed and the Committee was satisfied that
Company's net asset value. both firms had taken a considered approach.
Impact of Covid-19 on ongoing
rent collection and Going
Concern The Audit Committee has been closely monitoring
There is a risk that the rent collections over the course of the financial
ongoing Covid-19 pandemic may year. The Investment Manager and property managing
impact Company liquidity and agents have taken a proactive approach to tenants
investment returns in the short who have had cash flow difficulties and have
to medium term which could agreed amended terms where possible. The Audit
impact the Going Concern Committee has also considered the potential
assumption and the viability of reduction in 2021 rentals and its impact on the
the Group. Company's liquidity, and the prospects for the
next five years.
As disclosed in the Going Concern and Viability
Statements on pages 52 and 53, the Audit Committee
has considered various stress tests and
sensitivities to the normal cash flow forecasts,
and is confident that the Company will be able to
continue in operation and meet its liabilities as
they fall due over the five year period of its
assessment.
Internal control
The UK Corporate Governance Code requires the Board to conduct, at least
annually, a review of the adequacy of the Company's systems of internal control
and to report to shareholders that it has done so. The Audit Committee, on
behalf of the Board, also regularly reviews a detailed 'Risk Map' identifying
significant strategic, investment-related, operational and service
provider-related risks and ensures that risk management and all aspects of
internal control are reviewed at least annually.
The Company's system of internal controls is substantially reliant on the
Investment Manager's and the Administrator's own internal controls and internal
audit processes due to the relationships in place.
Although the Board believes that it has a robust framework of internal controls
in place, this can provide only reasonable and not absolute assurance against
material financial misstatement or loss and is designed to manage, not
eliminate, risk. No significant issues were identified from the internal
controls review.
Internal audit
The Audit Committee considered the need for an internal audit function and
concluded that this function is provided by the Schroders Group's Internal
Audit reviews, which cover the functions provided by the Investment Manager,
Schroder Real Estate Investment Management Limited.
In addition, the Investment Manager prepares an ISAE 3402/AAF 01/06 Internal
Controls Report which includes the Company within the scope of the review. This
report is reviewed by Ernst & Young LLP (EY) which issued an unqualified
opinion for the year ended December 2020. The Audit Committee has considered
both the Investment Manager's internal controls report and the review by EY.
External Auditor remuneration, independence and effectiveness
Annually, the Audit Committee considers the remuneration and independence of
the external auditor. The Committee recommends the remuneration of the external
auditor to the Board and keeps under review the ratio of audit to non-audit
fees to ensure that the independence and objectivity of the external auditor
are safeguarded.
Effectiveness of the independent audit process
The Audit Committee evaluated the effectiveness of Ernst & Young prior to
making a recommendation on its reappointment at the forthcoming Annual General
Meeting. As part of the evaluation, the Committee considered feedback from the
Investment Manager on the audit process and the half year and year end report
from the Auditor, which details the auditor's compliance with regulatory
requirements, on safeguards that have been established and their own internal
quality control procedures. The Audit Committee had discussions with the audit
partner on audit planning, accounting policies and audit findings, and met the
audit partner both with and without representatives of the Investment Manager
present. The Chairman of the Audit Committee also had informal discussions with
the audit partner during the course of the year. The Committee is satisfied
with the effectiveness of the auditors.
Non-audit services
In order to help safeguard the independence and objectivity of the auditor, the
Audit Committee maintains a policy on the engagement of the external auditor to
provide non-audit services. The Audit Committee's policy for the use of the
external auditor for non-audit services recognises that there are certain
circumstances where, due to Ernst & Young's expertise and knowledge of the
Company, it will often be in the best position to perform non-audit services.
Under the policy, the use of the external auditor for non-audit services is
subject to pre-clearance by the Audit Committee. Clearance will not be granted
if it is believed it would impair the external auditor's independence or where
provision of such services by the Company's auditor is prohibited. Prior to
undertaking any non-audit service, Ernst & Young also completes its own
independence confirmation processes which are approved by the audit partner.
During the year, the non-audit services fees paid to Ernst & Young were £17,525
in relation to the interim review.
Stephen Bligh, Director
1 June 2021
Independent Auditor's report to the members of Schroder Real Estate Investment
Trust Limited
Opinion
We have audited the consolidated financial statements (the "financial
statements") of Schroder Real Estate Investment Trust Limited (the "Company")
and its subsidiaries (together the "Group") for the year ended 31 March 2021
which comprise the Consolidated Statement of Comprehensive Income, the
Consolidated Statement of Financial Position, the Consolidated Statement of
Changes in Equity, the Consolidated Statement of Cash Flows and the related
notes 1 to 24, including a summary of significant accounting policies. The
financial reporting framework that has been applied in their preparation is
applicable law and International Financial Reporting Standards ('IFRS').
In our opinion, the financial statements:
- give a true and fair view of the state of the Group's affairs as at 31
March 2021 and of its profit for the year then ended;
- have been properly prepared in accordance with International Financial
Reporting Standards; and
- have been properly prepared in accordance with the requirements of The
Companies (Guernsey) Law, 2008.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing
(UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards
are further described in the Auditor's responsibilities for the audit of the
financial statements section of our report. We are independent of the Group in
accordance with the ethical requirements that are relevant to our audit of the
financial statements, including the UK FRC's Ethical Standard as applied to
listed public interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the Directors' use
of the going concern basis of accounting in the preparation of the financial
statements is appropriate. To evaluate the Directors' assessment of the Group's
ability to continue to adopt the going concern basis of accounting, we have:
· obtained an understanding of the process followed by management to make
its going concern assessment;
· obtained the cash flow forecasts which support the Directors' assessment
of going concern and have challenged the sensitivities and assumptions used in
the forecasts and evaluated the impact of these forecasts on the Group's
ability to continue to meet financial covenants and financial commitments as
they fall due;
· challenged the stress testing performed and validated the static data
assumptions used by agreement to supporting documentation;
· recalculated the debt covenants on external loans to validate compliance
within the accounting period;
· held discussions with the Audit Committee and the Investment Manager to
determine whether, in their opinion, there is any material uncertainty
regarding the Group's ability to pay liabilities and commitments as they fall
due and challenged this assessment through our audit procedures in relation to
the liquidity assessment; and
· assessed the disclosures in the Annual Report and Financial Statements
relating to going concern to ensure they were fair, balanced and understandable
and in compliance with IAS 1.
Based on the work we have performed, we have not identified any material
uncertainties relating to events or conditions that, individually or
collectively, may cast significant doubt on the Group's ability to continue as
a going concern for the period to 1 June 2022 from when the financial
statements are authorised for issue.
In relation to the Group's reporting on how they have applied the UK Corporate
Governance Code, we have nothing material to add or draw attention to in
relation to the Directors' statement in the financial statements about whether
the Directors considered it appropriate to adopt the going concern basis of
accounting.
Our responsibilities and the responsibilities of the Directors with respect to
going concern are described in the relevant sections of this report. However,
because not all future events or conditions can be predicted, this statement is
not a guarantee as to the Group's ability to continue as a going concern.
Overview of our audit approach
Audit scope · We have audited the financial statements of the Group for the
year ended 31 March 2021.
Key audit · Risk of misstatement in the fair value of directly or
matters indirectly held investment property portfolio
· Risk of incomplete or inaccurate rental revenue recognition
and related year-end receivables
Materiality · Overall Group materiality of £3.0m which represents 1% of
equity.
An overview of the scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation
of performance materiality determine our audit scope for the Group. This
enables us to form an opinion on the financial statements. We take into account
size, risk profile, the organisation of the Group and effectiveness of
group-wide controls and changes in the business environment when assessing the
level of work to be performed.
All audit work performed for the purposes of the audit was undertaken by the
Group audit team.
Changes from the prior year
There have been no significant changes in scope from the prior year audit.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were
of most significance in our audit of the financial statements of the current
period and include the most significant assessed risks of material misstatement
(whether or not due to fraud) that we identified. These matters included those
which had the greatest effect on: the overall audit strategy, the allocation of
resources in the audit; and directing the efforts of the engagement team. These
matters were addressed in the context of our audit of the financial statements
as a whole, and in our opinion thereon, and we do not provide a separate
opinion on these matters.
Risk Our response to the risk Key observations
communicated to the Audit
Committee
Risk of misstatement in We have performed the following The results of our
the fair value of procedures: procedures are:
directly or indirectly - obtained an understanding of Based on our procedures
held investment property the process and controls performed over the risk of
portfolio surrounding property valuation by misstatement in the fair
Refer to the Report of performing our walkthrough value of directly and
the Audit Committee procedures and evaluating the indirectly held investment
(page 65); implementation and design property portfolio, we
Significant accounting effectiveness of controls; concluded that the
policies (page 82); and methodology applied was
Note 11 of the Financial - assessed the independence appropriate and that the
Statements (pages 87 to and competence of the independent external valuations were a
90) valuers as required by auditing reasonable assessment of the
The Group's investment standards; fair value of the directly
property portfolio - read the valuation report and indirectly held
consists of UK provided by the Group's investment properties at 31
properties held directly independent valuers to agree the March 2021.
and through joint appropriateness and suitability The disclosure set out in
ventures, with a of the reported values and the the notes to the financial
combined fair value of £ changes in value from the statements are fundamental
438.8m (2020: £406.2m). previous accounting period; to users understanding of
There is a risk of - engaged our EY property this matter. We conclude
incorrect valuation of valuation specialists to perform that the balances and
the property portfolio review of a judgmentally selected disclosures in the financial
which could result in sample of property valuations to statements and notes
the Consolidated assess whether the reported value appropriately reflect the
Statement of Financial fell within a range of reasonable risk factors identified.
Position and the outcomes, which included: In relation to the specific
Consolidated Statement properties that were
of Comprehensive Income - validating the assumptions selected for testing by our
being materially used by the independent valuers EY property valuation
misstated. in undertaking their valuation specialists, we have
and assessment of the valuation concluded that the
methodologies adopted; assessment of fair values
- challenging the key inputs performed by the valuers are
and assumptions relating to within an acceptable range.
equivalent yield and rental rates
with reference to published
market data and comparable
transaction evidence through
market activity;
- assessing the
appropriateness of market related
inputs and reasonableness of
valuation methods, by comparing
against our own market data and
understanding of the property
market;
- performed analytical review
procedures across the portfolio
of investments, focusing on
correlations with market data and
any significant movements;
- with respect to key
objective inputs to the
valuation, comprising rental
income and length of lease,
agreed the inputs to lease
agreements or rent review
schedules on a sample basis;
- verified that the fair
values derived by the Group's
independent valuers for the
entire portfolio were correctly
included in the financial
statements
assessed the adequacy of the
additional disclosures of
estimates and valuation
assumptions as disclosed in the
notes were made in accordance
with IFRS 13 - Fair Value
Measurement.
Risk of incomplete or We have performed the following The results of our
inaccurate rental procedures: procedures are:
revenue recognition and - obtained an understanding of Based on our procedures
related year-end the process and controls for each performed over the risk of
receivables revenue stream by performing our incomplete or inaccurate
Refer to the Significant walkthrough procedures and rental revenue recognition
accounting policies evaluating the implementation and and related year-end
(page 83) in the design effectiveness of controls; receivables, we concluded
Financial Statements. - performed substantive that revenue and related
analytical review procedures over year-end receivables are
Revenue is earned in the rental revenue for each property. fairly stated.
form of rental income We formed an expectation of the
from the investment rental income for each property,
properties and is and compared this expectation to
recognised on an accrual the actual revenue recognised
basis. during the year;
During the year, the - agreed a sample of rental
Group recognised £21.5m rates to tenancy agreements and
of rental income (2020: recalculated rental revenue
£22.2m) and rent earned by the property for the
receivable of £4.1m period;
(2020: £2.4m). - recalculated a sample of
There is a risk of lease incentives based on the
incomplete or inaccurate terms within the lease agreement
rental revenue to assess the appropriateness of
recognition and related the amount recorded; this
year-end receivables included, on a sample basis,
through failure to verifying lease modifications
recognise proper income through agreement of the updated
entitlements or to apply terms to amended and restated
the appropriate lease agreements and performing
accounting treatment. an independent assessment as to
The recoverability of whether they have been
year-end receivable is appropriately treated in
based on a number of accordance with IFRS 16 - Leases
assumptions. ('IFRS 16');
- reviewed management's
assessment of the recoverability
of the overdue rent receivables,
and challenged the judgments
involved. For a sample of
tenants, we have inspected the
cash receipt subsequent to the
year-end date; and
- tested the risk of
management override of controls,
we tested a sample of rental
revenue journals to identify
unauthorised or inappropriate
journals. We enquired as to the
nature of each transaction
sampled and obtained
corroborating evidence to
conclude on whether the journals
were reasonable and in line with
our expectations. We selected
journals by applying criteria and
thresholds based on our
professional judgment.
Prior year comparison
In the prior year, our auditor's report included a key audit matter in relation
to the 'Impact of COVID-19 on Going Concern'. This is not considered to be a
key audit matter in the current year as the impact of COVID-19 on the Group is
less uncertain given the changes in the external environment since the last
reporting date.
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in
evaluating the effect of identified misstatements on the audit and in forming
our audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually or in the
aggregate, could reasonably be expected to influence the economic decisions of
the users of the financial statements. Materiality provides a basis for
determining the nature and extent of our audit procedures.
We determined materiality for the Group to be £3.0m (2020:£3.1m), which is 1%
(2020:1%) of equity. We believe that equity provides us with a materiality
aligned to the key measurement of the Group's performance.
During the course of our audit, we reassessed initial materiality and
considered there to be no change from the basis determined at the audit
planning stage, we have updated the value based on equity as at 31 March 2021.
Performance materiality
The application of materiality at the individual account or balance level. It
is set at an amount to reduce to an appropriately low level the probability
that the aggregate of uncorrected and undetected misstatements exceeds
materiality.
On the basis of our risk assessments, together with our assessment of the
Group's overall control environment, our judgement was that performance
materiality was 75% (2020:50%) of our planning materiality, namely £2.2m (2020:
£1.6m). We have used a higher threshold than in our first-year audit because
we now have prior experience as to the likelihood of misstatements and the
effectiveness of the control environment and accounting processes.
Reporting threshold
An amount below which identified misstatements are considered as being clearly
trivial.
We agreed with the Audit Committee that we would report to them all uncorrected
audit differences in excess of £0.15m (2020:£0.16m), which is set at 5% of
planning materiality, as well as differences below that threshold that, in our
view, warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative
measures of materiality discussed above and in light of other relevant
qualitative considerations in forming our opinion.
Other information
The other information comprises the information included in the annual report
set out on pages 3 to 67 and pages 101 to 130, other than the financial
statements and our auditor's report thereon. The Directors are responsible for
the other information contained within the annual report.
Our opinion on the financial statements does not cover the other information
and, except to the extent otherwise explicitly stated in this report, we do not
express any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the course of the audit or otherwise
appears to be materially misstated. If we identify such material
inconsistencies or apparent material misstatements, we are required to
determine whether there is a material misstatement in the financial statements
themselves. If, based on the work we have performed, we conclude that there is
a material misstatement of the other information, we are required to report
that fact.
We have nothing to report in this regard.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters in relation to
which The Companies (Guernsey) Law, 2008 requires us to report to you if, in
our opinion:
- proper accounting records have not been kept by the Group; or
- the financial statements are not in agreement with the Group's accounting
records and returns; or
- we have not received all the information and explanations we require for
our audit.
Corporate Governance Statement
The Listing Rules require us to review the Directors' statement in relation to
going concern, longer-term viability and that part of the Corporate Governance
Statement relating to the Group's compliance with the provisions of the UK
Corporate Governance Code specified for our review.
Based on the work undertaken as part of our audit, we have concluded that each
of the following elements of the Corporate Governance Statement is materially
consistent with the financial statements or our knowledge obtained during the
audit:
- Directors' statement with regards to the appropriateness of adopting the
going concern basis of accounting and any material uncertainties identified set
out on page 52;
- Directors' explanation as to its assessment of the Group's prospects, the
period this assessment covers and why the period is appropriate set out on page
52;
- Directors' statement on fair, balanced and understandable set out on page
56;
- Board's confirmation that it has carried out a robust assessment of the
emerging and principal risks set out on page 46;
- The section of the annual report that describes the review of
effectiveness of risk management and internal control systems set out on page
66; and
- The section describing the work of the audit committee set out on page 65.
