REG - Schroder Real Estate - Interim Results for the Period Ended 30 Sept 2021
23/11/2021 07:00
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RNS Number : 1925T Schroder Real Estate Inv Trst Ld 23 November 2021
For release 23 November 2021
Schroder Real Estate Investment Trust Limited
("SREIT"/ the "Company" / "Group")
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2021
INCREASED PORTFOLIO ALIGNMENT TO HIGH GROWTH SECTORS AND ACTIVE ASSET
MANAGEMENT UNDERPINNING NAV, EARNINGS AND DIVIDEND GROWTH
Schroder Real Estate Investment Trust, the actively managed UK focussed REIT,
today announces its interim results for the six months ended 30 September
2021.
Key financial highlights
· 9.0% increase in Net Asset Value ('NAV') to £323.4 million or
65.8 pps (31 March 2021: £296.8 million or 60.4 pps)
· Net asset value ('NAV') total return of 11.3%
· EPRA earnings of £8.3 million (30 September 2020: £5.1
million), reflecting improving rent collection and a reduction in bad debt
provisions, as well as the impact of recent acquisitions and active management
· IFRS profit of £33.2 million (30 September 2020: £-8.8 million)
· Underlying portfolio total return of 8.9% vs. the MSCI Benchmark
Index at 7.7%
· Loan to Value ('LTV'), net of all cash, of 30.7%, within the
long-term strategic range of 25% to 35%
· Dividends paid during the period totalled £6.5 million, or 1.33
pps, an increase of 8% over the period, with a further 7.5% increase announced
for the quarter to 30 September 2021, to be paid in December
· Dividend cover of 127% based on EPRA earnings
· Reduction in the Investment Manager's fees to generate an
annualised saving of approximately £650,000 per annum, effective from 1 July
2021
Key operational highlights
· Robust rent collection rate of 92% during the period, rising to
98% for the quarter to December 2021
· Including post period activity, 50 new lettings, renewals and
reviews completed, generating an additional £800,000 per annum of rental
income
· Portfolio vacancy of 4.9%, close to historic low
· Post period acquisition of four asset industrial portfolio in the
north west of England for £19.85 million, reflecting a net initial yield of
6.9% and increasing the industrial portfolio weighting to 44%
· Including the post period end industrial portfolio acquisition,
86% of the portfolio weighted to the industrial, office and retail warehouse
sectors (31 March 2021: 85%)
ESG achievements
· GRESB score improved from 71 to 75, with three-star rating
retained in the 2021 GRESB sustainability survey
· EPRA Best Practice Sustainability Reporting Gold Award for the
fourth consecutive year
· Post period end planning permission secured for first north-west
Net Zero Carbon warehouse development
Lorraine Baldry, Chairman of the Board, commented:
"The outlook for the UK real estate market is positive, with economic growth
expected to continue, coupled with a supportive interest rate environment.
Whilst we expect ongoing divergence in returns across the real estate market,
with the industrial sector continuing to outperform over the short to medium
term, the polarisation experienced over recent years is expected to narrow as
more employees are encouraged to return to offices and sentiment continues to
improve towards more resilient parts of the retail sector. Our diversified
portfolio, and exposure to Winning Cities and Regions, means we are well
positioned to benefit from these trends."
Nick Montgomery, Fund Manager, added:
"Good progress has been achieved over the period in delivering the strategy
against the backdrop of improving market conditions, with the outcome being
healthy growth in the NAV, sustained outperformance of the underlying
portfolio and further increases in the level of dividend."
"Whilst the focus is on growing net income and dividends, we are also
investing in existing assets to maximise returns and ensure the portfolio
remains resilient in response to structural changes and evolving occupier
trends. A key part of this is evolving our approach to delivering operational
excellence for occupiers as well as demonstrating continued improvements in
sustainability performance."
A webcast presentation for analysts and investors will be hosted today at
09.00 am. In order to join, please visit:
https://us02web.zoom.us/j/82830292832?pwd=RjJHVnZNQjJsdVVIRlVtd1hFMFZWZz09
(https://us02web.zoom.us/j/82830292832?pwd=RjJHVnZNQjJsdVVIRlVtd1hFMFZWZz09)
Meeting ID: 828 3029 2832
Passcode: 382838
For further information:
Schroder Real Estate Investment Management Limited: 020 7658 6000
Nick Montgomery / Matthew Riley
FTI Consulting: 020 3727 1000
Dido Laurimore / Richard Gotla / Ollie Parsons
________________________________________________________________________________________________________________________________________________________
Interim Report and Condensed Consolidated Financial Statements
For the period 1 April 2021 to 30 September 2021
About Us
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 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, 2020, as amended and the Authorised Closed-ended
Investment Schemes Rules 2021.
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. 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 good stock selection,
active management and operational excellence.
Highlights
· NAV asset value ("NAV") total return of 11.3%(2) for the six
months to 30 September 2021 (30 September 2020: -2.2%)
· Sustained outperformance of the real estate portfolio with a
total return of 8.9% over the period versus the MSCI Benchmark Index of 7.7%
· Active asset management strategy, with 50 new lettings, renewals
and reviews since 1 April 2021 which generated £2.4 million per annum of
rental income and increased contracted rental income by £800,000 per annum
· 87% of the portfolio located in Winning Cities and Regions i
· 86% of the portfolio weighted to the industrial, office and retail
warehouse sectors following post period end activity
· Loan to Value ii ('LTV'), net of cash, of 30.7%, increasing to
33.9% following post period end activity
Performance Summary
Property performance
30 September 2021 30 September 2020 31 March 2021
Value of property assets and joint venture assets £464.0m £397.8m £438.8m
Annualised rental income £28.0m £24.9m £28.3m
Estimated open market rental value £31.8m £29.4m £31.2m
Underlying portfolio total return 8.9% -0.3% 4.6%
MSCI benchmark total return 7.7% -1.3% 1.8%
Underlying portfolio income return 3.2% 3.2% 6.5%
MSCI Benchmark income return 2.1% 2.1% 4.4%
Financial summary
Six months to 30 September 2021 Six months to 30 September 2020 Year to 31 March
2021
Net asset value ("NAV") £323.4m £296.8m £296.8m
NAV per ordinary share 65.8p 58.0p 60.4p
EPRA Net Tangible Assets iii £323.4m £296.8m £296.8m
Profit/(loss) for the period £33.2m (£8.8m) £4.5m
EPRA earnings iv £8.3m £5.1m £11.6m
Capital values
30 September 30 September 2020 31 March 2021
2021
Share price 49.2p 32.3p 39.9p
Share price discount to NAV (4) (25.2%) (44.3%) (33.9%)
NAV total return (4) 11.3% (2.2%) 3.9%
FTSE All-Share Index 4,058.96 3,282.25 3,831.05
Earnings and dividends
Six months to 30 September 2021 Six months to 30 September 2020 Year to 31 March
2021
IFRS earnings (pps) 6.8 (1.7) 0.9
EPRA earnings (4) (pps) 1.7 1.0 2.3
Dividends paid (pps) 1.33 0.39 1.59
Annualised dividend yield on 30 September/31 March share price (3) 5.4% 2.4% 4.0%
Bank borrowings
30 September 2021 30 September 2020 31 March
2021
On-balance sheet borrowings v £154.1m £182.1m £154.1m
Loan to Value ratio ("LTV"), net of all cash vi 30.7% 25.9% 32.3%
Ongoing charges
Six months to Six months to 30 Sept 2020 Year to
30 Sept 2021 31 March 2021
Ongoing charges (including fund and property expenses) (6) 2.3% 2.5% 2.5%
Ongoing charges (including fund only expenses) (6) 1.3% 1.3% 1.4%
Chairman's Statement
Good progress delivering strategic objectives with improving shareholder
returns and a positive outlook.
Overview
The UK economy has experienced a strong recovery over the interim period to 30
September 2021, with UK Gross Domestic Product ('GDP') growth of 7% expected
for calendar 2021. The easing of pandemic restrictions has led to a surge in
household consumption driven by pent-up demand and excess savings, as well as
improved business sentiment. These factors, together with extraordinary levels
of government and central bank support, have raised asset values and led to a
sharp increase in activity levels across real estate occupier and investment
markets.
This economic recovery, combined with a high level of activity at a portfolio
level, has underpinned a 9% increase in the net asset value ('NAV') over the
period to £323.4 million, or 65.8 pence per share ('pps'). Improving rent
collection rates enabled the Company to increase dividends paid to 1.3 pps,
resulting in a NAV total return of 11.3%. This compared favourably to a NAV
total return over the financial year to 31 March 2021 of 3.9%.