Responsibilities of Directors
As explained more fully in the Statement of Directors' Responsibilities set out
on page 55, the Directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view, and for
such internal control as the Directors determine is necessary to enable the
preparation of financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for
assessing the Group's ability to continue as a going concern, disclosing, as
applicable, matters related to going concern and using the going concern basis
of accounting unless the Directors either intend to liquidate the Group or to
cease operations, or have no realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud
or error, and to issue an auditor's report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on
the basis of these financial statements.
Explanation as to what extent the audit was considered capable of detecting
irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and
regulations. We design procedures in line with our responsibilities, outlined
above, to detect irregularities, including fraud. The risk of not detecting a
material misstatement due to fraud is higher than the risk of not detecting one
resulting from error, as fraud may involve deliberate concealment by, for
example, forgery or intentional misrepresentations, or through collusion. The
extent to which our procedures are capable of detecting irregularities,
including fraud is detailed below.
However, the primary responsibility for the prevention and detection of fraud
rests with both those charged with governance of the Group and management.
- We obtained an understanding of the legal and regulatory frameworks that
are applicable to the Group and determined that the most significant are the
Companies (Guernsey) Law, 2008, the UK Corporate Governance Code, REIT
requirements set out in part 12 of the Corporation Tax Act (CTA) 2010 ('REIT
rules') and the Listing Rules of the UK Listing Authority ;
- We understood how the Group is complying with those frameworks by making
enquiries of the Investment Manager, the Administrator and those charged with
governance regarding:
- their knowledge of any non-compliance or potential non-compliance with
laws and regulations that could affect the financial statements;
- the Group's methods of enforcing and monitoring non-compliance with such
policies;
- the Investment Manager's process for identifying and responding to fraud
risks, including programs and controls the Group has established to address
risks identified by the Group, or that otherwise prevent, deter and detect
fraud; and
- how the Group monitors those programs and controls.
- We assessed the susceptibility of the Group's financial statements to
material misstatement, including how fraud might occur by:
- obtaining an understanding of entity-level controls and considering the
influence of the control environment;
- obtaining management's assessment of fraud risks including an
understanding of the nature, extent and frequency of such assessment documented
in the Group's Risk Matrix;
- making inquiries with those charged with governance as to how they
exercise oversight of management's processes for identifying and responding to
fraud risks and the controls established by management to mitigate specifically
those risks the entity has identified, or that otherwise help to prevent, deter
and detect fraud;
- making inquiries with management and those charged with governance
regarding how they identify related parties including circumstances related to
the existence of a related party with dominant influence; and
- making inquiries with management and those charged with governance
regarding their knowledge of any actual or suspected fraud or allegations of
fraudulent financial reporting affecting the Group.
- Based on this understanding we designed our audit procedures to identify
non-compliance with such laws and regulations. Our procedures involved:
- Through discussion, gaining an understanding of how those charged with
governance and the Investment Manager identify instances of non-compliance by
the Group with relevant laws and regulations;
- Inspecting the relevant policies, processes and procedures to further our
understanding;
- Reviewing Board minutes and internal compliance reporting;
- Inspected management's specialist's assessment of the Group's compliance
with the REIT rules. We have tested through recalculating and corroborating, to
supporting information, the Group's compliance with each of the REIT rules,
including the proportion of dividend distributed in the form of property income
distributions;
- Inspecting correspondence with regulators; and
- Obtaining relevant written representations from the Board of Directors.
A further description of our responsibilities for the audit of the financial
statements is located on the Financial Reporting Council's website at https://
www.frc.org.uk/auditorsresponsibilities. This description forms part of our
auditor's report.
Other matters we are required to address
- Following the recommendation from the audit committee we were appointed
by the Company on 5 November 2019 to audit the financial statements for the
year ending 31 March 2020 and subsequent financial periods.
The period of total uninterrupted engagement including previous renewals and
reappointments is 2 years, covering the years ending 2020 to 2021.
- The non-audit services prohibited by the FRC's Ethical Standard were not
provided to the Group and we remain independent of the Group in conducting the
audit.
- The audit opinion is consistent with the additional report to the audit
committee.
Use of our report
This report is made solely to the Company's members, as a body, in accordance
with Section 262 of The Companies (Guernsey) Law 2008. Our audit work has been
undertaken so that we might state to the Group's members those matters we are
required to state to them in an auditor's report and for no other purpose. To
the fullest extent permitted by law, we do not accept or assume responsibility
to anyone other than the Group and the Group's members as a body, for our audit
work, for this report, or for the opinions we have formed.
Richard Geoffrey Le Tissier
for and on behalf of Ernst & Young LLP
Guernsey, Channel Islands
1 June 2021
Financial Statements
Consolidated Statement of Comprehensive Income
31/03/2021 31/03/2020
Notes £000 £000
Rental income 21,458 22,160
Other income 4 205 1,333
Property operating expenses 5 (3,038) (2,248)
Net rental and related income, excluding joint 18,625 21,425
ventures
Share of net rental income in joint ventures 2,452 2,567
Net rental and related income, including joint 21,077 23,812
ventures
Profit on disposal of investment property 11 121 1,897
Net unrealised valuation loss on investment 11 (8,286) (17,364)
property
Expenses
Investment management fee 3 (2,906) (3,470)
Valuers' and other professional fees (1,698) (1,629)
Administrators' fee 3 (120) (120)
Auditor's remuneration 6 (150) (140)
Directors' fees 7 (150) (150)
Other expenses 7 (278) (303)
Total expenses (5,302) (5,812)
Net operating profit/(loss) before net finance 5,158 (34)
costs
Refinancing costs 16 - (27,364)
Finance costs (4,203) (5,271)
Net finance costs (4,203) (32,635)
Share of net rental income in joint ventures 12 2,452 2,567
Share of valuation gain/(loss) in joint ventures 12 1,135 (2,357)
Profit/(loss) before taxation 4,542 (32,459)
Taxation 8 - -
Profit/(loss) and total comprehensive income for 4,542 (32,459)
the year attributable to the equity holders of
the parent
Basic and diluted earnings/(loss) per share 9 0.9p (6.3p)
All items in the above statement are derived from continuing operations. The
accompanying notes 1 to 24 form an integral part of the financial statements.
Consolidated Statement of Financial Position
31/03/2021 31/03/2020
Notes £000 £000
Investment property 11 351,776 321,382
Investment in joint ventures 12 79,120 77,985
Non-current assets 430,896 399,367
Trade and other receivables 13 17,028 15,115
Cash and cash equivalents 14 12,175 33,051
Current assets 29,203 48,166
Total assets 460,099 447,533
Issued capital and reserves 15 332,811 336,258
Treasury shares 15 (35,967) (26,452)
Equity 296,844 309,806
Interest-bearing loans and borrowings 16 153,370 128,667
Lease liability 11 1,988 2,416
Non-current liabilities 155,358 131,083
Trade and other payables 17 7,897 6,644
Current liabilities 7,897 6.644
Total liabilities 163,255 137,727
Total equity and liabilities 460,099 447,533
60.4p 59.7p
Net Asset Value per Ordinary Share 18
The financial statements on pages 76 to 79 were approved at a meeting of the
Board of Directors held on 1 June 2021 and signed on its behalf by:
Lorraine Baldry, Chairman
Stephen Bligh, Director
The accompanying notes 1 to 24 form an integral part of the financial
statements.
Consolidated Statement of Changes in Equity
Notes Share Treasury Revenue Total
premium share reserve reserve
£000 £000 £000 £000
Balance as at 31 March 219,090 (26,452) 163,738 356,376
2019
Loss for the year - - (32,459) (32,459)
Dividends paid 10 - - (14,111) (14,111)
Balance as at 31 March 219,090 (26,452) 117,168 309,806
2020
Share buyback 18 - (9,515) - (9,515)
Profit for the year - - 4,542 4,542
Dividends paid 10 - - (7,989) (7,989)
Balance as at 31 March 219,090 (35,967) 113,721 296,844
2021
The accompanying notes 1 to 24 form an integral part of the financial
statements.
Consolidated Statement of Cash Flows
31/03/2021 31/03/2020
£000 £000
Operating activities
Profit/(loss) for the year 4,542 (32,459)
Adjustments for:
Profit on disposal of investment property (121) (1,897)
Net valuation loss on investment property 8,286 17,364
Share of profit of joint ventures (3,587) (210)
Net finance cost 4,202 32,635
Operating cash generated before changes in working 13,322 15,433
capital
Increase in trade and other receivables (1,923) (1,645)
Increase/(decrease) in trade and other payables 1,254 (2,743)
Cash generated from operations 12,653 11,045
Finance costs paid (3,990) (5,698)
Cash flows from operating activities 8,663 5,347
Investing activities
Proceeds from sale of investment property 6,409 80,034
Acquisition of investment property (36,500) -
Additions to investment property (8,896) (6,504)
Addition to joint ventures - (496)
Capital redemptions in joint ventures - 319
Net income distributed from joint ventures 2,452 2,567
Cash flows from investing activities (36,535) 75,920
Financing activities
Additions/(repayments) to debt 24,500 (29,000)
Refinancing fees paid - (26,147)
Dividends paid (7,989) (14,111)
Share buyback (9,515) -
Cash flows used in financing activities 6,996 (69,258)
Net (decrease)/increase in cash and cash (20,876) 12,009
equivalents for the year
Opening cash and cash equivalents 33,051 21,042
Closing cash and cash equivalents 12,175 33,051
The accompanying notes 1 to 24 form an integral part of the financial
statements.
Notes to the Financial Statements
1. Significant accounting policies
Schroder Real Estate Investment Trust Limited ("the Company") is a closed-ended
investment company registered in Guernsey. The consolidated financial
statements of the Company for the year ended 31 March 2021 comprise the Company
and its subsidiaries (together referred to as the "Group").
Statement of compliance
The financial statements have been prepared in accordance with International
Financial Reporting Standards ("IFRS") issued by the International Accounting
Standards Board (the "IASB"), and interpretations issued by the International
Financial Reporting Interpretations Committee.
The financial statements give a true and fair view and are in compliance with
The Companies (Guernsey) Law, 2008, applicable legal and regulatory
requirements and the Listing Rules of the UK Listing Authority.
Basis of preparation
The financial statements are presented in sterling, which is the Company's
functional currency, rounded to the nearest thousand. They are prepared on the
historical cost basis except that investment property and derivative financial
instruments are stated at their fair value.
The accounting policies have been consistently applied to the results, assets,
liabilities and cash flows of the entities included in the consolidated
financial statements and are consistent with those of the previous year.
Going concern
The Directors have examined significant areas of possible financial risk,
including the non-collection of rent and service charges as a result of the
Covid-19 pandemic; have considered potential resulting falls 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.
Overall, after utilising available cash, excluding the cash undrawn against the
RBS facility, and uncharged properties and units in Joint Ventures, and based
on the reporting period to 31 March 2021, property valuations would have to
fall by 42% before the relevant Canada Life Loan to Value covenants were
breached, and actual net rental income would need to fall by 74% before the
interest cover covenants were breached. Furthermore, the properties charged to
RBSI could fall in value by 70% prior to the 65% LTV covenant being reached
and, based on actual net rents for the quarter to March 2021, a 78% fall in net
income could be sustained prior to the RBSI loan covenant of 185% being
breached.
As at the financial year end the undrawn capacity of the RBS facility was £28
million. This facility is an efficient and flexible source of funding due to
the margin of 1.6% and its ability to be repaid and redrawn as often as
required.
The Board and Investment Manager are closely monitoring the potential impact
the Covid-19 pandemic may have on the Company's rental collection 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 period to 1
June 2022 . In addition to the matters described above, in arriving at their
conclusion the Directors have also considered:
· The current cash balance at 1 June 2021 of £13.5 million;
· The nature and timing of the Company's income and expenses; and
· That the Investment Manager and Administrator have successfully invoked
their business continuity plans to help ensure the safety and well-being of
their staff thereby retaining the ability to maintain the Company's business
operations.
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 financial statements.
Use of estimates and judgements
The preparation of financial statements in conformity with IFRS 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. These estimates and associated assumptions are based on
historical experience and various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis of
making judgements about the carrying values of assets and liabilities that are
not readily apparent from other sources. 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.
The most significant estimates made in preparing these financial statements
relate to the carrying value of investment properties, including those within
joint ventures, which are stated at fair value. The Group uses external
professional valuers to determine the relevant amounts. Judgements made by
management in the application of IFRS that have a significant effect on the
financial statements and estimates with a significant risk of material
adjustment in the next year are disclosed in note 19.
Another significant estimate is the amount of expected credit losses as per
IFRS 9 from rent demanded during the period which has not yet been collected.
Management has considered rental debtors on a quarterly basis and made
provisions and write offs where it has been deemed that these amounts are
irrecoverable. As at 31 March 2021 total provisions of £1.1m were recognised
and rental debtors are shown net of this provision in notes 13 and 19. In
addition to bad debt provisions recognised relating to rent recognised during
the period, an additional judgement has been made relating to rent demanded at
the end of March relating to the subsequent quarter from April and to June. Any
amounts which are deemed to be potentially irrecoverable have been removed from
the deferred income and rental debtor balances reported as at 31 March.
Basis of consolidation
Subsidiaries
The consolidated financial statements comprise the financial statements of the
Company and all of its subsidiaries drawn up to 31 March each year.
Subsidiaries are those entities controlled by the Company. Control exists where
the investor has the following;
-power over the investee,
-exposure, or rights, to variable returns from its involvement with the
investee,
-the ability to use its power over the entity to affect the amount of the
investor's returns.
The financial statements of subsidiaries are included in the consolidated
financial statements from the date that control commences until the date that
control ceases. Where properties are acquired by the Group through corporate
acquisitions but the acquisition does not meet the definition of a business
combination, the acquisition has been treated as an asset acquisition.
Joint ventures
Joint ventures are those entities over whose activities the Group has joint
control, established by contractual agreement. The consolidated financial
statements include the Group's share of profit or loss of jointly controlled
entities on an equity accounted basis. When the Group's share of losses exceeds
its interest in an entity, the Group's carrying amount is reduced to nil and
recognition of further losses is discontinued except to the extent that the
Group has incurred legal or constructive obligations or is making payments on
behalf of an entity.
Transactions eliminated on consolidation
Intra-group balances, and any gains and losses arising from intra-group
transactions, are eliminated in preparing the consolidated financial
statements. Gains arising from transactions with joint ventures are eliminated
to the extent of the Group's interest in the entity. Losses are eliminated in
the same way as gains but only to the extent that there is no evidence of
impairment.
Investment property
Investment property is land and buildings held to earn rental income together
with the potential for capital growth.
Acquisitions and disposals are recognised on the unconditional exchange of
contracts. Acquisitions are initially recognised at cost, being the fair value
of the consideration given, including transaction costs associated with the
investment property.
After initial recognition, investment properties are measured at fair value,
with unrealised gains and losses recognised in the statement of comprehensive
income. Realised gains and losses on the disposal of properties are recognised
in the statement of comprehensive income in relation to carrying value. Fair
value is based on the market valuations of the properties as provided by a firm
of independent chartered surveyors at the reporting date. Market valuations are
carried out on a quarterly basis.
As disclosed in note 20, the Group leases out all owned properties on operating
leases. A property held under an operating lease is classified and accounted
for as an investment property where the Group holds it to earn rentals, capital
appreciation, or both. Any such property leased under an operating lease is
classified as an investment property and carried at fair value.
Leases
For any material leases for which the Group is a lessee, the leasehold interest
is measured at fair value and included in investment properties with the
corresponding liability being shown as a non-current liability. The fair value
is calculated as the present value of the future lease payments.
Financial instruments
Non-derivative financial instruments
Financial assets
Non-derivative financial instruments comprise trade and other receivables and
cash and cash equivalents. These are recognised initially at fair value plus
any directly attributable transaction costs. Subsequent to initial recognition
they are measured at amortised cost using the effective interest rate method
less any impairment losses.
Cash and cash equivalents
Cash at bank and short-term deposits that are held to maturity are carried at
cost. Cash and cash equivalents are defined as cash in hand, demand deposits
and short-term, highly liquid investments readily convertible to known amounts
of cash and subject to insignificant risk of changes in value. For the purposes
of the Consolidated Statement of Cash Flows, cash and cash equivalents consist
of cash in hand and short-term deposits at banks with a term of no more than
three months.
Financial liabilities
Non-derivative financial instruments comprise loans and borrowings and trade
and other payables.