The underlying portfolio continues to deliver strong performance compared with
its peer group, with a total return of 8.9% compared with the MSCI Benchmark
Index (the 'Benchmark') of 7.7% for the period. This was driven by a high
portfolio industrial weighting, which has increased to 44% following a post
period end industrial portfolio acquisition, a recovery in retail warehouse
values and a higher income return of 3.2% versus the Benchmark at 2.1%. The
portfolio is now ranked on the 9(th) percentile of the Index since launch in
2004.
The portfolio's sustainability performance also continues to improve,
reflected in an improved 2021 GRESB survey score. Demonstrating further
improvement in the 2022 GRESB survey, alongside other sustainability-related
activity, is a key strategic objective for both the Board and Manager.
Strategy
The strategy continues to focus on delivering sustainable income growth and
improving the quality of the underlying portfolio though active management and
capital investment, with a particular focus on delivering operational
excellence and sustainability improvements.
Good progress has been made, with EPRA earnings of £8.3 million over the
six-month period comparing with £11.6 million over the previous financial
year. This was mainly due to improved rent collection rates that are now
approaching pre-pandemic levels, and a reduction in bad debts as tenants repay
historic arrears. This earnings growth enabled dividends to be increased over
the period to £6.5 million, reflecting dividend cover of 127% based on EPRA
earnings.
Reflecting our asset management capabilities and the portfolio's reversionary
potential, 41 leasing transactions completed during the period. This led to a
stable void rate of 5.1%, which is close to the historic low and reflects the
quality and positive sector weightings of the underlying portfolio.
The positive activity continued post period end, with a high volume of ongoing
leasing activity and planning consent granted for an 80,000 sq ft warehouse
scheme in Stanley Green, Greater Manchester, which will be the first
operational net zero warehouse in the region.
Finally, post period end the Company acquired a higher-yielding industrial
portfolio for £19.9 million. This acquisition and other activity has
supported a further 7.5% increase in the level of the next quarterly dividend
Sustainability
The Board and Investment Manager believe that focusing on environmental,
social and governance ('ESG') considerations 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. Alongside an improved GRESB score, the period saw increased
capital investment to improve buildings' sustainability performance as well as
ongoing asset level net zero analysis.
As set out in the year end results, the Board and Manager have agreed updated
objectives relating to the portfolio's environmental and social
characteristics, as well as in demonstrating good governance. These will be
based upon the principles contained within the EU Sustainable Finance
Disclosure Regulations, or 'SFDR', which requires complying companies to
report on the extent to which climate and other sustainability risks are
considered part of their investment consideration. The FCA is consulting on a
similar regime for the UK and we would expect to align with this as part of
developing our overall approach to demonstrating leadership in ESG. The
Manager's report comments on progress against these objectives and a detailed
assessment against the performance measures will be included in the Annual
Report and Consolidated Accounts to 31 March 2022.
Share buybacks
In September 2020 the Company announced a share buyback programme due to the
prevailing share price offering attractive value for shareholders. During the
period the Company acquired 338,340 shares at an average price of 40.3 pence
per share, bringing the total number of shares acquired since September 2020
to 27.4 million or £9.7 million. The share buyback programme has enhanced NAV
and dividends per share, and contributed to an improvement in the share price
rating. We 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
As noted above, due to improving rent collection rates and portfolio activity,
the quarterly dividend increased over the period from 0.625 pps to 0.675 pps,
resulting in total dividends paid of £6.5 million. This reflected dividend
cover of 127% based on both EPRA earnings and on a cash basis. The Company has
today announced a further 7.5% increase in the dividend to 0.726 pps, to be
paid to shareholders in December 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 30
September 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, as at 30 September 2021 the Company had unencumbered property
with a value of £39.4 million, and cash of £11.5 vii million.
As noted above, since the period end the Company has acquired an industrial
portfolio for £19.9 million, which will be funded by drawing a further £21.2
million on the RCF, increasing the total amount drawn to £45.7 million.
Following this acquisition, and based on period end cash of £11.5(7) million,
the Company's Loan to Value ratio, net of cash, is 33.9%. This is within the
long term strategic range of 25% to 35% and the Company continues to have
significant headroom on all debt covenants.
Board succession
Having joined the Board in January 2014, in line with best practice I intend
to retire as Chairman of the Company at the end of July 2022. Following a
comprehensive succession planning process led by my fellow independent
non-executive directors, Stephen Bligh and Graham Basham, I am pleased to
confirm that Alastair Hughes, the current Senior Independent Director of the
Company, will be appointed as Chairman with effect from 31 July 2022.
In anticipation of the appointment of Alastair Hughes as Chairman, a third
party organisation has been appointed to conduct a search to identify a
replacement Senior Independent Director of the Company.
The Investment Manager
On 2 June 2021, the Company announced a change to the Manager's fees which
resulted in a saving of £162,000 over the financial period, and an annualised
saving of approximately £650,000. The revised fee reflects 0.9% of net
asset value per annum, with tiering providing scope for a further ad valorem
fee reduction with growth of the Company. The fee includes investment
management, asset management and accounting services and there is no
performance fee.
The Board is pleased with the performance of the management team over the
period and is confident that they have the necessary skills and resources to
deliver on the future strategy.
On 1 October 2021, the Company separately announced the Manager's appointment
as company secretary at a fixed fee of £50,000 per annum, replacing Northern
Trust.
Outlook
The outlook for the UK real estate market is positive, with economic growth
expected to continue, coupled with a supportive interest rate environment.
Whilst we expect ongoing divergence in returns across the real estate market,
with the industrial sector continuing to outperform over the short to medium
term, the polarisation experienced over recent years is expected to narrow as
more employees are encouraged to return to offices and sentiment continues to
improve towards more resilient parts of the retail sector. Our diversified
portfolio, and exposure to Winning Cities and Regions, means we are well
positioned to benefit from these trends.
Whilst the outlook is positive, the UK recovery will need to absorb the
gradual winding down of government support, and rising Covid-19 case rates
over the winter could move the government to redeploy social distancing
measures. Supply shortages and rising inflation have also created near-term
headwinds that could weigh on activity in the coming months. Whilst this could
be disruptive to the recovery, low interest rates and an abundance of capital
seeking higher-yielding assets should support demand for good quality real
estate.
Lorraine Baldry
Chairman
Schroder Real Estate Investment Trust Limited
22 November 2021
Investment Manager's Report
Growth in net income, ESG focus and sustained outperformance of the underlying
portfolio
The Company's Net Asset Value ('NAV') as at 30 September 2021 was £323.4
million, or 65.8 pence per share ('pps'), which compared with £296.8 million,
or 60.4 pps, as at 31 March 2021. This reflected an increase over the interim
period of 5.4 pps, or 9%, with the underlying movement in the NAV per share
set out in the table below:
£m pps
NAV as at 31 March 2021 296.8 60.4
Unrealised change in the valuations of the direct real estate portfolio and 25.2 5.1
Joint Ventures
Capital expenditure (direct portfolio and share of Joint Ventures) (0.7) (0.1)
Net revenue 8.3 1.7
Dividends paid (6.5) (1.3)
Others 0.4 Nil
NAV as at 30 September 2021 (excluding the share buyback) 323.5 65.8
Share buyback (0.1) -
NAV as at 30 September 2021 323.4 65.8
The underlying portfolio, including joint ventures but excluding capital
expenditure, increased in value by 5.7% over the six month period to September
2021. Adjusting for capital expenditure, the net capital value increase was
5.5%. The total return from the underlying portfolio, including rental income,
was 8.9% which compared with the MSCI Benchmark (the 'Benchmark'), on a
like-for-like basis, of 7.7%. This compares with a total return for the
underlying portfolio for the full year to 31 March 2021 of 4.6%, which
compared with the Benchmark of 1.7%.
Net revenue for the period totalled £8.3 million, or 1.7 pps, an increase of
£3.2 million on the corresponding six month period to 30 September 2020 of
£5.1 million. This increase has been driven by improved rental collection
rates, the industrial acquisitions made in December 2020 and active asset
management. During the period, dividends totalling £6.5 million were paid and
338,340 shares were repurchased at an average discount of 33% compared with
the NAV at the start of the period. These factors, together with a general
recovery in the UK real estate market, contributed to a NAV total return of
11.3% over the period.
Strategy
The strategic objectives are to:
- Deliver a progressive dividend policy together with attractive
and sustainable NAV total returns;
- Maintain the long-term track record of outperformance of the
underlying portfolio;
- Increase exposure to larger assets with strong fundamentals in
higher growth locations;
- Actively manage the Company and its assets to maximise
shareholder returns;
- Ensure ESG considerations are 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 with a loan to value within the
long term target range of 25% to 35%.
The following progress has been made delivering against these objectives:
- 28% increase in underlying earnings over the six month period,
supporting an 8% increase in the quarterly dividend paid between the December
and June periods. Higher rent collection rates, portfolio activity and post
period end acquisitions have supported a further 7.5% increase in the dividend
relating to the quarter to 30 September 2021, to be paid in December 2021;
- Continued outperformance of the underlying portfolio, with a
total return of 8.9% compared with the Benchmark of 7.7%. This
outperformance was supported by a higher income return of 3.2% over the period
compared with the Benchmark of 2.1%. The underlying portfolio has now
outperformed over one, three, five, ten years and since the Company's IPO in
2004;
- Outperformance driven by active asset management with 50 new
lettings, rent reviews and renewals completed since the start of the period
totalling £2.4 million in annualised rental income, generating £800,000 per
annum of additional rent above the previous level;
- Continued investment to deliver operational excellence in larger
assets offering higher returns, with progress on key initiatives such as the
'Elevate' flexible office concept at City Tower in Manchester, planning
consent secured for an operational net zero warehouse development at Stanley
Green Trading Estate and leasing activity at St, John's Retail Park in
Bedford;
- Positive movement in portfolio sector weightings which,
following post period end activity, reflect 44% exposure to largely multi-let
estates (Benchmark 31%), retail warehousing of 11% (Benchmark 9.0%) and good
quality offices principally located in Winning Cities such as in London,
Manchester and Edinburgh of 31% (Benchmark 26.1%);
- Enhanced ESG performance across the portfolio including an
improvement in the 2021 GRESB score, further reductions in energy consumption,
buildings improvements and occupier satisfaction initiatives; and
- Consolidated net Loan to Value of 30.7% at the period end,
increasing to 33.9% following post period end activity. Average interest
rate of 2.4% with a weighted loan term of 12.5 years at the period end.
Real estate market overview
The UK real estate market has experienced a strong recovery over the period
due to the easing of pandemic restrictions and the resultant improvement in
consumer and business sentiment. This led to average capital values for UK
commercial real estate increasing by 5.3% over the period which compared with
a 3.5% decline over the year to 31 March 2021. Although Government measures
protecting tenants for non-payment of rent remain in place, income collection
rates are returning to pre-pandemic levels across industrial and office assets
with improving levels across more resilient parts of the retail and leisure
market. The positive market momentum should continue with average total
returns for calendar 2021 expected to be approximately 15%.
Following post period end activity the Company's exposure to the industrial
sector is 44%, an increase from 30% 12 months ago and comparing favourably
with the Benchmark of 31%. As expected, the industrial sector delivered the
strongest returns over the period, with average values increasing by 13.3%,
the highest six month increase recorded for the sector. Strong investor demand
has driven average industrial income yields down to 3.8%, which compares with
the average income yield for UK real estate of 4.4%. Whilst we expect the
tailwinds driving occupational demand to continue, the rate of capital growth
is expected to slow as on-line sales growth slows and new development activity
increases. This has led the Company to focus on higher yielding, multi-let
industrial assets, where new supply is more restricted and where value can be
added through active management. This approach resulted in the Company's
industrial portfolio producing a total return of 15.7% over the period
(Benchmark 15.4%), supported by a higher income return of 2.8% (Benchmark
1.9%) and rental value growth of 4.2% (Benchmark 3.5%).
Following post period end activity the Company's exposure to the retail
sector, including where retail is ancillary to the main use, reduced to 18.9%
compared with the Benchmark of 22.3%. A key change over the period has been
improved sentiment towards the retail warehouse sector, with average capital
values increasing by 7.5%. This compared with capital values for the retail
sector as a whole rising by 2.6%, dragged down by shopping centres and
secondary high street assets. This is due to the retail warehouse sector
complementing multi-channel retail strategies such as click-and-collect and
home delivery, combined with increased demand from food and homeware
occupiers. The Company is benefiting from this recovery due to 77% of single
use retail exposure being invested in retail warehousing. To illustrate,
positive leasing activity at St. John's Retail Park in Bedford, the Company's
largest retail asset, resulted in a capital value increase of 10.9% (Benchmark
5.5%) over the period which compared with -8.6% (Benchmark -2.5%) over the 12
month period to 31 March 2021.
Following post period end activity, the Company's exposure to the office
sector is 31% compared with the Benchmark of 26.1%. Uncertainty as office
tenants reassess their requirements weighed on the sector with average capital
values rising by 0.8% over the period. Whilst this led to take-up over the
first half of 2021 being 49% below the pre-pandemic average, vacancy rates
have stabilised in Central London and prime office rents in Leeds, Manchester
and the West End are increasing. This reflects a polarisation with healthy
demand for well specified offices in city centres and close to leading
universities, which enable companies to attract highly qualified staff. In
contrast, more secondary offices, particularly in out of town locations, are
vulnerable to weakening demand, functional obsolescence and rising
refurbishment costs.
Alongside a focus on office accommodation offering strong sustainability
credentials, occupiers increasingly require higher service levels and greater
levels of flexibility. We are therefore evolving our active management
approach to a hospitality mindset and are offering tenants greater levels of
flexibility and service levels. This approach to operational excellence is
best illustrated at City Tower in Manchester, where our 'Elevate' flexible
working concept is capturing post-pandemic demand and delivering materially
higher net rents.
Real estate portfolio
As at 30 September 2021 the portfolio comprised 39 properties valued at
£464.0 million, excluding lease incentives, increasing to 43 assets and
£483.9 million following the post period end industrial portfolio
acquisition. This includes the Company's share of joint venture properties at
City Tower in Manchester and the University of Law in Bloomsbury, London.
Following the post period end acquisitions, the portfolio generates rental
income of £30.2 million per annum, reflecting a net initial income yield of
5.8%, which compares with the MSCI Benchmark (the 'Benchmark') of 4.3%. The
portfolio also benefits from fixed contractual annual rental uplifts of £1.5
million over the next 24 months. The independent valuers' estimate that the
current rental value of the portfolio is £33.5 million per annum, reflecting
a reversionary income yield of 6.9%, which compares favourably with the
Benchmark at 4.9%. The Company's void rate is approximately 5%, calculated as
a percentage of estimated rental value, with a weighted average lease length,
calculated to the earlier of lease expiry or break, of 5.2 years.
The data tables below summarise the portfolio information as at 30 September
2021, including the post period end acquisitions. The weightings and property
values presented within the tables below combine period end valuations as
determined by the Property Valuers as at 30 September 2021, with transactional
information for the post period end industrial portfolio acquisition as
detailed in the 'Industrial portfolio acquisition' section on page 15 of the
2021 Interim Report and Condensed Consolidated Financial Statements.
Weighting (% of portfolio post period end acquisitions)
Sector weightings by value SREIT Benchmark
South East 11.3 19.5
Industrial Rest of UK 32.5 11.5
Industrial 43.8 31.0
City 0.0 3.6
Mid-town and West End 8.1 7.5
Rest of South East 5.4 7.9
Office Rest of UK 17.4 7.2
Offices 30.9 26.1
Retail warehouse 11.1 9.0
South East 0.8 6.9
Rest of UK 7.0 3.8
Shopping centres 0.0 2.6
Retail 7.8 13.3
- Retail ancillary to main use 4.5 -
- Retail single use 3.3 -
Other 6.4 20.6
Weighting (% of portfolio post period end acquisitions)
Regional weightings by value SREIT Benchmark
Central London viii 8.1 19.4
South East excluding Central London 19.3 31.9
Rest of South 10.2 13.8
Midlands and Wales 23.2 11.9
North 36.7 13.0
Scotland 2.4 4.1
Northern Ireland 0.0 0.2
The top ten properties, including post period end acquisitions and the share
of the joint venture properties at City Tower in Manchester and Store Street
in Bloomsbury, are set out below and comprise 65% of the portfolio value:
Top ten properties Value (£m) (% of portfolio post period end acquisitions)
1 Milton Keynes, Stacey Bushes Industrial Estate 50.5 10.4
2 Leeds, Millshaw Industrial Estate 47.7 9.9
3 Manchester, City Tower (25% share) 40.3 8.3
4 London, The University of Law (50% share) 39.4 8.1
5 Bedford, St John's Retail Park 29.5 6.1
6 Leeds, Headingley Central 23.9 4.9
7 Chippenham, Langley Park Industrial Estate 22.8 4.7
8 Norwich, Union Park Industrial Estate 22.5 4.6
9 Cheadle, Stanley Green Trading Estate 20.3 4.2
10 Uxbridge, 106 Oxford Road 15.4 3.2
Total as at 30 September 2021 (including post period end industrial portfolio 312.3 64.4
acquisition)
The Company's income is diverse with 308 tenants of which the Company's
largest and top ten tenants represent 6.5% and 25.6% of the portfolio as a
percentage of annual rent:
Top ten tenants Rent p.a. (£m) (% of portfolio post period end acquisitions)
1 University of Law Limited 2.00 6.5
2 Buckinghamshire New University 1.15 3.7
3 Siemens Mobility Limited 0.97 3.1
4 The Secretary of State 0.88 2.8
5 Matalan Retail Limited 0.57 1.9
6 Express Bi Folding Doors Limited 0.54 1.8
7 TJX UK Limited T/A Homesense 0.51 1.6
8 Jupiter Hotels Limited T/A Mercure 0.46 1.5
9 Premier Inn Hotels Limited 0.42 1.4
10 Lidl 0.42 1.3
Total as at 30 September 2021 (including the post period end industrial 7.92 25.6
portfolio acquisition)
The diverse and granular underlying rental income, and a high level of
occupier engagement, has supported improving rent collection rates with 98% of
the contracted rents collected for the quarter to 31 December 2021. The
breakdown between sectors is 99% of office rent collected, 97% of industrial
rent collected and 95% of retail, leisure and other rent collected. The
Company remains in active dialogue with its tenants for historic arrears which
currently total £2.3 million, of which £850,000 is categorised as bad debt.