Loans and borrowings
Borrowings are recognised initially at fair value of the consideration
received, less attributable transaction costs. Subsequent to initial
recognition, interest bearing borrowings are stated at amortised cost with any
difference between cost and redemption value being recognised in the statement
of comprehensive income over the period of the borrowings on an effective
interest basis.
Trade and other payables
Trade and other payables are stated at amortised cost.
Share capital
Ordinary shares, including treasury shares, are classified as equity.
Share buyback
Shares purchased are recognised on the trade date and debited to the existing
treasury reserve in the statement of changes in equity. Any broker's fees
relating to the share buyback are debited to other expenses.
Dividends
Dividends are recognised in the period in which they are paid.
Rental income
Rental income from investment properties is recognised on a straight-line basis
over the term of ongoing leases and is shown gross of any UK income tax. Lease
incentives are spread evenly over the lease term.
Surrender premiums and dilapidations are recognised in line with individual
lease agreements when cash inflows are certain.
Impairment
Financial assets
Financial assets at amortised cost are subject to impairment.
The Group's significant financial assets that are subject to IFRS 9's expected
credit loss model are trade receivables from the leasing of investment
properties. The credit risk associated with unpaid rent has increased due to
Covid 19 and management have done a detailed analysis over the recoverability
of expected rents. Rents received in advance have been closely monitored and
any rents deemed irrecoverable discussed by management. Note 19 provides
further details on the measurement of the loss allowance and amount recognised
at 31 March 2021.
Non-financial assets
The carrying amounts of the Group's non-financial assets, being the investment
in joint ventures, are reviewed at each reporting date to determine whether
there is any indication of impairment. If any such indication exists, then the
asset's recoverable amount is estimated.
The recoverable amount of an asset or cash-generating unit is the greater of
its value in use and its fair value less costs to sell. In assessing value in
use, the estimated future cash flows are discounted to their present value
using a pre-tax discount rate that reflects current market assessments of the
time value of money and the risks specific to that asset.
For the purpose of impairment testing, assets are grouped together into the
smallest group of assets that generates cash inflows from continuing use that
are largely independent of the cash inflows of other assets or groups of assets
(the "cash-generating unit").
An impairment loss is recognised if the carrying amount of an asset or its
cash-generating unit exceeds its estimated recoverable amount. Impairment
losses are recognised in the statement of comprehensive income.
Provisions
A provision is recognised in the Consolidated Statement of Financial Position
when the Group has a legal or constructive obligation as a result of a past
event and it is probable that an outflow of economic benefits will be required
to settle the obligation.
Finance costs
Finance costs comprise interest expense on borrowings that are recognised in
the statement of comprehensive income. Attributable transaction costs incurred
in establishing the Group's credit facilities are deducted from the fair value
of borrowings on initial recognition and are amortised over the lifetime of the
facilities through the statement of comprehensive income. Finance costs are
accounted for on an effective interest basis.
Expenses
All expenses are accounted for on an accruals basis. The costs recharged to
occupiers of the properties are presented net of the service charge income as
management consider that the property agent acts as principal in this respect.
Taxation
SREIT 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.
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 group
revenues. SREIM acts as advisor to the Board, who then make management
decisions following their recommendations. As such the Board of Directors are
considered to be the chief operating decision maker. A set of consolidated IFRS
information is provided on a quarterly basis.
2. New standards and interpretations
Standards, interpretations and amendments to published standards that are not
yet effective
Annual Improvements cycle - Effective date of 2018 - 2020
On 14 May 2020, the IASB issued 'Annual Improvements to IFRS Standards
2018-2020'. The pronouncement contains amendments to four International
Financial Reporting Standards (IFRSs) as result of the IASB's annual
improvements project. The amendments are effective for annual reporting periods
beginning on or after 1 January 2022.
It is Management's expectation that there will be no material impact on the
financial statements when these amendments become effective.
Management are satisfied that there are no other standards that are published
and not yet effective that will have a material effect on the accounts.
3. 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 one twelfth of the aggregate of 1.1% of the NAV
of the Company. The Investment Management Agreement can be terminated by either
party on not less than nine months written notice or on immediate notice in the
event of certain breaches of its terms or the insolvency of either party. The
total charge to the Consolidated Statement of Comprehensive Income during the
year was £2,906,000 (2020: £3,470,000). At the year end £20,000 (2020: £
295,000) was outstanding. As noted in the Report of the Directors, the terms of
the Investment Management Agreement have been revised with effect from 1 July
2021.
Northern Trust International Fund Administration Services (Guernsey) Limited is
the Administrator to the Company. The Administrator is entitled to an annual
fee equal to £120,000 (2020: £120,000) of which £nil (2020: £nil) was
outstanding at the year end. In addition to this £40,000 (2020: £40,000) was
paid for depository fees of which £3,000 (2020: £nil) was outstanding at year
end.
4. Other income
31/03/2021 31/03/2020
£000 £000
Dilapidations 192 482
Surrender premiums - 840
Miscellaneous income 13 11
205 1,333
5. Property operating expenses
31/03/2021 31/03/2020
£000 £000
Agents' fees 122 81
Repairs and maintenance 92 130
Advertising 33 97
Rates - vacant 400 342
Service charge, insurance and utilities on 1,445 933
vacant units
Ground rent 109 137
Bad debt provisions and write offs 837 528
3,038 2,248
6. Auditor's remuneration
The total expected audit fees for the year are £122,475 (2020: £116,500) and £
17,525 (2020: £16,500) for the half year interim review of the financial
statements. An additional £10,000 was paid to the auditors during the year
ended 31 March 2021 in respect of additional costs incurred during the 2020
audit, primarily as a result of the COVID pandemic.
7. Other expenses
31/03/2021 31/03/2020
£000 £000
Professional fees 248 235
Other expenses 30 68
278 303
Directors' fees
Directors are the only officers of the Company and there are no other key
personnel. The Directors' annual remuneration for services to the Group was £
150,000 (2020: £150,000), as set out in the Remuneration Report on page 63.
8. Taxation
31/03/2021 31/03/2020
£000 £000
Tax expense in year - -
Reconciliation of effective tax rate
Profit/(loss) before tax 4,542 (32,459)
Effect of:
Tax using the UK corporation tax rate of 19% 863 (6,167)
Revaluation loss not taxable 1,574 3,299
Share of profit of associates and joint (682) (40)
ventures not taxable
Profit on disposal of investment property not (23) (360)
taxable
UK REIT exemption (1,732) 3,268
Current tax expense in the year - -
SREIT 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.
9. Basic and diluted earnings per share
The basic and diluted earnings per share for the Group are based on the profit
for the year of £4,542,000 (2020: loss of £32,459,000) and the weighted average
number of Ordinary Shares in issue during the year of 508,699,880 (2020:
518,513,409).
10. Dividends paid
In respect of Ordinary Rate 31/03/2021
shares (pence) £000
Q/e 30 June 2020 (dividend paid 18 August 2020) 518.51 0.38575 2,002
million
Q/e 30 September 2020 (dividend paid 11 December 503.30 0.575 2,894
2020) million
Q/e 31 December 2020 (dividend paid 12 March 495.00 0.625 3,093
2021) million
1.59 7,989
In respect of Ordinary Rate 31/03/2020
shares (pence) £000
Q/e 31 March 2019 (dividend paid 7 June 2019) 518.51 0.65 3,370
million
Q/e 30 June 2019 (dividend paid 16 August 2019) 518.51 0.65 3,370
million
Q/e 30 September 2019 (dividend paid 18 December 518.51 0.65 3,370
2019) million
Q/e 31 December 2019 (dividend paid 11 March 518.51 0.77 4,001
2020) million
2.72 14,111
A dividend for the quarter ended 31 March 2021 of 0.656 pence per share was
approved and will be paid on the 25 June 2021.
11. Investment property
Leasehold Freehold Total
£000 £000 £000
Fair value as at 31 March 2019 39,822 331,275 371,097
Additions 34 6,470 6,504
Gross proceeds on disposals - (43,168) (43,168)
Realised gain on disposals - 1,897 1,897
Fair Value leasehold adjustment * 2,416 - 2,416
Net unrealised valuation loss on investment (5,454) (11,910) (17,364)
property
Fair value as at 31 March 2020 36,818 284,564 321,382
Additions 8,856 40 8,896
Acquisitions - 36,500 36,500
Gross proceeds on disposals (4,116) (2,293) (6,409)
Realised gain on disposals 65 56 121
Fair value leasehold adjustment movement (428) - (428)
Net unrealised valuation loss on investment (4,819) (3,467) (8,286)
property
Fair value as at 31 March 2021 36,376 315,400 351,776
* Relates to the fair value of the leasehold element of The Galaxy, Luton. The
corresponding lease liability is included on the Balance Sheet under
non-current liabilities.
The balance above includes:
Leasehold Freehold Total
£000 £000 £000
Investment property 34,388 315,400 349,788
Fair value leasehold adjustment 1,988 - 1,988
Fair value as at 31 March 2021 36,376 315,400 351,776
Leasehold Freehold Total
£000 £000 £000
Investment property 34,402 284,564 318,966
Fair value leasehold adjustment 2,416 - 2,416
Fair value as at 31 March 2020 36,818 284,564 321,382
No investment properties have been deemed to meet the criteria of a held for
sale asset at the year end (31 March 2020: £nil).
The fair value of investment properties, as determined by the valuer, totals £
359,300,000 (2020: £328,300,000). In addition to this, £9,512,000 (2020: £
9,334,000) relating to lease incentives is included within trade and other
receivables.
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 RICS
Valuation - Professional Standards global January 2019, issued by the Royal
Institution of Chartered Surveyors (the "Red Book") including the International
Valuation Standards.
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 properties
have been valued individually and not as part of a portfolio.
The valuation has been undertaken using an appropriate valuation methodology
and the Valuer's professional judgement. Consistent with the prior year, 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).
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
31 March 2021
31 March 2021 Industrial Retail Office Other Total
(1) (incl.
retail
warehouse)
Fair value (£ 170,400 87,050 85,350 16,500 359,300
000)
Area ('000 sq 1,963 506 414 177 3,060
ft)
Net passing Range £4.20 - £ £0 - £32.85 £0 - £29.10 £0 -£13.00 £0 - £32.85 £
rent per sq ft Weighted 8.36 £5.16 £11.46 £16.46 £6.95 7.55
per annum average
Gross ERV per Range £3.50 - £ £7.40 - £ £12.00-£ £2.10 -£ £2.10 - £
sq ft per annum Weighted 13.00 32.85 £13.40 24.00 13.00 32.85 £8.40
average £5.70 £17.59 £7.98
Net initial Range 4.40% - 2.72% -9.45% 5.77%-11.00% 4.75%-9.27% 2.72% -
yield (1) Weighted 7.02% 6.24% 7.47% 7.00% 11.00% 6.25%
average 5.57%
Equivalent Range 5.10% - 5.80%-10.04% 5.72%-9.25% 4.75% 4.75%-10.04%
yield Weighted 7.41% 7.38% 7.74% -8.96% 6.65%
average 6.16% 7.25%
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 2020
31 March 2020 Industrial Retail Office Other Total
(1) (incl.
retail
warehouse)
Fair value (£ 116,150 98,400 95,100 18,650 328,300
000)
Area ('000 sq 1,398 527 463 177 2,565
ft)
Net passing rent Range £0 - £ £0 - £38.50 £0 - £29.10 £0 -£13.00 £0 - £38.50
per sq ft per Weighted 10.00 £11.72 £15.02 £8.22 £8.22
annum average £4.64
Gross ERV per sq Range £3.75 - £ £4.30 - £ £10.00-£ £2.10 -£ £2.10 - £
ft per annum Weighted 10.00 31.80 26.00 13.00 31.80
average £5.50 £14.36 £17.05 £8.49 £9.61
Net initial Range 4.75% - 0% -11.50% 5.36% - 4.85% 0% - 11.50%
yield (1) Weighted 6.52% 5.88% 9.58% -8.31% 6.01%
average 5.23% 6.85% 7.33%
Equivalent yield Range 5.30% - 5.71%-9.82% 5.56%-9.93% 4.85% 4.85%-9.93%
Weighted 6.75% 6.97% 7.48% -7.99% 6.87%
average 6.25% 6.84%
Notes: (1) Yields based on rents receivable after deduction of head rents but
gross of non-recoverables
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:
Impact on fair value measurement Impact on fair value
Unobservable input of significant increase in input measurement of significant
decrease in input
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 are shown below:
Estimated movement in fair value of Industrial Retail Office Other All
investment properties at 31 March £'000 £'000 £'000 £'000 sectors
2021 £'000
Increase in ERV by 5% 8,119 2,536 3,822 706 15,183
Decrease in ERV by 5% (7,955) (3,497) (3,809) (501) (15,762)
Increase in net initial yield by (7,320) (3,355) (2,763) (569) (13,821)
0.25%
Decrease in net initial yield by 8,008 3,635 2,954 611 14,973
0.25%
Estimated movement in fair value of Industrial Retail Office Other All
investment properties at 31 March £'000 £'000 £'000 £'000 sectors
2020 £'000
Increase in ERV by 5% 5,611 4,238 4,520 638 15,007
Decrease in ERV by 5% (5,589) (3,894) (4,221) (392) (14,096)
Increase in net initial yield by (5,303) (4,015) (3,347) (615) (13,107)
0.25%
Decrease in net initial yield by 5,836 4,371 3,600 659 14,245
0.25%
12. Investment in joint ventures
£000
Closing balance as at 31 March 2019 80,165
Purchase of interest in City Tower Unit Trust 496
Capital distribution from Store Unit Trust (319)
Valuation loss on JV (2,357)
Closing balance as at 31 March 2020 77,985
Valuation gain on JV 1,135
Closing balance as at 31 March 2021 79,120
31/03/2021 31/03/2020
Summarised joint venture financial information £000 £000
not adjusted for the Group's share - City
Tower Unit Trust
Investment properties 160,700 163,750
Other assets 1,494 3,270
Total liabilities1 (3,240) (2,745)
Revenues for the year 8,271 8,313
Total comprehensive rental income 4,769 5,397
Net asset value attributable to the Group 39,739 41,069
Total comprehensive income attributable to the 1,266 1,349
Group
1 Liabilities are non-recourse to the Group.
31/03/2021 31/03/2020
Summarised joint venture financial information £000 £000
not adjusted for the Group's share - Store
Street Unit Trust
Investment properties 78,725 73,900
Other assets 241 38
Total liabilities1 (203) (106)
Revenues for the year 2,922 2,882
Total comprehensive rental income 2,395 2,497
Net asset value attributable to Group 39,381 36,916
Total comprehensive income attributable to the 1,186 1,249
Group
1 Liabilities are non-recourse to the Group.
The Company owns 25% of City Tower Unit Trust and 50% of Store Unit Trust. The
remaining units in the City Tower and Store Unit Trusts are owned by other
Schroders' funds.
The fair value of investment property owned by the two Joint Ventures has been
determined by BNP Paribas Real Estate, who are registered independent
appraisers. The two valuations were undertaken on the same basis as that
described under Note 11, Investment Property.
13. Trade and other receivables
31/03/2021 31/03/2020
£000 £000
Rent receivable 4,094 2,365
Other debtors and prepayments 12,934 12,750
17,028 15,115
Other debtors and prepayments includes £9,512,000 (2020: £9,334,000) in respect
of lease incentives.
As per Note 1 the rent receivable balance at 31 March 2021 included a bad debt
adjustment relating to rent demanded at the end of March 2021 relating to the
April to June 2021 quarter of £354,000 (2020: £nil).
14. Cash and cash equivalents
As at 31 March 2021 the Group had £12.2 million (2020: £33.1 million) in cash
and none of this amount is held with Canada Life (2020: £22.7 million).
15. Issued capital and reserves
Stated Capital
The share capital of the Company is represented by an unlimited number of
Ordinary Shares of no par value. As at the date of this Report, the Company has
565,664,749 ordinary shares in issue (2020: 565,664,749) of which 74,246,108
Ordinary shares are held in treasury (2020: 47,151,340). The total number of
voting rights of the Company was 491,418,641 (2020: 518,513,409) at the
financial year end.
Treasury capital
74,246,108 (2020: 47,151,340) Ordinary Shares, which represent 13.1% (2020:
8.3%) of the Company's total issued share capital, are held in treasury.
Revenue reserve
This reserve represents an accumulated amount of the Group's prior earnings net
of dividends.
16. Interest-bearing loans and borrowings
This note provides information about the contractual terms of the Group's
interest-bearing loans and borrowings. For more information about the Group's
exposure to interest rate risk, see note 19.