Portfolio performance
As noted above, the underlying portfolio continues to outperform the MSCI
Benchmark. The table below shows performance to 30 September 2021:
SREIT total return MSCI Benchmark total return Relative
Period to 30 September 2021 Six months One year Three years Since IPO ix Six months One year Three years Since IPO Six months One year Three years Since IPO
(%) (%) (% p.a.) (% p.a.) (%) (%) (% p.a.) (% p.a.) (%) (%) (% p.a.) (% p.a.)
Office +2.6 +4.6 +4.8 +7.7 +3.1 +3.0 +2.7 +7.1 -0.5 +1.6 +2.1 +0.6
Industrial +15.7 +29.4 +15.3 +10.5 +15.4 +28.9 +13.5 +9.6 +0.3 +0.3 +1.5 +0.8
Retail +6.8 +7.9 -3.3 +4.1 +5.8 +4.4 -4.4 +3.4 +1.0 +3.3 +1.1 +0.7
Other +17.6 +13.6 -0.9 +2.9 +4.4 +5.6 +3.3 +7.3 +12.7 +7.6 -4.0 -4.2
All sectors +8.9 +14.3 +6.0 +7.5 +7.7 +11.1 +3.6 +6.3 +1.1 +2.9 +2.4 +1.1
Transactions and asset management
Below are examples of acquisitions and ongoing active management initiatives
that should support continued outperformance of the underlying portfolio.
Industrial portfolio acquisition
Post period end acquisition of a portfolio of four industrial assets in the
north west of England. The purchase price of £19.85 million reflects a net
initial yield of 6.9% and a capital value of £53 per sq ft.
Valley Road Industrial Estate, Birkenhead
Unconditional contracts have been exchanged to acquire Valley Road Industrial
Estate in Birkenhead, for £11.4 million, reflecting a net initial yield of
6.8%, a reversionary yield of 7.8% and a low average capital value of £60 per
sq ft. The 10 acre estate comprises 190,000 sq ft of warehouse space and
ancillary offices across 15 units, of which approximately 40% by Estimated
Rental Value ('ERV') have been recently refurbished.
The estate is located close to Junction 1 of the M53 and features a manned
secure access, low site cover and good circulation. With an EPC rating of C,
it offers the opportunity to improve sustainability credentials through
initiatives including upgrades to LED lighting, installation of PIR sensors
and improvements to insulation.
The estate is let to seven tenants generating a combined rent of £830,000 per
annum, reflecting a low average rent of £4.36 per sq ft. This compares with
an ERV of £950,000 per annum, or £4.99 per sq ft. Tenants include KPFF
Limited, a frozen food distribution production company, at £300,000 per annum
or 36% of total income; Balfour Beatty, an international infrastructure
company, at £247,200 per annum or 29% of total income; and Park Retail, a
gift and voucher distribution company, at £85,910 per annum or 10% of total
income. The weighted average unexpired lease term is 4.3 years to earliest
termination and approximately 10% of the estate is vacant, where the
refurbishment has just been completed and where there is a 12 months rental
guarantee. The majority of this space has good tenant interest.
Coral Products, Haydock Industrial Estate, Haydock
Acquisition of a 98,551 sq ft manufacturing and recycling facility on Haydock
Industrial Estate, which is leased to Coral Product (Mouldings) Limited
("Coral"). The purchase price of £4.9 million reflects a net initial yield of
6.6% and a low capital value of £49 per sq ft. Coral, who were recently
acquired by a subsidiary of the Canada-based IPL Plastics Group, occupy the
entire site on a lease expiring in January 2031, with a tenant break in 2026,
at a rent of £340,000 per annum or £3.45 per sq ft. This compares with an
ERV of £394,000 per annum or £4.00 per sq ft. The asset is well located
with direct access to the A580 (East Lancashire Road) and in turn the M6
motorway.
The unit benefits from a new roof across the majority of the building. The
tenant is understood to be committed to the site due to recent investment and
the recycling licence, but there may be potential to acquire adjoining sites
and pursue a longer term redevelopment strategy.
Newfield Fabrications, Sandbach, Cheshire
Acquisition of two assets let to Newfield Fabrications ("Newfield"), a steel
fabricating business established in 1965, for a combined £3.6 million, which
reflects a net initial yield of 7.4% and a low capital value of £42 per sq
ft. Both assets are in an established industrial area in Sandbach, Cheshire,
approximately three miles from junction 17 of the M6.
The first asset comprises a 77,880 sq ft manufacturing and distribution
facility on a 4.1 acre site, let on a 13.9 year term at a rent of £247,000
per annum, or £3.17 per sq ft. The lease benefits from five yearly rent
reviews linked to the retail price index ("RPI"), subject to a minimum
increase of 2% per annum and a cap of 4% per annum. The facility has an EPC
rating of C and features photo-voltaic panels.
The second asset comprises an 8,000 sq ft industrial unit with main road
frontage, also let for 13.9 years at a rent of £36,000 per annum, or £4.50
per sq ft. The lease also benefits from five yearly rent reviews linked to
the RPI, subject to a minimum increase of 2% per annum and a cap of 4% per
annum. The property has an EPC rating of C.
Cheadle, Stanley Green Trading Estate (Industrial)
Asset strategy
Stanley Green Trading Estate in Cheadle, Greater Manchester was acquired in
December 2020 for £17.3 million. The strategy for 2021 was to crystallise
higher rents on the trading estate and secure planning consent for an 80,000
sq ft, Net Zero Carbon ("NZC") scheme, on the adjoining 3.4 acre site.
Asset overview and performance
Stanley Green Trading Estate comprises 150,000 sq ft of trade counter,
self-storage and warehouse accommodation with an adjoining development 3.4
acre site. As at 30 September 2021, the asset was valued at £20.3 million
reflecting a net initial income yield of 4.3% and a reversionary yield of 5.0%
(5.5% and 6.3% respectively excluding the value attributable to the non-income
producing development site). Over the period the asset delivered a total
return of 15.5%.
Key activity
- Stockport Metropolitan Borough Council's planning committee
unanimously resolved to grant planning permission for 80,000 sq ft of
operational Net Zero Carbon ("NZC") accommodation on the development site on
30 September 2021. The Company will now progress the development of 11
warehouse and trade units at a cost of approximately £8 million which is
scheduled to complete in Q4 2022. The target rental value income to be
generated is £950,000 per annum or £11.86 per sq ft, with pre-lets targeted
during the construction phase.
- At the existing trading estate, a five year lease renewal
completed with Factory Kitchens for a 2,859 sq ft unit at a rent of £40,026
per annum, or £14.00 per sq ft. This compares with the previous rent of
£8.75 per sq ft and represents an uplift of £15,010 per annum, or 60.0%.
This compares with the average rent across the trading estate of £6.32 per sq
ft.
- Negotiations are progressing with a number of occupiers to regear
their leases across the trading estate which should support continued income
growth.
Chippenham, Langley Park Industrial Estate (Industrial)
Asset strategy
Langley Park Trading Estate in Chippenham was acquired in December 2020 for
£19.3 million. The strategy for 2021 was to drive net income growth through a
key lease renewal with Littlefuse (19.6% income on acquisition) and a rent
review with Siemens (53.4% income on acquisition) to increase the rental
income, WAULT and quality of accommodation across the estate.
Asset overview and performance
Langley Park Industrial Estate is a multi-let industrial estate comprising
400,000 sq ft of warehouse and ancillary office accommodation on a large site
of 28 acres located close to Chippenham town centre. As at 30 September 2021,
the asset was valued at £22.8 million reflecting a net initial income yield
of 6.9% and a reversionary yield of 7.6%. Over the period the asset delivered
a total return of 18.9%.
Key activity
- Negotiations ongoing with Littlefuse to extend their lease term
from December 2022 for ten years.
- Negotiations continuing with Siemens on the outstanding June
2021 rent review with the objective of agreeing a new longer lease.
- Given the positive discussions with occupiers who have expressed
an interest in additional accommodation, a masterplan has been prepared that
could see up to 130,000 sq ft of additional warehouse accommodation built at
the site. A pre planning application has been submitted in relation to this
proposal.
Bedford, St. John's Retail Park (Retail Warehouse)
Asset strategy
The strategy for 2021 was to let the vacant units, improve retailer mix and
retain tenants by negotiating new longer term leases.
Asset overview and performance
St. John's Retail Park comprises a 130,000 sq ft retail warehouse scheme
underpinned by income from covenants including Lidl, Home Bargains, TK Maxx
and Costa with an average lease term, to the earlier of lease expiry of break,
of seven years. The asset benefits from an affluent catchment and has good
parking. As at 30 September 2021, the asset was valued at £29.5 million
reflecting a net initial income yield of 6.2% and a reversionary yield of
6.0%. Over the period the asset delivered a total return of 14.3%.
Key activity
- Lidl and Home Bargains have reported strong trading figures
since opening in late 2020. Both retailers have traded throughout the pandemic
and driven high volumes of footfall, supporting the attraction of new
occupiers and the retention of existing occupiers.
- Following the completion of these lettings and the resultant
boost in footfall, a vacant 9,919 sq ft unit has been let to Bensons for Beds
at £130,000 per annum, or £13.00 per sq ft. This is in line with the ERV as
at 30 March 2021, with the tenant receiving 15 months' incentive.
- Further activity over the interim period included a five year
lease renewal completed with Carpetright for a 9,970 sq ft unit at a rent of
£150,000 per annum, or £15.00 per sq ft, with regear discussions ongoing
with Tapi, Hobbycraft and Halfords.
- The remaining vacant unit at St. John's Retail Park is under
offer at a rental level above the ERV as at 30 September 2021.
Manchester, City Tower (Mixed-Use Office, statistics below reflect SREIT 25%
Share)
Asset strategy
The office strategy for 2021 was to lease vacant office space through
conventional lettings as well as through the 'Elevate' flexible working
concept. The strategy for the retail, leisure and hotel space was to improve
tenant mix and explore mutually beneficial regears. There is also a rolling
refurbishment strategy ongoing to ensure the building captures occupier demand
and delivers improved sustainability performance.
Asset overview and performance
City Tower comprises 610,000 sq ft of office, retail, leisure and hotel
accommodation located on a three acre island site in a core location. As at 30
September 2021, the asset was valued at £40.3 million reflecting a net
initial income yield of 5.8% and a reversionary yield of 6.9%. Over the
period the asset delivered a total return of 3.2%.
Key activity
- The first phase of the Elevate flexible working concept has
completed, including delivery of a 28(th) floor tenant lounge which includes
an event space and three shared meeting rooms. 89% of the completed Elevate
office suites are now let or under offer on terms ahead of the asset business
plan.
- A new five year lease has exchanged with Oodle Financial
Services Limited, an existing tenant, for an additional 9,181 sq ft unit at a
gross office rent (including service charge and fit-out rent) of £103,286 per
annum, or £45.00 per sq ft. As part of this lease agreement the Company will
undertake refurbishment works to deliver the suite in line with the Elevate
fit out. The net office rent (excluding service charge and fit-out rent)
equates to £63,647 per annum, or £27.73 per sq ft. This compares with the
previous passing rent of £22.50 per sq ft, reflecting a net uplift of
23.2%.
- A new five year lease has also completed with MAPP, an existing
tenant, following surrender of their existing unit, for 2,647 sq ft at a gross
office rent (including service charge and fit-out rent) of £29,117 per annum,
or £44.00 per sq ft. This unit was refurbished as part of the first phase of
the Elevate concept. The net office rent (excluding service charge and fit-out
rent) equates to £16,656 per annum, or £25.17 per sq ft. This letting was
17.1% ahead of the 30 June 2021 ERV. Further lettings at City Tower are
expected to complete shortly.
- The 12(th), 13(th) and 20(th) floor space leased to the previous
management workspace operator has been surrendered and a phased refurbishment
will be carried out and launched as additional Elevate flexible space.
- Good progress is being made letting the ground floor leisure and
retail space. Namii has taken a lease for ten years on the 2,973 sq ft sq ft
unit. The rent payable is the higher of base rent or 2.5% of gross turnover
capped at £25,000 per annum. The base rent is set at the higher of £10,000
per annum or 75% of the turnover rent in year one, reviewed annually. The
tenant will receive 12 months' rent free plus 16 months' half rent.
Additionally, a new ten year lease has completed for a ground floor
retail/leisure unit with Min Kee, an Asian grab-and-go operator, for a 1,002
sq ft unit at a rent of £14,375 per annum, or £57.39 per sq ft. This
compares with the previous passing rent of £39.82 per sq ft and represents an
uplift of £4,400 per annum or 44.1%. The letting was 36.9% ahead of the ERV
as at 30 March 2021. The tenant will receive three months' rent free.
Responsible investing with impact
Sustainability and responsible investment are integral to the Company's
investment process. We believe that understanding, managing and measuring the
impact of Environmental, Social and Governance ('ESG') considerations, will
deliver enhanced long-term returns for shareholders and positively impact 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 as
manager publishing its own 'Pathway to Net Zero Carbon' by 2050. The Company
will publish its own Net Zero Carbon pathway by the end of the current
financial year.
Continued progress has been made during the period with the Company improving
its GRESB score from 71 to 75 (out of 100), and retaining its three star
rating in the GRESB sustainability survey. The Company also achieved a GRESB
Public Disclosure A Rating for the second consecutive year and the EPRA Best
Practice Sustainability Reporting Gold Award for the fourth consecutive year.
At the end of March 2021, the Board and Manager agreed updated sustainability
objectives for the Company including details of how performance will be
monitored. The below table comments on progress against these objectives and
a full assessment against the performance measures will be given in the
financial year report and accounts to 31 March 2022.
Objective Management Strategy Interim Progress
Governance and Oversight The Manager's process includes oversight on sustainability by its Investment
Committee and Group Investment Risk Committee.
We continue to incorporate sustainability considerations into the investment
The Board reviews the objectives and progress of the sustainability programme process including acquisition proposals, annual asset business plans and
at least annually. annual Fund strategy statements. The Investment Committee continues to review
each of these steps and sustainability risks are to be included as part of Q3
This includes maintaining good health & safety and managing compliance 2021 reporting to the Group Investment Risk Committee.
with regulations.
The external Property Managers continue to ensure asset level operational,
environmental, health and safety compliance is maintained and reports are made
to the Manager.
Net Zero Carbon ('NZC') Determine portfolio alignment with NZC and Paris Agreement to limit climate Impact and Sustainability Action Plans (ISAPs) completed for all managed
change to 1.5C. Asset analysis to determine energy/carbon targets and assets where the Company retains operational control. The ISAPs feed into the
offsetting. asset and Company Net Zero Carbon (NZC) pathway. Development of this pathway
is underway to be published in the current financial year alongside new energy
Determine new energy and carbon targets to 2022, 2025 and 2030 through Impact and carbon targets for the Company.
and Sustainability Action Plans (ISAPs) for buildings to assess understanding
of improvement and opportunities and Net Zero analysis to enable target
setting.
Improve collaboration with occupiers to support whole building performance.
Assess 'whole life carbon' on major projects. Use Schroders Refurbishment and
Development brief on projects to set and manage ambitions. Use NABERS UK
Design for Performance to support improved operational in-use outcomes.
Procure 100% landlord-controlled electricity on certified green tariffs by
2022 (December 2020 at 97%).