31/03/2021 31/03/2020
£000 £000
Non-current liabilities
Loan facility 154,085 129,585
Unamortised arrangement fees (715) (918)
153,370 128,667
The Group has in place a £129.6 million loan facility with Canada Life. This
has been in place since 16 April 2013 and has been refinanced several times,
most recently in October 2019. As part of this most recent refinancing, a break
fee of £25.8 million was paid and all previously unamortised finance costs of £
1.6 million were written off.
The loan is split in to two equal tranches of £64.8 million as follows:
- Facility A matures in October 2032 and attracts an interest rate of
2.36%
- Facility B matures in October 2039 and attracts an interest rate of
2.62%
The Company also has in place a revolving credit facility ('RCF') with Royal
Bank of Scotland. In January 2019 the RCF limit was increased from £32.5
million to £52.5 million. As at 31 March 2021 there was a balance of £24.5
million drawn (2020: £nil). This facility expires on 3 July 2023.
The interest rate is based on the Loan to Value ratio as set out below:
- LIBOR + 1.60% if the Loan to Value is less than or equal to 60%; and
- LIBOR + 1.85% if the Loan to Value is greater than 60%
During both the current and prior year, the Loan to Value has remained less
than 60%. Since this loan has variable interest, an interest rate cap for £32.5
million of the loan was entered into and this comes in to effect if GBP 3 month
LIBOR reaches 1.5%. As at the reporting date GBP 3 month LIBOR has not reached
1.5%.
The Canada Life facility has a first charge security over all the property
assets in the ring-fenced Security Pool (the 'Security Pool') which at 31 March
2021 contained properties valued at £273.6 million (2020: £262.8 million).
Various restraints apply during the term of the loan although the facility has
been designed to provide significant operational flexibility.
The RBS facility has a first charge security over all the property assets held
in SREIT No.2 Limited which at 31 March 2021 contained properties valued at £
125.9 million (2020: £105.3 million).
The principal covenants for Canada Life and RBS are that the loan should not
comprise more than 65% of the value of the assets in the Security Pool nor
should estimated rental and other income arising from assets in the Security
Pool, calculated on any interest payment date and one year projected from any
interest payment date, comprise less than 185% of the interest payments.
As at the Interest Payment Date, the Canada Life interest cover, calculated in
accordance with the ICR covenant was 562% (2020: 548%) and the forward-looking
interest cover was 423% (2020: 436%), with the Loan to Value ratio of 47.4%
(47.4% net of all cash) (2020: 49.3%, 40.7% net of all cash).
As at the Interest Payment Date, the RBS interest cover, calculated in
accordance with the ICR covenant was 1,151% (2020: 2,135%) and the
forward-looking interest cover was 864% (2020: 1,712%), with the Loan to Value
ratio of 19.5% (2020: 0%).
Please see a reconciliation of financing movements for the year below split in
to cash and non cash items:
31/03/2021
£000
Loan balance brought forward 128,667
Drawdown on RBS RCF (cash) 37,000
Repayment of RBC RCF (cash) (12,500)
Movement in fair value 203
Loan balance carried forward 153,370
17. Trade and other payables
31/03/2021 31/03/2020
£000 £000
Deferred income 3,701* 3,885
Rental deposits 1,448 1,166
Interest payable 780 728
Other trade payables and accruals 1,968 865
7,897 6,644
*As per Note 1 this balance includes a bad debt adjustment relating to rent
demanded at the end March for the April to June quarter of £354k
18. NAV per Ordinary Share and share buyback
On 8 September 2020 the Company announced that it was commencing a share
buyback programme. From 8 September 2020 to 31 March 2021 the Company purchased
a sum of 27,094,768 shares for a sum of £9.52 million and at an average price
of 35 pence per share.
As a consequence of the buyback the number of ordinary shares in issue fell
from 518,513,409 to 491,418,641 during the reporting period.
The NAV per Ordinary Share is based on the net assets of £296,844,000 (2020: £
309,806,000) and 491,418,641 (2020: 518,513,409) Ordinary Shares in issue at
the reporting date.
19. Financial instruments, properties and associated risks
Financial risk factors
The Group holds cash and liquid resources as well as having debtors and
creditors that arise directly from its operations. The Group uses interest rate
contracts when required to limit exposure to interest rate risks, but does not
have any other derivative instruments.
The main risks arising from the Group's financial instruments and properties
are market price risk, credit risk, liquidity risk and interest rate risk. The
Group has no exposure to foreign currency exchange risk. The Board regularly
reviews and agrees policies for managing each of these risks and these are
summarised below:
Market price risk
Rental income and the market value for properties are generally affected by
overall conditions in the economy, such as changes in gross domestic product,
employment trends, inflation and changes in interest rates. Changes in gross
domestic product may also impact employment levels, which in turn may impact
the demand for premises. Furthermore, movements in interest rates may also
affect the cost of financing for real estate companies. Both rental income and
property values may also be affected by other factors specific to the real
estate market, such as competition from other property owners, the perceptions
of prospective tenants of the attractiveness, convenience and safety of
properties, the inability to collect rents because of bankruptcy or the
insolvency of tenants, the periodic need to renovate, repair and re-lease space
and the costs thereof, the costs of maintenance and insurance, and increased
operating costs.
The Directors monitor the market value of investment properties by having
independent valuations carried out quarterly by a firm of independent chartered
surveyors. Note 11 sets out the sensitivity analysis on the market price risk.
Concentration risk, based on industry and geography, is set out in the tables
on pages 20 and 21. Included in market price risk is interest rate risk which
is discussed further below.
Credit risk
Credit risk is the risk that an issuer or counterparty will be unable or
unwilling to meet a commitment that it has entered into with the Group. In the
event of default by an occupational tenant, the Group will suffer a rental
income shortfall and incur additional costs, including legal expenses, in
maintaining, insuring and re-letting the property. The Investment Manager
reviews reports prepared by Dun & Bradstreet, or other sources, to assess the
credit quality of the Group's tenants and aims to ensure there is no excessive
concentration of risk and that the impact of any default by a tenant is
minimised.
In respect of credit risk arising from other financial assets, which comprise
cash and cash equivalents, exposure to credit risk arises from default of the
counterparty with a maximum exposure equal to the carrying amounts of these
instruments. In order to mitigate such risks, cash is maintained with major
international financial institutions with high quality credit ratings. During
the year, and at the reporting date, the Group maintained a relationship with
branches and subsidiaries of HSBC. HSBC has a Credit Rating of AA negative
(provided by Standard and Poor).
The maximum exposure to credit risk for rent receivables at the reporting date
by type of sector was:
31/03/2021 31/03/2020
Carrying amount Carrying amount
£000 £000
Office 545 468
Industrial 1,916 973
Retail 3,100 1,443
5,561* 2,884*
*Note that this is the gross rental debtors, this is shown in note 13 as £
4,094k (2020: £2,365k) which is the above figure net of bad debt provision of
£1,113k (2020: £519k) and deferred income adjustment of £354k (2020: £nil) as
per Note 1 significant estimates and judgements.
Rent receivables which are past their due date were:
31/03/2021 31/03/2020
Carrying amount Carrying amount
£000 £000
0-30 days 2,952 2,490
31-60 days 77 92
61-90 days 201 38
91 days plus 2,331 64
5,561* 2,884*
*Note that this is the gross rental debtors, this is shown in note 13 as £
4,094k (2020: £2,365k) which is the above figure net of bad debt provision of
£1,113k (2020: £519k) and deferred income adjustment of £354k (2020: £nil) as
per Note 1 significant estimates and judgements.
Management has considered rental debtors on a quarterly basis and made
provisions where it has been deemed that these amounts are unrecoverable. As at
31 March 2021 total provisions of £1.1m were recognised and rental debtors are
shown net of this provision in the balance sheet.
On initial recognition the Group calculates the expected credit loss for
debtors based on the lifetime expected credit losses under the IFRS 9
simplified approach. Management consider aged debtors' analyses, the strength
of tenant covenants, macroeconomic factors and any rental deposits held when
considering this.
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulties in
meeting obligations associated with its financial obligations.
The Group's investments comprise UK commercial property. Property and
property-related assets are inherently difficult to value due to the individual
nature of each property. As a result, valuations are subject to substantial
uncertainty. There is no assurance that the estimates resulting from the
valuation process will reflect the actual sale price even where such sales
occur shortly after the valuation date. Investments in property are relatively
illiquid. However, the Group has tried to mitigate this risk by investing in
properties that it considers to be good quality.
In certain circumstances, the terms of the Group's debt facilities entitle the
lender to require early repayment and in such circumstances the Group's ability
to maintain dividend levels and the net asset value could be adversely
affected. The Investment Manager prepares cash flows on a rolling basis to
ensure the Group can meet future liabilities as and when they fall due.
The following table indicates the maturity analysis of the financial
liabilities.
As at 31 March 2021 Carrying Expected 6 mths 6 mths - 2-5 More
amount cash flows or less 2 years years than 5
£000 £000 £000 £000 £000 years
£000
Financial liabilities
Interest-bearing loans 153,370 204,800 1,813 5,438 35,377* 162,173
and borrowings and
interest
Leasehold liability 1,988 10,717 46 139 278 10,254
Trade and other payables 3,416 3,416 1,968 - - 1,448
Total financial 158,774 218,934 3,827 5,577 35,655 173,875
liabilities
*Please note that this
assumes that the £24.5
million facility is
repaid in 2023.
As at 31 March 2020 Carrying Expected 6 mths 6 mths - 2-5 More
amount cash flows or less 2 years years than 5
£000 £000 £000 £000 £000 years
£000
Financial liabilities
Interest-bearing loans 129,395 181,533 1,614 4,840 9,680 165,399
and borrowings and
interest
Leasehold liability 2,416 13,442 57 173 346 12,866
Trade and other payables 2,031 2,031 865 - - 1,166
Total financial 133,842 197,006 2,536 5,013 10,026 179,431
liabilities
Interest rate risk
Exposure to market risk for changes in interest rates relates primarily to the
Group's long-term debt obligations and to interest earned on cash balances. As
interest on the Group's long-term debt obligations is payable on a fixed-rate
basis the Group is not exposed to interest rate risk in relation to this loan
facility. As at 31 March 2021 the fair value of the Group's £129.6 million
loan with Canada Life was £128.4 million (2020: £131.1 million).
The RBS revolving credit facility is a low margin flexible source of funding
with a margin of 1.6% above 3 month LIBOR and it is considered by management
that the carrying value is equal to fair value (sum of £24.5m drawn as at year
end).
A 1% increase or decrease in short-term interest rates would increase or
decrease the annual income and equity by £122,000 based on the cash balance as
at 31 March 2021.
Fair values
The fair values of financial assets and liabilities are not materially
different from their carrying values, unless disclosed below, in the financial
statements.
The fair value hierarchy levels are as follows:
- Level 1 - quoted prices (unadjusted) in active markets for identical
assets and liabilities;
- Level 2 - inputs other than quoted prices included within level 1 that
are observable for the asset or liability, either directly (i.e. as prices) or
indirectly (i.e. derived from prices); and
- Level 3 - inputs for the assets or liability that are not based on
observable market data
(unobservable inputs).
There have been no transfers between Levels 1, 2 and 3 during the year (2020:
none).
The following summarises the main methods and assumptions used in estimating
the fair values of financial instruments and investment property.
Investment property - level 3
Fair value is based on valuations provided by an independent firm of chartered
surveyors and registered appraisers. These values were determined after having
taken into consideration recent market transactions for similar properties in
similar locations to the investment properties held by the Group. The fair
value hierarchy of investment property is level 3. See Note 11 for further
details.
Interest-bearing loans and borrowings - level 2
Fair values are based on the present value of future cash flows discounted at a
market rate of interest. Issue costs are amortised over the period of the
borrowings. As at 31 March 2021, the fair value of the Group's £129.6 million
loan with Canada Life was £128.4 million (2020: £131.1 million).
Capital management
The Board's policy is to maintain a strong capital base to maintain investor,
creditor and market confidence and to sustain future development of the
business. The objective is to ensure that it will continue as a going concern
and to maximise the return to its equity shareholders through an appropriate
level of gearing. The Company's capital management process ensures it meets its
financial covenants in its borrowing arrangements. Breaches in meeting the
financial covenants could permit the lenders to immediately accelerate the
repayment of loans and borrowings. The Company monitors as part of its
quarterly board meetings that it will adhere to specific leverage, interest
cover and rental cover ratios. There have been no breaches in the financial
covenants of any loans and borrowings during the financial year.
The Company's debt and capital structure comprises the following:
31/03/2021 31/03/2020
£000 £000
Debt
Fixed-rate loan facility 129,585 129,585
Floating rate loan facility * 24,500 -
154,085 129,585
Equity
Called-up share capital 183,123 192,638
Reserves 113,721 117,168
296,844 309,806
Total debt and equity 450,929 439,391
There were no changes in the Group's approach to capital management during the
year.
* This amount refers to the amount drawn. The total facility as at 31 March
2021 was £52.5m (2020: £52.5m).
20. Operating leases
The Group leases out its investment property under operating leases. At 31
March 2021 the future minimum lease receipts under non-cancellable leases are
as follows:
31/03/2021 31/03/2020
£000 £000
Less than one year 24,623 20,916
Between one and five years 69,917 62,642
More than five years 58,123 61,871
152,663 145,429
The total above comprises the total contracted rent receivable as at 31 March
2021.
The Group has entered into leases on its property portfolio. The commercial
property leases typically have lease terms between 5 and 15 years and include
clauses to enable periodic upward revision of the rental charge according to
prevailing market conditions. Some leases contain options to break before the
end of the lease term.
21. List of Subsidiary and Joint Venture Undertakings
The companies listed below are those which were part of the Group at 31 March
2021 and 31 March 2020:
Undertaking Category Country of Ultimate
incorporation ownership
SREIT No.2 Ltd Subsidiary Guernsey 100%
SREIT Holding (No.2) Ltd Subsidiary Guernsey 100%
SREIT Holding Company Limited Subsidiary Guernsey 100%
SREIT Property Ltd Subsidiary Guernsey 100%
SREIT (Portergate) Ltd Subsidiary Guernsey 100%
SREIT (Victory) Ltd Subsidiary Guernsey 100%
SREIT (Uxbridge) Ltd Subsidiary Guernsey 100%
SREIT (City Tower) Ltd Subsidiary Guernsey 100%
SREIT (Store) Ltd Subsidiary Guernsey 100%
SREIT (Bedford) Ltd Subsidiary Guernsey 100%
SREIT Holding Company (No.3) Subsidiary Guernsey 100%
Limited
SREIT No.3 Finance Limited Subsidiary Guernsey 100%
City Tower Unit Trust Joint Venture Jersey 25%
Store Unit Trust Joint Venture Jersey 50%
The registered address for all 100% owned entities is the same as for the group
and can be found on page 130.
22. Related party transactions
Material agreements and transactions with the Investment Manager are disclosed
in note 3. Transactions with regard to joint ventures are disclosed in note 12.
Transactions with the directors are shown in the directors' remuneration
report.
23. Capital commitments
As at 31 March 2021 the Group had capital commitments of £3.2 million (2020: £
6.0 million).
24. Post balance sheet events
Between the period of the 1 April and 12 April 2021, the Company purchased a
further 338,340 shares pursuant to its buyback programme, to be held in
treasury, for a sum of £136,000 at an average price of 40.3 pence per share.
As noted in the Chairman's Statement, the Board and Investment Manager have
agreed a change to the Investment Manager's fees which will result in an
initial saving of approximately £600,000 per annum. This will take effect from
1 July 2021.
The current annual investment management fee is 1.1% of net asset value ('NAV')
and equates to an annualised fee, based on the audited NAV as at 31 March 2021,
of £3.3 million per annum. The fee covers all of the appointed services of the
Investment Manager and there are standard provisions for reimbursement of
expenses. Additional fees can be agreed for out of scope services on an ad hoc
basis. The new fee agreement includes a blended (not cliff edge), tiered fee
structure as follows:
NAV Management fee percentage per annum of NAV
<£500 million 0.9%
£500 million - £1 billion 0.8%
£1 billion+ 0.7%
Based on the most recent NAV at 31 March 2021, the impact of this fee reduction
would be to reduce the current annualised fee from £3.3 million to £2.7 million
per annum, a reduction of £600,000 per annum or 18%. In consideration for
agreeing the fee reduction, the notice period for non-fault termination of the
Investment Manager's appointment will be increased from nine to twelve months.
Other information (unaudited)
EPRA Performance Measures (unaudited)
As recommended by the European Public Real Estate Association, EPRA performance
measures are disclosed in the section below.
EPRA performance measures: summary table
31/03/2021 31/03/2020
EPRA earnings £11,572,000 £12,729,000
EPRA earnings per share 2.3pps 2.5pps
EPRA Net Tangible Assets £296,844,000 £309,806,000
EPRA Net Tangible Assets per share 60.4pps 59.7pps
EPRA Net Disposal Value £297,806,000 £308,253,000
EPRA Net Disposal Value per share 60.6pps 59.4pps
EPRA Net Initial Yield 5.4% 5.3%
EPRA "topped-up" Net Initial Yield 5.7% 5.6%
EPRA vacancy rate 4.8% 7.3%
EPRA cost ratios - including direct 34.6% 32.2%
vacancy costs
Adjusted EPRA cost ratios - including 26.8% 27.2%
direct vacancy costs
EPRA cost ratios - excluding direct 34.6% 32.2%
vacancy costs
Adjusted EPRA cost ratios - excluding 26.8% 27.2%
direct vacancy costs
a. EPRA earnings and EPS
Total comprehensive income or loss excluding realised and unrealised gains and
losses on investment property, share of profit or loss on joint venture
investments and changes in the fair value of financial instruments, divided by
the weighted average number of shares.
31/03/2021 31/03/2020
£000 £000
IFRS profit/(loss) after tax 4,542 (32,459)
Adjustments to calculate EPRA Earnings:
Profit on disposal of investment property (121) (1,897)
Net valuation loss on investment property 8,286 17,364
Share of valuation (gain)/loss in associates and (1,135) 2,357
joint ventures
Refinancing costs - 27,364
EPRA earnings 11,572 12,729
Weighted average number of Ordinary shares 508,699,880 518,513,409
IFRS earnings/(loss) per share (pence) 0.9 (6.3)
EPRA earnings per share (pence) 2.3 2.5
b. EPRA Net Tangible Assets per share
The IFRS equity attributable to shareholders adjusted for items including
deferred tax, the fair value of financial instruments and intangible assets.
31/03/2021 31/03/2020
£000 £000
IFRS NAV per financial statements 296,844 309,806
EPRA Net Tangible Assets 296,844 309,806
Shares in issue at the end of the year 491,418,641 518,513,409
IFRS NAV per share (pence) 60.4 59.7
EPRA Net Tangible Assets per share 60.4 59.7
(pence)
c. EPRA Net Disposal Value per share
The IFRS equity attributable to shareholders adjusted for items including
goodwill as a result of deferred tax, intangibles and the fair value of fixed
interest rate debt.
31/03/2021 31/03/20
£000 £000
IFRS NAV per the Financial Statements 296,844 309,806
Adjustments to calculate EPRA Net Disposal Value:
The fair value of fixed interest rate debt 962 (1,553)
EPRA Net Disposal Value 297,806 308,253
EPRA Net Disposal Value per share (pence) 60.6 59.4
d. EPRA Net Initial Yield
Annualised rental income based on the cash rents passing at the Balance Sheet
date, less non-recoverable property operating expenses, divided by the
grossed-up market value of the complete property portfolio. The EPRA "topped
up" NIY is the EPRA NIY adjusted for unexpired lease incentives.
31/03/2021 31/03/2020
£000 £000
Investment property - wholly-owned 359,300 328,300
Investment property - share of joint ventures 79,538 77,888
and funds
Complete property portfolio 438,838 406,188
Allowance for estimated purchasers' costs 25,453 23,559
Gross up completed property portfolio 464,291 429,747
valuation
Annualised cash passing rental income 28,327 24,878
Property outgoings (3,041) (2,251)
Annualised net rents 25,286 22,627
Notional rent expiration of rent free periods 1,165 1,518
(1)
Topped-up net annualised rent 26,451 24,145
EPRA NIY 5.4% 5.3%
EPRA "topped-up" NIY 5.7% 5.6%
(1) The period over which rent free periods expire is 2 years (2020: 2 years).
e. EPRA cost ratios
Administrative and operating costs as a percentage of 31/03/2021 31/03/2020
gross rental income calculated including and excluding
direct vacancy costs.
£000 £000
Administrative/property operating expense line per IFRS 8,340 8,059
income statement
Ground rent costs (110) (138)
EPRA Costs (including direct vacancy costs) 8,230 7,921
Direct vacancy costs (1,844) (1,232)
EPRA Costs (excluding direct vacancy costs) 6,386 6,689
Company adjustments - -
Adjusted EPRA Costs (including company adjustment costs) 8,230 7,921
Direct vacancy costs (1,844) (1,232)
Adjusted EPRA Costs (excluding direct vacancy costs) 6,386 6,689
Gross Rental Income less ground rent costs 21,349 22,022
Share of Joint Ventures income less ground rent costs 2,452 2,567
Gross Rental Income 23,801 24,589
EPRA cost ratio (including direct vacancy costs) 34.6% 32.2%
EPRA cost ratio (excluding direct vacancy costs) 26.8% 27.2%
EPRA vacancy rate 4.8% 7.3%
Adjusted EPRA cost ratio (including company adjustment 34.6% 32.2%
costs)
Adjusted EPRA cost ratio (excluding direct vacancy 26.8% 27.2%
costs)
Alternative Performance Measures (unaudited)
The Company uses the following Alternative Performance Measures ("APMs") in its
annual report, financial statements and notes to the financial statements. The
APMs are reconciled to the financial statements through the narrative below.
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 101) to dividends paid (note
10) in the period.
Dividend Yield - the dividends paid, expressed as a percentage relative to its
share price.
EPRA Earnings - the earnings excluding all capital components not relevant to
the underlying net income performance of the portfolio, such as the realised
and unrealised fair value gains or losses on investment properties. See page
101 for a reconciliation of this figure.
EPRA Net Tangible Assets - the IFRS equity attributable to shareholders
adjusted for items including deferred tax, the fair value of financial
instruments and intangible assets.
Gross LTV - the value of the external loans unadjusted for unamortised
arrangement costs (note 16) 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 and are as per external
valuations and have not been adjusted for IFRS lease incentive debtors nor 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 16) less cash held (note 14) 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 and
are as per external valuations and have not been adjusted for IFRS lease
incentive debtors or the fair value of the head lease at Luton.
Ongoing charges including Fund expenses - all operating 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. No capital costs, including capital expenditure or acquisition/disposal
fees, are included as costs.
Ongoing charges including Fund and property expenses - all operating 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 as costs, as well as interest costs and any other
costs considered to be non-recurring. In the current period the material
non-recurring costs include non-cash bad debt expenses of £0.8m.
Share discount/premium - the share price of an Investment Trust 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 77) expressed as
a percentage.
NAV total return - the return to shareholders calculated on a per share basis
by adding dividends paid (note 10) in the period on a time-weighted basis to
the increase or decrease in the NAV per share (page 77).
AIFMD Disclosures (unaudited)
The Alternative Investment Fund Managers Directive ('AIFMD') remuneration and
leverage disclosures for Schroder Real Estate Investment Manager ('SREIM') for
the year to 31 December 2020
Remuneration disclosures
These disclosures form part of the non-audited section of this Annual Report
and Consolidated Financial Statements and should be read in conjunction with
the Schroders plc Remuneration Report on pages 75 to 102 of the 2020 Annual
Report & Accounts (available on the Group's website - https://www.schroders.com
/en/investor-relations/results-and-reports/annual-report-and-accounts-2020/),
which provides more information on the activities of our Remuneration Committee
and our remuneration principles and policies.
The AIF Material Risk Takers ('AIF MRTs') of SREIM are individuals whose roles
within the Schroders Group can materially affect the risk of SREIM or any AIF
fund that it manages. These roles are identified in line with the requirements
of the AIFM Directive and guidance issued by the European Securities and
Markets Authority.
The Remuneration Committee of Schroders plc has established a remuneration
policy to ensure the requirements of the AIFM Directive are met for all AIF
MRTs. The Remuneration Committee and the Board of Schroders plc review
remuneration strategy at least annually. The directors of SREIM are responsible
for the adoption of the remuneration policy, for reviewing its general
principles at least annually, for overseeing its implementation and for
ensuring compliance with relevant local legislation and regulation. During 2020
the Remuneration Policy was reviewed to ensure compliance with the UCITS/AIFMD
remuneration requirements and no significant changes were made.
The implementation of the remuneration policy is, at least annually, subject to
independent internal review for compliance with the policies and procedures for
remuneration adopted by the Board of SREIM and the Remuneration Committee. The
most recent review found no fundamental issues but resulted in a range of more
minor recommendations, principally improvements to process and policy
documentation.
The total spend on remuneration is determined based on a profit share ratio,
measuring variable remuneration charge against pre-bonus profit, and from a
total compensation ratio, measuring total remuneration expense against net
income. This ensures that the interests of employees are aligned with
Schroders' financial performance. In determining the remuneration spend each
year, the underlying strength and sustainability of the business is taken into
account, along with reports on risk, legal, compliance and internal audit
matters from the heads of those areas.
The remuneration data that follows reflects amounts paid in respect of
performance during 2020.
· The total amount of remuneration paid by SREIM to its staff is nil as
SREIM has no employees. Employees of SREIM or other Schroders Group entities
who serve as Directors of SREIM receive no additional fees in respect of their
role on the Board of SREIM.
· The following disclosures relate to AIF MRTs of SREIM. Those AIF MRTs
were employed by and provided services to other Schroders group companies and
clients. In the interests of transparency, the aggregate remuneration figures
that follow reflect the full remuneration for each SREIM AIF MRT. The aggregate
total remuneration paid to the 76 AIF MRTs of SREIM in respect of the financial
year ended 31 December 2020 is £56.30 million, of which £36.33 million was paid
to senior management, £14.75 million was paid to MRTs deemed to be taking risk
on behalf of SREIM or the AIF funds that it manages and £5.22 million was paid
to other AIF MRTs including control function MRTs.
For additional qualitative information on remuneration policies and practices
see www.schroders.com/rem-disclosures.
Leverage disclosure
In accordance with AIFMD the Company is required to make available to
investors information in relation to leverage. Under AIFMD, leverage is any
method by which the exposure of the Company is increased through the borrowing
of cash or securities, leverage embedded in derivative positions or by another
means. It is expressed as a ratio between the total exposure of the Company and
its net asset value and is calculated in accordance with the "Gross method" and
the "Commitment method" as described in the AIFMD. The Gross method represents
the aggregate of all the Company's exposures other than cash balances held in
the base currency, while the Commitment method, which is calculated on a
similar basis, may also take into account cash and cash equivalents, netting
and hedging arrangements, as applicable.
The Investment Manager has set the expected maximum leverage percentages for
the Company and calculated the actual leverages as at 31 December 2020 as shown
below (the Company calculates and externally reports its leverage one quarter
in arrears):
Maximum limit set Actual as at
31.12.2020
Gross leverage 195 152
Commitment leverage 220 160
There have been no changes to the maximum levels of leverage employed by the
Company during the financial year nor any breaches of the maximum levels during
the financial reporting period.
Sustainability Performance Measures (Environmental) (unaudited)
SREIT reports sustainability information in accordance with EPRA Best Practice
Recommendations on Sustainability Reporting (sBPR) 2017, 3rd Edition for the 12
months, 1st January 2020 - 31st December 2020, presented with comparison
against 2019. As permitted by the EPRA Sustainability Reporting Guidelines,
environmental data has been developed and presented in line with the Global
Real Estate Sustainability Benchmark (GRESB).
The reporting boundary has been scoped to where SREIT has operational control
being managed properties where SREIT is responsible for payment of utility
invoices and/or arrangement of waste disposal contracts. 'Operational control'
has been selected as the reporting boundary (as opposed to 'financial control'
or 'equity share') as this reflects the portion of the portfolio where the
Company can influence operational procedures and, ultimately, sustainability
performance. The operational control approach is the most commonly applied
within the industry.
As at 31 December 2020, there were 25 managed properties within the portfolio
of which two properties were purchased towards the end of the reporting period
and so have not been captured in the reported data. This compares to 22 managed
properties in the portfolio during 2019 which have been included in the
reporting.
Where data coverage is less than 100%, a supporting explanation is provided
within the data notes immediately below the relevant table. Energy and water
consumption data is reported according to automatic meter reads, manual meter
reads or invoice estimates. Where required, missing consumption data has been
estimated by prorating data from other periods using recognised techniques. The
proportion of data that is estimated is presented in the footnotes to the data
tables. Historic consumption data has been restated where more complete and/or
accurate records have become available.
SREIT does not contain any managed assets that consume energy from district
heating or cooling sources. Therefore, the EPRA sBPR DH&C-Abs and DH&C-LfL
indicators are not applicable and not presented in this report. Furthermore,
the Company does not have any direct employees; it is served by the employees
of the Investment Manager (Schroder Real Estate Investment Management).
Accordingly, the EPRA Overarching Recommendation for companies to report on the
environmental impact of their own offices is not relevant/material and not
presented in this report.
There have been significant reductions in consumption due to the COVID-19
pandemic which has affected the majority of the 2020 reporting year. The
reductions are due to changes in occupancy and building operations during the
COVID-19 period.
This report has been prepared by EVORA Global, retained sustainability and
energy management consultants to Schroder Real Estate Investment Management.
The Sustainability Performance Measures have been assured in accordance with
AA1000 to provide a Type 2 Moderate Assurance unqualified audit of the
sustainability content located within the SREIT annual report for the year
ending 31st December 2020. The full assurance statement can be found on the
following link, please see the Sustainability Page for full assurance
statement:
https://www.schroders.com/en/uk/adviser/fund-centre/funds-in-focus/
investment-trusts/schroders-investment-trusts/
schroder-real-estate-investment-trust/sustainability/
Total energy consumption (Elec-Abs; Fuels-Abs)
The table below sets out total landlord obtained energy consumption from the
Company's managed portfolio by sector:
Total electricity Total fuel consumption Energy Intensity
consumption (kWh) (kWh/m2)
(kWh)
Sector 2019 2020 2019 2020 2019 2020
Industrial, Distribution Warehouse 87,758 134,716 105 21,021 0.8 1.4
Coverage 5/5 6/6 2/2 4/4 5/5 6/6
Leisure 268,140 218,056 72,697 24.6 15.7
Coverage 1/1 1/1 1/1 1/1 1/1
Mixed use, Office/Retail 285,074 279,179 121.7 119.2
Coverage 1/1 1/1 1/1 1/1
Mixed use, Other 2,528,805 1,795,726 1,234 109.8 77.9
Coverage 2/2 2/2 1/1 2/2 2/2
Office, Low-Rise 2,106,939 1,699,887 1,819,356 1,514,969 135.3 110.8
Coverage 10/10 10/10 9/9 9/9 10/10 10/10
Office, Mid-Rise 308,871 279,792 431,247 378,210 184.0 163.6
Coverage 1/1 1/1 1/1 1/1 1/1 1/1
Retail High Street 17,618 16,795 9.2 8.8
Coverage 1/1 1/1 1/1 1/1
Retail Warehouse 39,377 63,987 23,955 3.4 7.7
Coverage 1/1 1/1 1/1 1/1 1/1
Sub-Total 5,642,582 4,488,140 2,324,640 1,938,154
Coverage 22/22 23/23 14/14 15/15
Total (Electricity and fuel) 7,967,222 6,426,294
Coverage 22/22 23/23
Renewable electricity % 98% 97%
22/22 23/23
Coverage
- Consumption data relates to the managed portfolio only:
- Industrial, Distribution Warehouse: Tenant Space and Outdoor/Exterior
Area/Parking;
- Leisure: Common Areas, Tenant Space and Outdoor/Exterior Area/Parking;
- Mixed-use, Office/Retail: Whole Building;
- Mixed-use, Other: Whole Building, Common Areas, Tenant Space;
- Office, Low-Rise: Whole Building, Shared Services, Common Areas, Tenant
Space and Outdoor/Exterior/Parking;
- Office, Mid-Rise Office: Shared Services;
- Retail High Street: Common Areas; and
- Retail Warehouse: Tenant Space and Outdoor/Exterior Area/Parking
- Energy procured directly by tenants is not reported.
- Estimation: 0% electricity and gas data have been estimated through
prorating.
- Where appropriate (for relevant assets) consumption data has been
adjusted to reflect the Company's share of asset ownership.