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 Verification GRESB - Continue to target opportunities to improve the GRESB score year on The Company achieved a Three Star rating in the 2021 GRESB sustainability
year. assessment with a score of 75 (out of 100). The Company also achieved a GRESB
Public Disclosure 'A' Rating for the second consecutive year.
Data Assurance - Continue to obtain third party assurance of sustainability
data in line with the independent assurance process. The Company achieved the EPRA Best Practice Sustainability Reporting Gold
Award for the fourth consecutive year.
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 and TCFD Determine a climate risk profile, adaptation strategy and reporting in line Transition Risk: We are assessing all managed assets against Paris Aligned
with TCFD through asset and portfolio scenario analysis. 1.5°C carbon and energy intensity performance benchmarks, to the year 2050
using the Carbon Risk Real Estate Monitor ('CRREM') tool.
Physical Risk: We licence a proprietary physical risk database through a
third-party provider. The tool assesses vulnerability to physical risk
hazards, including those related to climate change.
Operational excellence Set standards for operational excellence for managed assets incorporating the We continue to develop the approach to operational excellence for all managed
hospitality mindset in our strategy at each asset. assets.
Improve BREEAM In-Use ('BIU') certification across the portfolio to support In January 2021, we commissioned an occupier satisfaction survey across the
improvement across nine aspects: Management, Health and Wellbeing, Energy, portfolio's tenant base to better understand occupier requirements. As part of
Transport, Water Resources, Resilience, Land Use and Ecology and Pollution. this project, we have worked alongside the external Property Managers to
develop an action plan to improve the relationship with occupiers.
Improve the EPC profile of the portfolio through asset management including
refurbishment. Potential to adopt NABERS Energy for Offices which rates base We have continued to explore opportunities to improve asset level
building actual energy efficiency. sustainability performance and, through applying the ISAP process, has
identified improvements which it is working with the Property Managers to
Assess the approach to monitor indoor environment quality (IEQ) and set new implement. This includes rolling out of Automatic Meter Reading ("AMR")
standard. devices across landlord utility supplies, enhancement to biodiversity (for
example, native landscaping and bird boxes) and improvements to sustainable
Promote and facilitate our occupiers' use of bicycles, buses and electric transport facilities (for example, electric vehicle charging points, cycle
vehicles as transport methods to our assets. storage and shower and changing facilities).
Minimise water demand in line with best practice industry benchmarks.
Provide dedicated space for waste/recycling segregation and storage.
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 30
September 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 of £11.5(( x )) million. This resulted in a Loan to
Value ratio, net of cash, of 30.7%.
Since the period end the Company has acquired three industrial assets for
£19.9 million, which will be funded by drawing a further £21.2 million on
the RCF, increasing the total amount drawn to £45.7 million. Following
these acquisitions, and based on current cash of £11.5(10) million, the
Company's Loan to Value ratio, net of cash, is 33.9%, which is within the long
term strategic range of 25% to 35%. The Company continues to have
significant headroom on all debt covenants.
£129.6 million term loan with Canada Life
The loan is fully compliant with all covenants as summarised below:
Lender Loan (£m) Maturity Total Interest rate (%) Asset Value (£m) Loan to Value ('LTV') ratio xi (%) LTV ratio covenant (%) Interest cover ratio ('ICR') (%) xii ICR ratio covenant (%) Projected Interest cover ratio (%) xiii Projected ICR ratio covenant (%)
Canada Life Term Loan 129.6 50%: 15/10/2032 2.5 xiv 290.8 44.6 65 563 185 441 185
50%: (44.6 net of cash in facility)
15/10/2039
The Company has significant headroom with LTV and ICR covenants summarised
below:
· Net LTV on the secured assets against this loan is 44.6%. On this
basis the properties charged to Canada Life could fall in value by 31% prior
to the 65% LTV covenant being breached;
· The interest cover ratio is 563% based on actual net rents for
the quarter to September 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 45% and 76% respectively prior to
either the LTV or interest cover ratio covenants being breached.
£52.5 million revolving credit facility ("RCF") with RBSI
At 30 September 2021, £24.5 million of the £52.5 million RCF was drawn. The
loan is fully compliant with its covenants as summarised below:
Lender Loan/ amount drawn (£m) Maturity Total Interest rate (%) Asset Value (£m) Loan to Value ('LTV') ratio xv (%) LTV ratio covenant (%) Interest cover ratio ('ICR') (%) xvi ICR ratio covenant (%) Projected Interest cover ratio (%) xvii Projected ICR ratio covenant (%)
RBS RCF 52.5 xviii / 24.5 03/07/2023 1.7 xix 133.8 18.3 65 xx 1153 250 1,079 250
The RBSI loan has an interest rate cap for £32.5 million and comes into
effect if GBP 3 month SONIA reaches 1.5%. The Company has significant
headroom within its LTV and ICR covenants which are summarised below assuming
loan security is granted over the three industrial assets:
· Net LTV on the secured assets against this loan is 18.3%. On this
basis the properties charged to RBSI could fall in value by 88% prior to the
65% LTV covenant being breached, although while the Company is holding the
balance drawn in cash, no breach of the LTV covenant would occur; and
· The interest cover ratio is 1,153% based on actual net rents. A
78% fall in net income could be sustained prior to the loan covenant of 250%
being breached.
· As noted above, post period end the Company will draw down a
further £21.2 million on the RCF, increasing the total amount drawn to £45.7
million. Charging these assets to the RBS RCF facility will have the following
impact on the loan and its covenants:
Lender Loan/ amount drawn (£m) Maturity Total Interest rate (%) Asset Value (£m) Loan to Value ('LTV') ratio xxi (%) LTV ratio covenant (%) Interest cover ratio ('ICR') (%) xxii ICR ratio covenant (%) Projected Interest cover ratio (%) xxiii Projected ICR ratio covenant (%)
RBS RCF 52.5 xxiv / 45.7 03/07/2023 1.7 xxv 153.7 29.7 65 xxvi 1015 250 962 250
Given the increase in the RCF and the maturity in July 2023, consideration is
being given to refinancing options which may include an increase in the RCF
capacity.
Outlook
Good progress has been achieved over the period in delivering the strategy
against the backdrop of improving market conditions, with the outcome being
healthy NAV growth, sustained outperformance of the underlying portfolio and
further increases in the level of dividend.
Whilst the focus is on growing net income and dividends, we are also investing
in existing assets to maximise returns and ensure the portfolio remains
resilient in response to structural changes and evolving occupier trends. A
key part of this is evolving our approach to delivering operational excellence
for occupiers as well as demonstrating continued improvements in
sustainability performance.
Whilst we are alert to the risks of an increase in Covid-19 case rates over
the winter, and the possibility of more persistent inflation leading to higher
interest rates, the momentum in the broader economy and high yield offered by
the real estate sector means we are positive about the outlook for the
Company.
Nick Montgomery
Fund Manager
22 November 2021
Responsibility Statement of the Directors in respect of the Interim Report
We confirm that to the best of our knowledge:
• the condensed set of financial statements has been prepared in accordance
with IAS 34 Interim Financial Reporting; and
• the interim management report (comprising the Chairman's and the
Investment Manager's report) includes a fair review of the information
required by:
(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an
indication of important events that have occurred during the first six months
of the financial year and their impact on the condensed set of financial
statements; and a description of the principal risks and uncertainties for the
remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being
related party transactions that have taken place in the first six months of
the current financial year and that have materially affected the financial
position or performance of the entity during that period; and any changes in
the related party transactions described in the last annual report that could
do so.
We are responsible for the maintenance and integrity of the corporate and
financial information included on the Company's website, and for the
preparation and dissemination of financial statements. Legislation in Guernsey
governing the preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
By order of the Board
Lorraine Baldry
Chairman
22 November 2021
Independent Review Report to Schroder Real Estate Investment Trust Limited
Conclusion
We have been engaged by Schroder Real Estate Investment Trust Limited (the
"Company") and its
subsidiaries (together the "Group") to review the Condensed Consolidated Financial Statements in the Interim Report and Consolidated
Financial Statements for the six months ended 30 September 2021 which
comprises the Unaudited Condensed Consolidated Statement of Comprehensive
Income, Unaudited Condensed Consolidated Statement of Financial Position,
Condensed Consolidated Statement of Changes in Equity, Condensed Consolidated
Statement of Cash Flows, and the related Notes 1 to 16. We have read the
other information contained in the Interim Report and Consolidated Financial
Statements and considered whether it contains any apparent misstatements or
material inconsistencies with the information in the Condensed
Consolidated Financial Statements.