- Coverage relates to the number of managed assets for which data is
reported.
- Renewable electricity (%) is calculated according to the attributes of
energy supply contracts as at 31 December 2020 and only reflects renewable
electricity procured under a 100% 'green tariff' (i.e. where generation is from
100% renewable sources). The renewables percentage of standard (non-'green
tariff') energy supplies are not currently known and therefore has not been
included within this number. As far as we know, no renewable fuel was consumed
during the reporting period and therefore a percentage renewable fuel figure is
not presented here.
- All energy was procured from a third-party supplier. No
'self-generated' renewable energy was consumed during the reporting period and
is therefore not presented here.
- Intensity: An energy intensity kWh/m2 is reported for assets. The
numerator is landlord-managed energy consumption and the denominator is net
lettable floor area (m2). For Retail High Street, common parts' energy
consumption is divided by common parts area (m2).
- Please see the Objectives and Targets section in the CSR Report page 32
for narrative commentary on historical trends and programmes in place to
improve performance.
Like-for-like energy consumption (Elec-LfL; Fuels-LfL; Energy-Int)
The table below sets out the like-for-like landlord-obtained energy consumption
from the Company's managed portfolio by sector.
Total electricity Total fuel consumption Energy
consumption (kWh) Intensity
(kWh) (kWh/m2)
Sector 2019 2020 % 2019 2020 % Change 2019 2020
Change
Mixed-use, Office/Retail 285,074 279,179 -2% 121.7 119.2
Coverage 1/1 1/1 1/1
Mixed-use, Other 2,424,786 1,690,178 -30% 169.5 118.2
Coverage 1/1 1/1 1/1
Office, Low-Rise 1,994,121 1,620,182 -19% 1,758,557 1,477,145 -16% 129.4 106.8
Coverage 9/9 9/9 8/8 8/8 10/10
Office, Mid-Rise 308,871 279,792 -9% 431,247 378,210 -12% 184.0 163.6
Coverage 1/1 1/1 1/1 1/1 1/1
Retail, High Street 17,618 16,795 -5% 9.2 8.8
Coverage 1/1 1/1 1/1
Retail, Warehouse
Coverage
Sub-Total 5,030,471 3,886,127 -23% 2,189,805 1,855,355 -15%
Coverage 13/13 13/13 9/9 9/9
Total (Electricity and fuel) 7,220,275 5,741,482 -20%
Coverage 14/14 14/14
Renewable electricity % 100% 100%
14/14 14/14
Coverage
- Like-for-like excludes assets that were purchased, sold, under
refurbishment or subject to a significant change in the scope of reported data
during the two years reported.
- Consumption data relates to the managed portfolio only:
- Industrial, Distribution Warehouse: Tenant Space and Outdoor/Exterior
Area/Parking;
- Leisure: Common Areas, Tenant Space and Outdoor/Exterior Area/Parking;
- Mixed use, Office/Retail: Whole Building;
- Mixed use, Other: Whole Building, Common Areas, Tenant Space;
- Office, Low-Rise: Whole Building, Shared Services, Common Areas, Tenant
Space and Outdoor/Exterior/Parking;
- Office, Mid-Rise Office: Shared Services;
- Retail High Street: Common Areas; and
- Retail Warehouse: Tenant Space and Outdoor/Exterior Area/Parking
- Estimation: 0% electricity and gas data have been estimated through
prorating.
- Where appropriate (for relevant assets), consumption data has been
adjusted to reflect the Company's share of ownership.
- Coverage relates to the number of managed assets for which data is
reported.
- Intensity: An energy intensity kWh/m2 is reported for assets within the
like-for-like portfolio. The numerator is landlord-managed energy consumption
and the denominator is net lettable floor area (m2). For Retail High Street,
common parts energy consumption is divided by the common parts area (m2).
Refer to Objectives and Targets section in the CSR Report on page 32 for
narrative commentary on historical trends and programmes in place to improve
performance.
Greenhouse gas emissions (GHG-Dir-Abs; GHG-Indir-Abs; GHG-Int)
The table below sets out the Company's greenhouse gas emissions by sector.
Absolute Absolute Like for like emissions Like for like
emissions intensity (tCO²e) intensity
(tCO²e) (kg CO2e/m2) (kg CO2e/m2)
Sector 2019 2020 2019 2020 2019 2020 Change 2019 2020
Industrial,
Distribution
Warehouse
Scope 1 3.9 0.2 0.3
Scope 2 22.5 31.4
Coverage 5/5 6/6 5/5 6/6
Leisure
Scope 1 13.4 5.9 3.7
Scope 2 68.6 50.9
Coverage 1/1 1/1 1/1 1/1
Mixed use,
Office/Retail
Scope 1 31.2 27.8 31.2 27.8
Scope 2 73.0 65.1 73.0 65.1 -11%
Coverage 1/1 1/1 1/1 1/1 1/1 1/1 1/1
Mixed use,
Other
Scope 1 0.2 28.1 18.2 43.4 27.6
Scope 2 647.4 419.0 620.7 394.3 -36%
Coverage 2/2 2/2 2/2 2/2 1/1 1/1 1/1
Office,
Low-Rise
Scope 1 334.8 278.8 30.1 23.3 323.6 271.8 -16% 28.8 22.4
Scope 2 539.4 396.6 510.5 378.0 -26%
Coverage 10/10 10/10 10/10 10/10 10/10 10/10 10/10
Office,
Mid-Rise
Scope 1 79.3 69.6 39.4 33.5 79.3 69.6 -12% 39.4 33.5
Scope 2 79.1 65.3 79.1 65.3 -17%
Coverage 1/1 1/1 1/1 1/1 1/1 1/1 1/1
Retail, High
Street
Scope 1 2.4 2.1 2.4 2.1
Scope 2 4.5 3.9 4.5 3.9 -13%
Coverage 1/1 1/1 1/1 1/1 1/1 1/1 1/1
Retail,
Warehouse
Scope 1 4.4 0.9 1.7
Scope 2 10.1 14.9
Coverage 1/1 1/1 1/1
Total Scope 1 428 357 403 341 -15%
Total Scope 2 1,445 1,047 1,288 907 -30%
Total Scope 1 & 1,872 1,404 1,691 1,248 -26%
2
Coverage 22/22 23/23 14/14 14/14
- Like-for-like excludes assets that were purchased, sold, under
refurbishment or subject to a significant change in the scope of reported data
during the two years reported.
- Scope 1 GHG emissions relate to the use of onsite natural gas.
- Scope 2 GHG emissions relate to the use of electricity.
- The Company's greenhouse gas (GHG) inventory has been developed as
follows:
- Fuels/electricity GHG emissions factors taken from the UK government's
Greenhouse Gas Reporting Factors for Company Reporting (2019 and 2020).
- GHG emissions from electricity (Scope 2) are reported according to the
'location-based' approach.
- GHG emissions are presented as tonnes of carbon dioxide equivalent (tCO
²e) and GHG intensity is presented as kilograms of carbon dioxide equivalent
(kgCO2e), where available greenhouse gas emissions conversion factors allow.
- Emissions data relates to the managed portfolio only:
- Industrial, Distribution Warehouse: Tenant Space and Outdoor/Exterior
Area/Parking
- Leisure: Common Areas, Tenant Space and Outdoor/Exterior Area/Parking
- Mixed-use, Office/Retail: Whole Building
- Mixed-use, Other: Whole Building, Common Areas, Tenant Space
- Office, Low-Rise: Whole Building, Shared Services, Common Areas, Tenant
Space and Outdoor/Exterior/Parking
- Office, Mid-Rise Office: Shared Services
- Retail High Street: Common Areas
- Retail Warehouse: Tenant Space and Outdoor/Exterior Area/Parking
- Emissions associated with energy procured directly by tenants is not
reported.
- Estimation: 0% electricity and gas data have been estimated through
prorating.
- Where appropriate (for relevant assets), emissions data has been
adjusted to reflect the Company's share of asset ownership.
- Coverage relates to the number of managed assets for which data is
reported.
- Intensity: An intensity kgCO2e/m2 is reported for absolute consumption
and for assets within the like-for-like portfolio. The numerator is
landlord-managed GHG emissions from energy consumption and the denominator is
net lettable floor area (m2). For Retail High Street, GHG emissions from common
parts energy consumption is divided by common parts area (m2).
- Refer to the Objectives and Targets Section in the CSR report on page
32 for the narrative commentary on historical trends and programmes in place to
improve performance.
Water (Water-Abs; Water-LfL; Water-Int)
The table below sets out water consumption for assets managed by the Company.
Absolute water Absolute Like-for-like Like-for-like
(m³) intensity water (m³) intensity
(m³/m²) (m³/m²)
Sector 2019 2020 2019 2020 2019 2020 Change 2019 2020
Leisure 144 136 0.06 0.05 144 136 -6% 0.06 0.05
Coverage 1/1 1/1 1/1 1/1 1/1 1/1 1/1
Mixed use, Other 5,644 4,280 0.30 0.30 5,644 4,280 -24% 0.39 0.30
Coverage 2/2 1/1 2/2 1/1 1/1 1/1 1/1
Office, Low-Rise 13,231 9,726 0.63 0.47 13,231 9,726 -26% 0.63 0.47
Coverage 8/8 8/8 8/8 8/8 8/8 8/8 8/8
Office, Mid-Rise 13 143 0.00 0.04
Coverage 1/1 1/1 1/1 1/1
Retail, High 2,309 1,194 1.21 0.62 2,309 1,194 -48% 1.21 0.62
Street
Coverage 1/1 1/1 1/1 1/1 1/1 1/1 1/1
Retail, 129 0.01
Warehouse
Coverage 1/1 1/1
Total 21,342 15,608 21,328 15,337 -28%
Coverage 13/13 13/13 11/11 11/11
- Like-for-like excludes assets that were purchased, sold, under
refurbishment or subject to a significant change in the scope of reported data
during the two years reported.
- Consumption data relates to the managed portfolio only:
- Leisure: Common Areas
- Mixed-use, Other: Whole Building and Common Areas
- Office, Low-Rise: Whole Building, Tenant Space and Common Areas
- Office, Mid-Rise: Tenant Space
- Retail, High Street: Common Areas
- Retail, Warehouse: Tenant Space
- Estimation: 0.8% water data have been estimated through prorating.
- Where appropriate (for relevant assets), consumption data has been
adjusted to reflect the Company's share of ownership.
- Coverage relates to the number of managed assets for which data is
reported.
- Intensity: An intensity m3/m2 is reported for absolute consumption and
for assets within the like-for-like portfolio. For Office, Mid-rise, and
Retail, Warehouse the numerator is landlord-managed whole building water
consumption and the denominator is net lettable floor area (m2). For Mixed-use,
Other and Office, Low Rise landlord-managed whole building or common parts
water consumption is divided by net lettable area or common parts area (m2).
For Leisure and Retail, High Street landlord-managed common parts' water
consumption is divided by common parts area (m2).
- All water was procured from a municipal supply. As far as we are aware,
no surface, ground, rainwater or wastewater from another organisation was
consumed during the reporting period and therefore is not presented here.
- Refer to the Objectives and Targets Section in the CSR report on page
33 for the narrative commentary on historical trends and programmes in place
to improve performance.
Waste (Waste-Abs; Waste-LfL)
The table below sets out waste managed by the Company by reported disposal
route and sector.
Absolute tonnes Like for like tonnes
2019 2020 2019 2020
% change
Tonnes % Tonnes % Tonnes % Tonnes %
Leisure Recycled 143.9 44.8% 85.1 44.5% 143.9 44.8% 85.06 44.5% -40.9%
Incineration 177.0 55.2% 106.0 55.5% 177.0 55.2% 106.0 55.5% -40.1%
with energy
recovery
Unknown 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0%
Landfill 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0 0.0% 0.0%
Total 320.9 191.0 320.9 191.0 -40.5%
Coverage 1/1 1/1 1/1 1/1
Mixed-use, Recycled 0.2 4.0% 3.2 31.4% 0.2 4.0% 3.20 31.4% 2033.3%
Office/
Retail Incineration 3.6 96.0% 7.0 68.6% 3.6 96.0% 7.00 68.6% 94.4%
with energy
recovery
Landfill
Total 3.8 10.2 3.8 10.2 172.0%
Coverage 1/1 1/1 1/1 1/1
Mixed-use, Recycled 284.2 45.8% 204.4 51.9% 284.2 45.8% 204.4 51.9% -28.1%
Other
Incineration 336.0 54.2% 189.6 48.1% 336.0 54.2% 189.6 48.1% -43.6%
with energy
recovery
Landfill
Total 620.16 394.0 620.1 394.0 -36.5%
Coverage 2/2 2/2 2/2 2/2
Office, Recycled 63.5 40.2% 54.1 54.4% 63.5 40.2% 54.1 54.4% -14.9%
Low-Rise
Incineration 94.7 59.9% 45.3 45.6% 94.7 59.8% 45.3 45.6% -52.1%
with energy
recovery
Landfill
Total 158.2 99.4 158.22 99.4 -37.2%
Coverage 9/9 9/9 9/9 9/9
Office, Recycled 18.2 70.3% 20.6 69.5%
Mid-Rise
Incineration 7.7 29.7% 9.1 30.5%
with energy
recovery
Landfill
Total 25.9 29.6
Coverage 1/1 1/1
Retail, Recycled 82.9 96.5% 49.8 83.1% 82. 96.5% 49.8 83.1% -39.9%
High 9
Street
Incineration 3.00 3.5% 10.2 16.9% 3.00 3.5% 10.2 16.9% 239.7%
with energy
recovery
Landfill
Total 85.9 60.0 85.9 60.0 -30.2%
Coverage 1/1 1/1 1/1 1/1
Total Recycled 592.8 48.8% 417.1 53.2% 574.6 48.3% 396.5 52.5% -31.0%
Incineration 621.9 51.2% 367.1 46.8% 614.2 51.7% 358.1 47.5% -41.7%
with energy
recovery
Landfill
Total 1,215 784 1,189 755 -36.5%
Coverage 15/15 15/15 14/14 14/14
- Whilst zero waste is sent directly to landfill, a residual component of
the 'recycled' and 'incineration with energy recovery' waste streams may end up
in landfill.
- Like-for-like excludes assets that were purchased, sold, under
refurbishment or subject to a significant change in the scope of reported data
during the two years reported.
- Waste data relates to the managed portfolio only.
- Waste management procured directly by tenants is not reported.
- The Company has no waste management responsibilities for Industrial or
Retail, Warehouse
- Where appropriate (for relevant assets), waste data has been adjusted
to reflect the Company's share of asset ownership.
- Coverage relates to the number of managed assets for which data is
reported.
- Reported data relates to non-hazardous waste only. Hazardous waste is
not reported as due to the low volumes produced it is not considered material.
Furthermore, robust tonnage data on the small quantities that are produced is
not available.
- Refer to the Objectives and Targets Section in the CSR report on page
34 for the narrative commentary on historical trends and programmes in place to
improve performance.
Sustainability certification (Cert-Tot): Green building certificates
The table below sets out the proportion of the Company's total portfolio with a
Green Building Certificate by floor area.
Rating Portfolio by floor area (%)
Mixed-use, Other (BREEAM Fit Out/ Refurbishment, 3%
BREEAM In Use)
Offices, Low and Mid-rise (BREEAM In-Use) 6%
All other sectors 0%
Total 9%
Coverage 100%
- Green building certificate records for the Company are provided as at
31st March 2021 by portfolio floor area.
- Data provided includes managed and non-managed assets (i.e. the whole
portfolio), excluding two assets that were bought at the end of the reporting
period, which will be onboarded and captured in next year's reporting.
- Where appropriate (for relevant assets), floor area coverage data has
been adjusted to reflect the Company's share of ownership.
Sustainability certification (Cert-Tot): Energy performance certificates
The table below sets out the proportion of the Company's total portfolio with
an Energy Performance Certificate by floor area.
Energy performance certificate rating Portfolio by floor area (%)
A 1
B 4
C 31
D 25
E 9
F 2
G 1
Exempt 2
No EPC 25
Coverage 100%
- Energy Performance Certificate (EPC) records for the Company are
provided as at 31st March 2021 by portfolio floor area.
- Data provided includes managed and non-managed assets (i.e. the whole
portfolio), excluding two assets that were bought at the end of the reporting
period, which will be onboarded and captured in next year's reporting.
- Where appropriate (for relevant assets), floor area coverage data has
been adjusted to reflect the Company's share of asset ownership, including 25%
of the net lettable area of City Tower, Manchester (reflecting the Company's
25% ownership share) and 50% of Store Street, London (reflecting the Company's
50% ownership share).
- EPCs are available for 76% of the portfolio by floor area. In general
terms, since the introduction of the EPC Regulations in 2008, EPCs are required
for the letting of units or buildings or the sale of buildings. In addition,
the UK Minimum Energy Efficiency Standards regulations ('MEES') came into force
for commercial buildings on 1st April 2019 and require a minimum EPC rating of
E for new lettings; the rules apply to all leases from 1 April 2023. The EPCs
for the portfolio will be managed to ensure compliance with the MEES
regulations. The F&G EPCs relate to six units in six assets. These are being
reviewed in 2021 and 2022 to improve the EPC ratings where feasible.
Sustainability Performance Measures (Social)
EPRA's Sustainability Best Practices Recommendations Guidelines 2017 ("EPRA's
Guidelines") include Social and Governance reporting measures to be disclosed
for the entity i.e. the Company. The Company is an externally managed Real
Estate Investment Trust and has no direct employees. A number of these Social
Performance measures relate to entity employees and therefore these measures
are not relevant for reporting at the entity level. The Investment Manager to
the Company, Schroder Real Estate Investment Management Limited, is part of
Schroders PLC which has responsibility for the employees that support the
Company. The Company aims to comply with EPRA's Guidelines and therefore has
included Social and Governance Performance Measure disclosures in this report.
However, these are presented as appropriate for the activities and
responsibilities of Schroder Real Estate Investment Trust Limited (the
"Company"), Schroders PLC or the Investment Manager, Schroder Real Estate
Investment Management Limited.
The Schroders PLC Annual Report and Accounts for the 12 months to 31 December
2020 supports the performance measures in relation to the Investment Manager as
set out below. Schroders PLC's principles in relation to people including
diversity, gender pay gap, values, employee satisfaction survey, wellbeing and
retention can be found at:
- https://www.schroders.com/en/sysglobalassets/annual-report/2020/documents/
Schroders_2020AnnualReport.pdf
- https://www.schroders.com/en/working-here/inclusion-and-diversity/
- https://www.schroders.com/en/working-here/inclusion-and-diversity/
gender-pay-gap-report-2020/
Employee gender diversity (Diversity-Emp)
As at 31 March 2021 the Company Board comprised of four members: 1 (25%
female); 3 (75% male).
For further information on Schroders PLC employee gender diversity, covering
more employee categories, please refer to Schroders 2020 Annual Report and
Accounts (page 37):
https://www.schroders.com/en/sysglobalassets/annual-report/2020/documents/
Schroders_2020AnnualReport.pdf
Gender pay ratio (Diversity-Pay)
The remuneration of the Company Board is set out on page 63 of this Report and
Accounts document.
Schroders PLC female representation and gender pay report can be found in
Schroders 2020 Annual Report and Accounts (pages 37, 87 and 93):
https://www.schroders.com/en/sysglobalassets/annual-report/2020/documents/
Schroders_2020AnnualReport.pdf
Information on Diversity and Inclusion at Schroders can be found at:
- https://www.schroders.com/en/people/diversity-and-inclusion
- https://www.schroders.com/en/working-here/inclusion-and-diversity/
gender-pay-gap-report-2020/
The following are reported for Schroders in relation to the Investment
Management of the Company:
Training and development (Emp-Training)
Schroders requires employees to complete mandatory internal training. Schroders
encourages all staff with professional qualifications to maintain the training
requirements of their respective professional body.
Employee performance appraisals (Emp-Dev)
The Schroders' performance management process requires annual performance
objective setting and annual performance reviews for all staff. The Investment
Manager confirms that performance appraisals were completed for 100% of
investment staff relevant to the Company in 2020.
The following are reported for Schroders PLC:
Employee turnover and retention (Emp-Turnover)
For Schroders' PLC turnover and retention rates please refer to Schroders
Annual Report and Accounts (page 22): https://www.schroders.com/en/
sysglobalassets/annual-report/2020/documents/Schroders_2020AnnualReport.pdf
Employee health and safety (H&S-Emp)
Schroders PLC does not include employee health and safety performance measures
in its Annual Report and Accounts.
The following are reported in relation to the assets held in the Company's
portfolio over the reporting period to 31 December 2020:
Asset health and safety assessments (H&S-Asset)
The table below sets out the proportion of the Company's total portfolio where
health and safety impacts were assessed or reviewed for compliance or
improvement.
Portfolio by floor area (%)
2019 2020
All sectors 100% 100%
Asset health and safety compliance (H&S-Comp)
The table below sets out the number of incidents of non-compliance with
regulations/and or voluntary codes identified.
Number of incidents
2019 2020
All Sectors 0 0
Community engagement, impact assessments and development programmes (Comty-Eng)
The table below sets out the proportion of the Company's total portfolio that
completed local community engagement, impact assessments and/or development
programs.
Portfolio by number assets (%)
2019 2020
Industrial, Distribution 0% 7.5%
Warehouse
Mixed-use, Other 2.5% 2.5%
Office, Low-rise 12.5% 12.5%
Office, Mid-rise 0% 2.5%
All other sectors 0% 0%
Total 15% 25%
Sustainability Performance Measures (Governance)
Composition of the highest governance body (Gov-Board)
The Board of the Company comprised 4 Non-Executive independent Directors (0
executive board members) for the 12 months to 31 March 2021.
· The average tenure of the four directors to 31 March is five years and
ten months; and
· The number of directors with competencies relating to environmental and
social topics is two and their experience can be seen in their biographies.
Nominating and selecting the highest governance body (Gov-Select)
The role of the Nomination Committee, chaired by Lorraine Baldry, is to
consider and make recommendations to the Board on its composition so as to
maintain an appropriate balance of skills, experience and diversity, including
gender, and to ensure progressive refreshing of the Board. On individual
appointments, the Nomination Committee leads the process and makes
recommendations to the Board.
Before the appointment of a new director, the Nomination Committee prepares a
description of the role and the capabilities required for a particular
appointment. While the Nomination Committee is dedicated to selecting the best
person for the role, it aims to promote diversification and the Board
recognises the importance of diversity. The Board agrees that its members
should possess a range of experience, knowledge, professional skills and
personal qualities as well as the independence necessary to provide effective
oversight of the affairs of the Company.
Process for managing conflicts of interest (Gov-Col)
The Company's Conflicts of Interest Policy sets out the policy and procedures
of the Board and the Company Secretary for the management of conflicts of
interest.
Streamlined Energy and Carbon Reporting
Schroder Real Estate Investment Trust plc (the "Company") is a real estate
investment company with a premium listing on the Official List of the Financial
Conduct Authority and whose shares are traded on the Main Market of the London
Stock Exchange (ticker: SREI).
The Company is a Real Estate Investment Trust ('REIT') and benefits from the
various tax advantages offered by the UK REIT regime. The Company continues to
be declared as an authorised closed-ended investment scheme by the Guernsey
Financial Services Commission under section 8 of the Protection of Investors
(Bailiwick of Guernsey) Law, 1987, as amended and the Authorised Closed-ended
Collective Investment Schemes Rules 2008.
The Board and Investment Manager, in recognition of the importance it places on
sustainability, has voluntarily included a report for the Company aligned with
the UK Companies (Directors' Report) and Limited Liability Partnerships (Energy
and Carbon Report) Regulations 2018, (the Regulations) on its UK energy use,
associated Scope 1 and 2 greenhouse gas (GHG) emissions, an intensity metric
and, where applicable, global energy use. This reporting is also referred to as
Streamlined Energy and Carbon Reporting (SECR).
This Energy and Carbon Report applies for the Company's annual report for the
12 months to 31 March 2021. The statement has, however, been prepared for the
calendar year, the 12 months to 31 December 2020, to report annual figures for
emissions and energy use for the available period for which such information is
available. In addition, the regulations advise providing a narrative on energy
efficiency actions taken in the previous financial year.
As a property company, energy consumption and emissions result from the
operation of buildings. The reporting boundary has been scoped to those held
properties where the Company retained operational control: where the Company is
responsible for operating the entire building, shared services (e.g. common
parts' lighting, heating and air conditioning), external lighting and/or void
spaces. 'Operational control' has been selected as the reporting boundary (as
opposed to 'financial control' or 'equity share') as this reflects the portion
of the portfolio where the Company can influence operational procedures and,
ultimately, sustainability performance. This incorporates consumption in tenant
areas, where the landlord procures energy for the whole building. As at 31
December 2020, there were 25 managed properties within the portfolio, of which
two properties were purchased at the end of the reporting period and so have
not been captured in the reported data. This compares to 22 managed properties
in the portfolio during 2019 which have been included in the reporting. All
Company assets are located in the UK.
The Company is not directly responsible for any GHG emissions/energy usage at
single let/FRI assets nor at multi-let assets where the tenant is a
counterparty to the energy contract. These emissions form part of the wider
value chain (i.e. 'Scope 3') emissions, which are not monitored at present. As
a real estate company with no direct employees or company owned vehicles as at
31 December 2020, there is no energy consumption or emissions associated with
travel or occupation of corporate offices to report. Fugitive emissions
associated with refrigerant losses from air conditioning equipment are widely
understood by the industry to be less material than other sources of emissions
and data is often not collected. The Company received fugitive emissions data
for the reporting year and this confirmed that they are de minimis and
consequently these have been excluded from the reporting.
In addition to reporting absolute energy consumption and GHG emissions, the
Company has reported separately on performance within the 'like-for-like'
portfolio, as well as providing intensity ratios, where appropriate. The
like-for-like portfolio includes buildings where each of the following
conditions is met:
. Owned for the full 24-month period (sales/acquisitions are
excluded);
. No major renovation or refurbishment has taken place;
. At least 24 months data is available;
Note also that buildings where tenant voids may have led to additional utility
responsibility being temporarily met by the Landlord are also excluded.
For the intensity ratios, the denominator determined to be relevant to the
business is square metres of net lettable area for most sectors, including
Industrial Distribution Warehouses, Leisure, Mixed-use, Offices and Retail
Warehouses. For Retail High street, the most relevant denominator is the common
parts area. The intensity ratio is expressed as:
. Energy: kilowatt hours per metre squared (net lettable area or
common parts area) per year or kWh/m2/yr.
. GHG: kilograms carbon dioxide equivalent per metre square (net
lettable area or common parts area) per year or kgCO2e/m2/yr.
Energy Consumption and Greenhouse Gas Emissions
The table below sets out the Company's energy consumption.
Absolute Energy Like-for-like Energy (kWh)
(kWh)
2019 2020 2019 2020 % change
Gas 2,324,640 1,938,154 2,189,805 1,855,355 -15%
Electricity 5,642,582 4,488,140 5,030,471 3,886,127 -23%
Total 7,967,222 6,426,294 7,220,275 5,741,482 -20%
The table below sets out the Company's greenhouse gas emissions.
Absolute Like-for-like Emissions
Emissions (tCO2e) (tCO2e)
2019 2020 2019 2020 % change
Scope 1 (Direct emissions from gas 428 357 403 341 -15%
consumption)
Scope 2 (Indirect emissions from 1,445 1,047 1,288 907 -30%
electricity)
Total 1,872 1,404 1,691 1,248 -26%
The like-for-like energy consumption for the 2020 calendar year for the managed
assets held within the Company has decreased by 20%; the greenhouse gas
emissions have decreased by 26%. Please note, changes in occupancy and building
operations during the COVID-19 period will have had an impact on performance
and so the 2020 reporting year is not directly comparable to 2019. However,
energy performance improvement opportunities continued to be considered across
the portfolio. Initiatives undertaken during the reporting year include boiler
and hot water system replacements/upgrades, wall and roof insulation upgrades,
LED lighting upgrades and installation of lighting and ventilation occupancy
sensors. Automatic meter readers are also being rolled out to all landlord
electricity supplies for improved energy monitoring.
The table below sets out the Company's energy and greenhouse gas emissions
intensities by sector.
Energy Intensities (kWh Emissions Intensities
per m2) (tCO2e per m2)
2019 2020 2019 2020
Industrial Distribution 0.8 1.4 0.2 0.3
Warehouses
Leisure 24.6 15.7 5.9 3.7
Mixed-use, Office/Retail 121.7 119.2 31.2 27.8
Mixed-use, Other 109.8 77.9 28.1 18.2
Office, Low Rise 135.3 110.8 30.1 23.3
Office, Mid Rise 184 163.6 39.4 33.5
Retail High Street 9.2 8.8 2.4 2.1
Retail Warehouse 3.4 7.7 0.9 1.7
Methodology
· All energy consumption and GHG emissions reported occurred at the
Company assets, all of which are located in the UK.
· Energy consumption data is reported according to automatic meter
readings, manual meter readings or invoice estimates. Historic energy and
consumption data have been restated where more complete and/or accurate records
have become available. Where required, missing consumption data has been
estimated through pro rata extrapolation. Data has been adjusted to reflect the
Company's share of asset ownership, where relevant.
· The sustainability content located on throughout the SREIT annual report
for the year ending 31st December 2020 has been assured in accordance with
AA1000. The same data set has been used to compile this data report. The full
Assurance Statement can be found at the following link:
https://www.schroders.com/en/uk/adviser/fund-centre/funds-in-focus/
investment-trusts/schroders-investment-trusts/
schroder-real-estate-investment-trust/sustainability/
· The Company's GHG emissions are calculated according to the principles
of the Greenhouse Gas (GHG) Protocol Corporate Standard.
o The Company's Greenhouse Gas Emissions are reported as tonnes of carbon
dioxide equivalent (tCO2e), which includes the following emissions covered by
the GHG Protocol (where relevant and available greenhouse gas emissions factors
allow): carbon dioxide (CO2), methane (CH4), hydrofluorocarbons (HFCs), nitrous
oxide (N20), perfluorocarbons (PFCs), sulphur hexafluoride (SF6) and nitrogen
triflouride (NF3).
o GHG emissions from electricity (Scope 2) are reported according to the
'location-based' approach.
o The following greenhouse gas emissions conversion factors and sources have
been applied:
Country Emissions GHG Emissions Emissions Factor Data Source
Source Factor
United Electricity 0.2560kgCO2e UK Government's GHG Conversion Factors for
Kingdom 2019 Company Reporting (2019)
Electricity 0.2333kgCO2e UK Government's GHG Conversion Factors for
2020 Company Reporting (2020)
Gas 0.184kgCO2e
Energy Efficiency Actions
Environmental data management system and quarterly reporting
Environmental data for the Company is collated by sustainability consultants
Evora Global, supported by their proprietary environmental data management
system SIERA. Energy, water, waste and greenhouse gas emissions' data are
collected and validated for all assets where the portfolio has operational
control on a quarterly basis.
Energy target, improvement programme and net zero carbon
The Investment Manager has an energy and greenhouse gas emissions performance
reduction target to achieve an 18% reduction in landlord-controlled energy
consumption by 2020/21 (2015/16 baseline) across all UK-managed assets which
includes assets of the Company. This is accompanied by a target of a 32%
reduction in landlord-controlled greenhouse gas emissions by 2020/21 (2015/16
baseline); this target is inclusive of decarbonisation of the UK electricity
grid over recent years.
The Investment Manager together, with sustainability consultants Evora Global
and property manager MAPP, looks to identify and deliver energy and greenhouse
gas emissions reductions on a cost-effective basis. The programme involves
reviewing all managed assets within the Company and identifying and
implementing improvement initiatives, where viable. The process is of continual
review and improvement.
Energy performance improvement initiatives undertaken at several assets during
the reporting period include boiler replacements/upgrades, wall and roof
insulation upgrades, upgrades to Automatic Meter Readers for improved energy
monitoring, LED upgrades and installation of lighting and ventilation occupancy
sensors.
Recognising the need for the real estate industry to address its carbon impact,
the Investment Manager joined other members of the Better Buildings Partnership
(BBP) in September 2019 to sign the Member Climate Change Commitment and in
December 2020 published its 'Pathway to Net Zero Carbon' - which can be found
here:
https://www.schroders.com/en/sysglobalassets/email/uk/realestate/2020/
schroder-real-estate-net-zero-carbon-pathway-december-2020_1621372_v1.pdf.
New energy and carbon targets will be established for the Company in 2021 in
the context of a net zero carbon ambition.