Based on our review, nothing has come to our attention that causes us to
believe that the Condensed Consolidated Financial Statements for the six
months ended 30 September 2021 are not prepared, in all material respects,
in accordance International Accounting Standard 34 "Interim Financial
Reporting" and the Disclosure Guidance and Transparency Rule of the United
Kingdom's Financial Conduct Authority.
Basis for Conclusion
We conducted our review in accordance with International Standard on Review
Engagements 2410 (UK and Ireland) "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the
Auditing Practices Board ("ISRE 2410"). A review of interim financial
information consists of making enquiries, primarily of persons responsible
for financial and accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and consequently
does not enable us to obtain assurance that we would become aware of all
significant matters that might be identified in an
audit. Accordingly, we do not express an audit opinion.
As disclosed in Note 1, the Annual Report and Consolidated Financial Statements of the Group are
prepared in accordance with International Financial Reporting Standards. The Condensed Consolidated Financial
Statements have been prepared in accordance with International Accounting Standard 34 "Interim Financial
Reporting".
Responsibilities of the Directors
The Directors are responsible for preparing the Interim Report and Condensed
Consolidated Financial Statements in accordance with the Disclosure Guidance
and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Auditor's Responsibilities for the review of the financial information
In reviewing the Interim Report and Condensed Consolidated Financial
Statements, we are responsible for expressing to the Company a conclusion on
the Condensed Consolidated Financial Statements. Our conclusion, is based on
procedures that are less extensive than audit procedures, as described in the
Basis for Conclusion paragraph of this report.
Use of our report
This report is made solely to the Company in accordance with guidance
contained in International Standard on Review Engagements 2410 (UK and
Ireland) "Review of Interim Financial Information Performed by the Independent
Auditor of the Entity" issued by the Auditing Practices Board ("ISRE 2410").
To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company, for our work, for this
report, or for the conclusions we have formed.
Ernst & Young LLP
Guernsey, Channel Islands
22 November 2021
The maintenance and integrity of the Company's website is the responsibility
of the Directors; the work carried out by the auditors does not involve
consideration of these matters and, accordingly, the auditors accept no
responsibility for any changes that may have occurred to the financial
statements since they were initially presented on the website.
Legislation in Guernsey governing the preparation and dissemination of
financial statements may differ from legislation in other jurisdictions.
Condensed Consolidated Statement of Comprehensive Income
Six months to Six months Year
to to
30/09/2021 30/09/2020 31/03/2021
Notes £000 £000 £000
(unaudited) (unaudited) (audited)
Rental income 11,832 10,288 21,458
Other income 270 139 205
Property operating expenses (806) (1,724) (3,038)
Net rental and related income, excluding joint ventures 11,296 8,703 18,625
Share of total net income in joint ventures 1,583 1,276 2,452
Net rental and related income, including joint ventures 12,879 9,979 21,077
Gain/(loss) on disposal of investment property - - 121
Net unrealised valuation gain/(loss) on investment property 6 24,689 (13,500) (8,286)
Expenses
Investment management fee 2 (1,397) (1,449) (2,906)
Valuers' and other professional fees (759) (768) (1,698)
Administrator's fee 2 (60) (60) (120)
Auditor's remuneration (102) (83) (150)
Directors' fees (75) (75) (150)
Other expenses (161) (158) (278)
Total expenses (2,554) (2,593) (5,302)
Net operating profit/(loss) before net 33,431 (7,390) 5,158
finance costs
Interest receivable - 74 -
Finance costs (2,041) (2,342) (4,203)
Net finance costs (2,041) (2,268) (4,203)
Share of total net income in joint ventures 7 1,583 1,276 2,452
Share of net valuation profit/(loss) in joint ventures 7 224 (394) 1,135
Profit/(loss) before taxation 33,197 (8,776) 4,542
Taxation 4 - - -
Profit/(loss) and total comprehensive income for the period attributable to 33,197 (8,776) 4,542
the equity holders of the parent
Basic and diluted earnings per share 6.8p (1.7p) 0.9p
All items in the above statement are derived from continuing operations. The
accompanying notes 1 to 16 form an integral part of the condensed interim
financial statements.
Condensed Consolidated Statement of Financial Position
Notes 30/09/2021 30/09/2020 31/03/2021
£000 £000 £000
(unaudited) (unaudited) (audited)
Investment property 6 377,301 313,083 351,776
Investment in joint ventures 7 79,964 77,591 79,120
Non-current assets 457,265 390,674 430,896
Trade and other receivables 8 19,117 18,535 17,028
Cash and cash equivalents 9 10,626 78,675 12,175
Current assets 29,743 97,210 29,203
Total assets 487,008 460,099
487,884
Issued capital and reserves 359,472 325,482 332,811
Treasury shares (36,103) (28,708) (35,967)
Equity 323,369 296,774 296,844
Interest-bearing loans and borrowings 10 153,510 181,351 153,370
Lease liability 6 1,987 2,412 1.988
Non-current liabilities 155,497 183,763 155,358
Trade and other payables 11 8,142 7,347 7,897
Current liabilities 8,142 7,347 7,897
Total liabilities 163,639 191,110 163,255
Total equity and liabilities 487,008 487,884 460,099
Net Asset Value per ordinary share 12 65.8p 58.0p 60.4p
The financial statements on pages 25-38 of the 2021 Interim Report and
Condensed Consolidated Financial Statements were approved at a meeting of the
Board of Directors held on 22 November 2021 and signed on its behalf by:
Lorraine Baldry
Chairman
The accompanying notes 1 to 16 form an integral part of the condensed interim
financial statements.
Condensed Consolidated Statement of Changes in Equity
For the period from 1 April 2020 to 30 September 2020 (unaudited)
Notes Share premium Treasury share reserve Revenue reserve Total
£000 £000 £000 £000
Balance as at 31 March 2020 219,090 (26,452) 117,168 309,806
Loss for the period - - (8,776) (8,776)
Share buyback - (2,256) - (2,256)
Dividend paid 5 - - (2,000) (2,000)
Balance as at 30 September 2020 219,090 (28,708) 106,392 296,774
For the year ended 31 March 2021 (audited) and for the period from 1 April
2021 to 30 September 2021 (unaudited)
Notes Share premium Treasury share reserve Revenue reserve Total
£000 £000 £000 £000
Balance as at 31 March 2020 219,090 (26,452) 117,168 309,806
Profit for the year - - 4,542 4,542
Dividends paid 5 - - (7,989) (7,989)
Share buyback - (9,515) - (9,515)
Balance as at 31 March 2021 219,090 (35,967) 113,721 296,844
Share buyback 12 - (136) - (136)
Profit for the period - - 33,197 33,197
Dividends paid 5 - - (6,536) (6,536)
Balance as at 30 September 2021 219,090 (36,103) 140,382 323,369
The accompanying notes 1 to 16 form an integral part of the condensed interim
financial statements.
Condensed Consolidated Statement of Cash Flows
Six months Six months Year
to to to
30/09/2021 30/09/2020 31/03/2021
£000 £000 £000
(unaudited) (unaudited) (audited)
Operating activities
Profit/(Loss) for the period/year 33,197 (8,776) 4,542
Adjustments for:
Profit on disposal of investment property - - (121)
Net valuation (gain)/loss on investment property (24,689) 13,500 8,286
Share of profit of joint ventures (1,807) (882) (3,587)
Net finance cost 2,041 2,268 4,202
Operating cash generated before changes in working 8,742 6,110 13,322
capital
(Increase)/decrease in trade and other receivables (2,072) (3,421) (1,923)
Increase/(decrease) in trade and other payables 244 702 1,254
Cash generated from operations 6,914 3,391 12,653
Finance costs paid (1,918) (2,034) (3,990)
Interest received - 74 -
Net cash from operating activities 4,996 1,431 8,663
Investing activities
Proceeds from the sale of investment property - - 6,409
Additions to investment property (836) (5,205) (8,896)
Acquisition of investment property - - (36,500)
Investment in joint ventures (620) - -
Net income distributed from joint ventures 1,583 1,154 2,452
Net cash (used in)/from investing activities 127 (4,051) (36,535)
Financing activities
Share buyback (136) (2,256) (9,515)
Additions to external debt - - 24,500
Drawdown of external debt - 52,500 -
Dividends paid (6,536) (2,000) (7,989)
Net cash from/(used in) financing activities (6,672) 48,244 6,996
Net (decrease)/increase in cash and cash equivalents for the period/year (1,549) 45,624 (20,876)
Opening cash and cash equivalents 12,175 33,051 33,051
Closing cash and cash equivalents 10,626 78,675 12,175
The accompanying notes 1 to 16 form an integral part of the condensed interim
financial statements.