Renewable electricity tariffs and carbon offsets
The Investment Manager has an objective to procure 100% renewable electricity
for all landlord-controlled supplies for which it has responsibility, which
includes the assets of the Company, by 2025. As at 31 December 2020, 97% of the
Company's landlord-controlled electricity was on renewable tariffs. No carbon
offsets were purchased during the reporting period.
Report of the Depositary to the Shareholders
Northern Trust (Guernsey) Limited has been appointed as Depositary to Schroder
Real Estate Investment Trust Limited (the "Company") in accordance with the
requirements of Article 36 and Articles 21(7), (8) and (9) of the Directive
2011/61/EU of the European Parliament and of the Council of 8 June 2011 on
Alternative Investment Fund Managers and amending Directives 2003/41/EC and
2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (the "AIFM
Directive").
We have enquired into the conduct of Schroder Real Estate Investment Management
Limited (the "AIFM") for the year ending 31st March 2021, in our capacity as
Depositary to the Company.
This report, including the review provided below, has been prepared for and
solely for the Shareholders in the Company. We do not, in giving this report,
accept or assume responsibility for any other purpose or to any other person to
whom this report is shown.
Our obligations as Depositary are stipulated in the relevant provisions of the
AIFM Directive and the relevant sections of Commission Delegated Regulation
(EU) No 231/2013 (collectively the "AIFMD legislation").
Amongst these obligations is the requirement to enquire into the conduct of the
AIFM and the Company and their delegates in each annual accounting period.
Our report shall state whether, in our view, the Company has been managed in
that period in accordance with the AIFMD legislation. It is the overall
responsibility of the AIFM to comply with these provisions. If the AIFM or
their delegates have not so complied, we as the Depositary will state why this
is the case and outline the steps which we have taken to rectify the situation.
The Depositary and its affiliates is or may be involved in other financial and
professional activities which may on occasion cause a conflict of interest with
its roles with respect to the Company. The Depositary will take reasonable care
to ensure that the performance of its duties will not be impaired by any such
involvement and that any conflicts which may arise will be resolved fairly and
any transactions between the Depositary and its affiliates and the Company
shall be carried out as if effected on normal commercial terms negotiated at
arm's length and in the best interests of Shareholders.
Basis of Depositary Review
The Depositary conducts such reviews as it, in its reasonable discretion,
considers necessary in order to comply with its obligations and to ensure that,
in all material respects, the Company has been managed (i) in accordance with
the limitations imposed on its investment and borrowing powers by the
provisions of its constitutional documentation and the appropriate regulations
and (ii) otherwise in accordance with the constitutional documentation and the
appropriate regulations. Such reviews vary based on the type of Company, the
assets in which a Company invests and the processes used, or experts required,
in order to value such assets.
Review
In our view, the Company has been managed during the year, in all material
respects:
(i) in accordance with the limitations imposed on the investment and
borrowing powers of the Company by the constitutional document; and by the
AIFMD legislation; and
(ii) otherwise in accordance with the provisions of the
constitutional document; and the AIFMD legislation.
For and on behalf of
Northern Trust (Guernsey) Limited
Glossary
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 whose names are set out on page 49 of this
document and "Director" means any one of them.
Disclosure Guidance and means the disclosure guidance and transparency rules
Transparency Rules contained within the FCA's Handbook of 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.
Diluted and adjusted EPS per share are derived as set out
under NAV.
Estimated rental value Is the Group's external valuers' reasonable opinion as to
("ERV") the open market rent which, on the date of the valuation,
could reasonably be expected to be obtained on a new
letting or rent review of a property.
EPRA is the European Public Real Estate Association.
EPRA Net Tangible is the IFRS equity attributable to shareholders adjusted
Assets for items including deferred tax, the fair value of
financial instruments and intangible assets.
EPRA Net Disposal Value is the IFRS equity attributable to shareholders adjusted
for items including goodwill as a result of deferred tax
and the fair value of interest rate debt
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.
Market Abuse Regulation means regulation (EU) No.596/2014 of the European
Parliament and of the Council of 16 April 2014 on market
abuse.
MSCI (formerly Investment Property Databank or 'IPD') is a
Company that produces an independent benchmark of property
returns.
Net Asset Value and NAV is shareholders' funds divided by the number of shares in
per share issue at the 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.
Notice of Annual General Meeting
Notice is hereby given that the Annual General Meeting of the Company will be
held at 1 London Wall Place, EC2Y 5AU on 9 September 2021 at 11a.m.
The Board takes the well-being of its Shareholders and colleagues seriously and
has been closely monitoring the evolving Covid-19 pandemic. At present it is
the intention of the Board to hold this meeting with Shareholders given the
option of attending in person. In the event that the UK Government's guidance
on social distancing and public gatherings nearer to the time of the AGM does
not permit this, the Board will make such arrangements as it deems necessary to
the format of the AGM to comply with Government guidance and regulations.
Resolution on Agenda
Form of Proxy 1. To elect a Chairman of the Meeting.
To consider and, if thought fit, pass the following Ordinary
Resolutions:
Ordinary Resolution 2. To receive, consider and approve the Consolidated
1 Annual Report and Financial Statements of the Company for the
year ended 31 March 2021.
Ordinary Resolution 3. To approve the Remuneration Report for the year ended
2 31 March 2021.
Ordinary Resolution 4. To re-elect Ms Lorraine Baldry as a Director of the
3 Company.
Ordinary Resolution 5. To re-elect Mr Stephen Bligh as a Director of the
4 Company.
Ordinary Resolution 6. To re-elect Mr Alastair Hughes as a Director of the
5 Company.
Ordinary Resolution 7. To re-elect Mr Graham Basham as a Director of the
6 Company.
Ordinary Resolution 8. To appoint Ernst and Young LLP as Auditor of the
7 Company until the conclusion of the next Annual General
Meeting.
Ordinary Resolution 9. To authorise the Board of Directors to determine the
8 Auditor's remuneration.
Ordinary Resolution 10. To receive and approve the Company's Dividend Policy
9 which appears on page 51 of the Annual Report.
To consider and, if thought fit, pass the following Special
Resolutions:
Special Resolution 1 11. That the Company be authorised, in accordance with
section 315 of The Companies (Guernsey) Law, 2008, as amended
(the "Companies Law"), to make market acquisitions (within the
meaning of section 316 of the Companies Law) of ordinary shares
in the capital of the Company ("Ordinary Shares") either for
retention as treasury shares, insofar as permitted by the Law
or cancellation, provided that:
a. the maximum number of ordinary shares hereby authorised
to be purchased shall be 14.99% of the issued ordinary shares
on the date on which this resolution is passed;
b. the minimum price which may be paid for an ordinary
share shall be £0.01;
c. the maximum price (exclusive of expenses) which may be
paid for an ordinary share shall be an amount equal to the
higher of (i) 5% above the average of the mid-market value of
the ordinary shares (as derived from the regulated market on
which the repurchase is carried out) for the five business days
immediately preceding the date of the purchase; and (ii) the
higher of (a) the price of the last independent trade; and (b)
the highest current independent bid at the time of purchase, in
each case on the regulated market where the purchase is carried
out;
d. such authority shall expire at the conclusion of the
annual general meeting of the Company to be held in 2022 unless
such authority is varied, revoked or renewed prior to such date
of the general meeting; and
e. the Company may make a contract to purchase ordinary
shares under such authority prior to its expiry which will or
may be executed wholly or partly after its expiration and the
Company may make a purchase of ordinary shares pursuant to any
such contract.
Special Resolution 2 12. That the Directors of the Company be and are hereby
empowered to allot ordinary shares of the Company for cash as
if the pre-emption provisions contained under Article 13 of the
Articles of Incorporation did not apply to any such allotments
and to sell ordinary shares which are held by the Company in
treasury for cash on a non-pre-emptive basis provided that this
power shall be limited to the allotment and sales of ordinary
shares:
a. up to such number of ordinary shares as is equal to 10%
of the ordinary
shares in issue (including treasury shares) on the date on
which this resolution is passed;
b at a price of not less than the net asset value per
share as close as practicable to the allotment or sale;
provided that such power shall expire on the earlier of the
conclusion of the annual general meeting of the Company to be
held in 2022 or on the expiry of 15 months from the passing of
this Special Resolution, except that the Company may before
such expiry make offers or agreements which would or might
require ordinary shares to be allotted or sold after such
expiry and notwithstanding such expiry the Directors may allot
or sell ordinary shares in pursuance of such offers or
agreements as if the power conferred hereby had not expired.
Close of Meeting.
By Order of the Board
For and on behalf of
Northern Trust International Fund Administration Services (Guernsey) Limited
Secretary
1 June 2021
Notes
1. To be passed, an ordinary resolution requires a simple majority of the
votes cast by those shareholders voting in person or by proxy at the AGM
(excluding any votes which are withheld) to be voted in favour of the
resolution.
2. To be passed, a special resolution requires a majority of at least 75%
of the votes cast by those shareholders voting in person or by proxy at the AGM
(excluding any votes which are withheld) to be voted in favour of the
resolution.
3. A member who is entitled to attend and vote at the meeting is entitled
to appoint one or more proxies to exercise all or any of their rights to
attend, speak and vote instead of him or her. A proxy need not be a member of
the Company. More than one proxy may be appointed provided that each proxy is
appointed to exercise the rights attached to different shares held by the
member.
4. A form of proxy is enclosed for use at the meeting and any adjournment
thereof. The form of proxy should be completed and sent, together with the
power of attorney or other authority (if any) under which it is signed, or a
notarially certified copy of such power or authority, so as to reach the
Company's Registrars, Computershare Investor Services (Guernsey) Limited, at
The Pavilions, Bridgwater Road, Bristol, BS99 6ZY at least 48 hours before the
time of the AGM (excluding any part of a day that is not a working day).
5. Completing and returning a form of proxy will not prevent a member from
attending in person at the meeting and voting should he or she so wish.
6. To have the right to attend and vote at the meeting or any adjournment
thereof (and also for the purpose of calculating how many votes a member may
cast on a poll) a member must have his or her name entered on the register of
members not later than at close of business of 23 September 2020.
7. Pursuant to Article 41 of the Uncertificated Securities (Guernsey)
Regulations 2009, entitlement to attend and vote at the meeting and the number
of votes which may be cast thereat will be determined by reference to the
register of members of the Company at close of business on 23 September 2020.
Changes to entries in the register of members of the Company after that time
shall be disregarded in determining the rights of any member to attend and vote
at such meeting.
Corporate Information
Registered Address Independent Auditor
PO Box 255 Ernst & Young LLP
Trafalgar Court PO Box 9
Les Banques Royal Chambers
St. Peter Port St. Julian's Avenue
Guernsey GY1 3QL St. Peter Port
Guernsey GY1 4AF
Directors (all Non-executive) Property Valuer
Lorraine Baldry (Chairman) Knight Frank LLP
Graham Basham 55 Baker Street
Stephen Bligh London
Alastair Hughes W1U 8AN
Investment Manager and Accounting Agent Sponsor and Brokers
Schroder Real Estate Investment Management J.P. Morgan Securities plc
Limited 25 Bank Street
1 London Wall Place Canary Wharf
London London E14 5JP
EC2Y 5AU
Secretary and Administrator Tax Advisors
Northern Trust International Fund Deloitte LLP
Administration Services (Guernsey) Limited 2 New Street Square
PO Box 255 London EC4A 3BZ
Trafalgar Court
Les Banques Receiving Agent and UK Transfer/Paying
St Peter Port Agent
Guernsey GY1 3QL Computershare Investor Services
(Guernsey) Limited
Depositary 13 Castle Street
Northern Trust (Guernsey) Limited St Helier
PO Box 255 Jersey
Trafalgar Court JE1 1ES
Les Banques
St Peter Port
Guernsey GY1 3QL
Solicitors to the
Company as to Guernsey Law:
as to English Law: Mourant Ozannes
Stephenson Harwood (Guernsey) LLP
LLP Royal Chambers
1 Finsbury Circus St Julian's Avenue
London EC2M 7SH St. Peter Port
Guernsey GY1 4HP
FATCA GIIN
5BM7YG.99999.SL.831
[1] Winning Cities defined as higher growth locations - Source: Oxford
Economics/Schroders.
[2]Source: MSCI property level returns gross of fees on a like-for-like basis
including direct and indirect property investments. Past performance is not a
guide to future performance and may not be repeated.
[3] This is an APM, please see page 105 for details.
[4] Winning Cities defined as higher growth locations - Source: Oxford
Economics/Schroders.
[5] This is an APM, please see page 105 for details.
[6] Excluding one-off refinancing costs related to the Canada Life loan of £
27.4m in the year ended 31 March 2020.
[7] As reconciled to valuation reports from Knight Frank for the portfolio and
BNP for the joint ventures. Does not include any IFRS adjustments for lease
incentives nor the fair value of leasehold adjustments.
[8] Adjusted EPRA earnings is an APM and please see page 105 for details.
[9] As per third party valuation reports unadjusted for IFRS lease incentive
amounts
[10] Source: Oxford Economics, Schroders March 2021.
[11] Reconciles to the valuation reports from Knight Frank for the direct
portfolio and BNP for the Joint Ventures. Does not include any IFRS adjustments
for lease incentives nor the fair value of the leasehold adjustment for The
Galaxy, Luton.
[12] Represents the annualised contracted income as at 31 March 2021 of the
portfolio, including rents from joint venture assets.
[13] Represents the ERV of the portfolio as estimated by the valuers, including
rents for the joint venture assets.
[14] Source: MSCI Quarterly Version of Balanced Monthly Index Funds including
joint venture investments on a like-for-like basis as at 31 March 2021.
[15] This is an Alternative Performance Measure ("APM"). EPRA calculations are
included in the EPRA Performance measures section on page 102.
[16] This is an APM. EPRA calculations are included in the EPRA Performance
measures section on page 101.
[17] This is an APM. Details are included in the APM section on page 105.
[18] This is an APM. Details are included in the APM section on page 105. The
prior year figure represents the NAV total return excluding one-off refinancing
costs of £27.4m. NAV total return including finance costs in the prior year of
-9.4%
[19] This is an APM. EPRA calculations are included in the EPRA Performance
measures section on page 105.
[20] On-balance sheet borrowings reflect the loan facilities with Canada Life
and RBS without the deduction of unamortised finance costs of £0.7m.
[21] This is an APM. Details are included in the APM section on page 105.
[22] This is an APM. Details are included in the APM section on page 105.
[23] This is an APM. Details are included in the APM section on page 105.
[24] Please note that this is net of all capital expenditure, acquisition costs
and movement in IFRS16 lease incentives.
[25] Includes £0.5m relating to JV capital expenditure
[26] Net revenue is equal to EPRA earnings as per the reconciliation on page
103.
[27] Calculation of pence per share is based on shares in issue as at 31 March
2020 to enable comparison to 31 March 2020 data
[28] Calculation of pence per share is based on shares in issue as at 31 March
2021
[29] Note Central London is defined by MSCI as City, Mid-Town, West End and
Inner London.
[30] The Company listed in July 2004.
[31] Loan balance divided by property value as at 31 March 2021.
[32] For the quarter preceding the Interest Payment Date ('IPD'), ((rental
income received - void rates, void service charge and void insurance)/interest
paid).
[33] The projected ICR covenant for contracted the four quarters following the
IPD deducting assumed non-recoverable costs (void rates, void service charge
and void insurance)/interest paid) based on average of the past four quarters
[34] Fixed total interest rate for the loan term.
[35] Loan balance divided by property value as at 31 March 2021.
[36] For the quarter preceding the Interest Payment Date ('IPD'), ((rental
income received - void rates, void service charge and void insurance)/interest
paid).
[37] The projected ICR covenant for contracted the four quarters following the
IPD deducting assumed non-recoverable costs (void rates, void service charge
and void insurance)/interest paid) based on average of the past four quarters
[38] Facility drawn at 31 March 2021 from a total available facility of £52.5
million.
[39] Total interest rate as at 31 March 2021 comprising 3 months LIBOR of 0.09%
and the margin of 1.6% at an LTV below 60% and a margin of 1.90% above 60% LTV.
[40] This covenant drops to 60% after year three of the five-year term.
[41] The Carbon Risk Real Estate Monitor (CRREM) tool converts internationally
agreed climate change mitigation goals (e.g. Paris Agreement) into geography
and sector-specific carbon emission and energy intensity minimum performance
benchmarks.
[42] The BBP is an industry association of leading UK commercial property
owners committed to improving building sustainability. [43] Excludes refinancing costs of £27.4m END
(END) Dow Jones Newswires
June 02, 2021 02:00 ET (06:00 GMT)
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