Notes to the Interim Report
1. Significant accounting policies
Schroder Real Estate Investment Trust Limited ("the Company") is a
closed-ended investment company incorporated in Guernsey. The condensed
interim financial statements of the Company for the period ended 30 September
2021 comprise the Company, its subsidiaries and its interests in joint
ventures (together referred to as the "Group").
Statement of compliance
The condensed interim financial statements have been prepared in accordance
with the Disclosure Guidance and Transparency Rules of the United Kingdom
Financial Conduct Authority and IAS 34 Interim Financial Reporting. They do
not include all the information required for the full annual financial
statements, and should be read in conjunction with the consolidated financial
statements of the Group as at and for the year ended 31 March 2021. The
condensed interim financial statements have been prepared on the basis of the
accounting policies set out in the Group's annual financial statements for the
year ended 31 March 2021. The financial statements for the year ended 31 March
2021 have been prepared in accordance with International Financial Reporting
Standards ("IFRS") as issued by the International Accounting Standards Board.
The Group's annual financial statements refer to new Standards and
Interpretations.
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 and the potential impact on 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 30 September 2021, property valuations would
have to fall by 45% before the relevant Canada Life Loan to Value covenants
were breached, and actual net rental income would need to fall by 76%
before the interest cover covenants were breached.
Furthermore, the properties charged to RBSI could fall in value by 72% prior
to the 65% LTV covenant being reached and, based on actual net rents for the
quarter to September 2021, a 78% fall in net income could be sustained prior
to the RBSI loan covenant of 250% being breached.
The Board and Investment Manager continue to closely monitor the potential
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
22 November 2022. In addition to the matters described above, in arriving at
their conclusion the Directors have also considered:
· The current cash balance at 22 November 2021 of £12.98 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 condensed interim financial statements.
Use of estimates and judgments
The preparation of financial statements requires management to make
judgements, estimates and assumptions that affect the application of policies
and the reported amounts of assets and liabilities, income and expenses.
Actual results may differ from these estimates. The estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to accounting
estimates are recognised in the period in which the estimates are revised and
in any future periods affected. There have been no changes in the judgements
and estimates used by management as disclosed in the last annual report and
financial statements for the year ended 31 March 2021.
Segmental reporting
The Directors are of the opinion that the Group is engaged in a single segment
of business, being property investment, and in one geographical area, the
United Kingdom. There is no one tenant that represents more than 10% of the
Group's revenue. The chief operating decision-maker is considered to be the
Board of Directors who are provided with consolidated IFRS information on a
quarterly basis.
2. Material agreements
Schroder Real Estate Investment Management Limited is the Investment Manager
to the Company.
Between the period of 1 April 2021 to 30 June 2021 the Investment Manager was
entitled to a fee of 1.1% payable monthly and calculated with regard to the
NAV of the Group.
With effect from 1 July 2021 a new fee agreement was agreed and implemented
between the Board and the Investment Manager which 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%
The fee covers all of the appointed services of the Investment Manager and
there are standard provisions for the reimbursement of expenses. Additional
fees can be agreed for out of scope services on an ad hoc basis.
The total charge to profit during the period was £1,397,000 (year to 31 March
2021: £2,906,000; six months to 30 September 2020: £1,449,000). At the
period end no amount was outstanding (31 March 2021: £20,000; 30 September
2020: £646,000).
Northern Trust International Fund Administration Services (Guernsey) Limited
was the Administrator to the Company during the period. The Administrator was
entitled to an annual fee equal to £120,000 of which no sum (31 March 2021:
£30,000; 30 September 2020: £30,000) was outstanding at the period end.
With effect from 1 October 2021, Langham Hall (Guernsey) Limited and Langham
Hall UK Depositary LLP replaced Northern Trust and will provide
Administration, Designated Manager and Depositary services to the Group
respectively going forward.
3. Basic and Diluted Earnings per share
The basic and diluted earnings per share for the Group is based on the profit
for the period of £33,197,000 (31 March 2021: profit of £4,542,000; 30
September 2020: loss of £8,776,000) and the weighted average number of
ordinary shares in issue during the period of 491,086,039 (31 March 2021:
508,699,880 and 30 September 2020: 518,056,505).
4. Taxation
01/04/2021 to 01/04/2020 to 01/04/2020 to
30/09/2021 30/09/2020 31/03/2021
£000 £000 £000
Tax expense in the period/year - - -
Reconciliation:
Profit/(loss) before tax 33,197 (8,776) 4,542
Effect of:
Tax using the UK corporation tax rate of 19% 6,307 (1,667) 863
Revaluation (profit)/loss not taxable (4,691) 2,565 1,574
Share of revaluation (profit)/loss of joint ventures not taxable (43) 75 (216)
(Profit)/loss on disposal of investment property not taxable - - (23)
UK REIT exemption on non-capital income (1,573) (973) (2,198)
Current tax expense in the year - - -
SREIT has elected to be treated as a UK real estate investment trust ("REIT").
The UK REIT rules exempt the profits of SREIT and its subsidiaries' (the
"Group") UK property rental business from corporation tax. Gains on UK
properties are also exempt from tax, provided they are not held for trading or
sold in the three years after completion of development. The Group is
otherwise subject to corporation tax.
As a REIT, SREIT is required to pay Property Income Distributions equal to at
least 90% of the Group's exempted net income. To retain UK REIT status there
are a number of conditions to be met in respect of the principal company of
the Group, the Group's qualifying activity and its balance of business. The
Group continues to meet these conditions.
5. Dividends paid
Number of 01/04/2021 to
In respect of ordinary Rate 30/09/2021
shares (pence) £000
Q/e 31 March 2021 (dividend paid 25 June 2021) 491.08 million 0.656 3,221
Q/e 30 June 2021 (dividend paid 13 August 2021) 491.08 million 0.675 3,315
1.331 6,536
Number of 01/04/2020 to
In respect of ordinary Rate 30/09/2020
shares (pence) £000
Q/e 30 June 2020 (dividend paid 18 August 2020) 518.51 million 0.39 2,000
Number of 01/04/2020 to
In respect of ordinary Rate 31/03/2021
shares (pence) £000
Q/e 30 June 2020 (dividend paid 18 August 2020) 518.51 million 0.386 2,000
Q/e 30 Sept 2020 (dividend paid 11 December 2020) 503.30 million 0.575 2,895
Q/e 31 December 2020 (dividend paid 12 March 2021) 495.00 million 0.625 3,094
1.5858 7,989
A dividend for the quarter ended 30 September 2021 of 0.726 pence per share
(totalling £3.56 million) was approved on 22 November 2021 and will be paid
on 17 December 2021.
6. Investment property
For the period 1 April 2020 to 30 September 2020 (unaudited)
Leasehold Freehold Total
£000 £000 £000
Fair value as at 1 April 2020 36,818 284,564 321,382
Additions 5 5,200 5,205
Fair value leasehold adjustment (4) - (4)
Net valuation gain on investment property (3,210) (10,290) (13,500)
Fair value as at 30 September 2020 33,609 279,474 313,083
6. Investment property (continued)
For the year 1 April 2020 to 31 March 2021 (audited)
Leasehold Freehold Total
£000 £000 £000
Fair value as at 1 April 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 (428) - (428)
Net valuation loss on investment property (4,819) (3,467) (8,286)
Fair value as at 31 March 2021 36,376 315,400 351,776
For the period 1 April 2021 to 30 September 2021 (unaudited)
Leasehold Freehold Total
£000 £000 £000
Fair value as at 1 April 2021 36,376 315,400 351,776
Additions - 836 836
Fair value leasehold adjustment - - -
Net valuation gain on investment property 1,082 23,607 24,689
Fair value as at 30 September 2021 37,458 339,873 377,301
The fair value of investment property, as determined by the valuer, totals
£384,375,000 (31 March 2021: £359,300,000; 30 September 2020:
£320,050,000). None of this sum was in relation to an unconditional exchange
of contracts (March 2021: £nil; September 2020: £nil).
As at 30 September 2021, £9,062,304 (31 March 2021: £9,512,762;
30 September 2020: £9,739,000) in connection with lease incentives is
included within trade and other receivables. Furthermore, included in
non-current liabilities is a sum of £1,987,395 (31 March 2021: £1,988,000;
September 2020: £2,412,000) relating to the fair value of the leasehold
element of The Galaxy, Luton.
The fair value of investment property has been determined by Knight Frank LLP,
a firm of independent chartered surveyors, who are registered independent
appraisers. The valuation has been undertaken in accordance with the current
editions of RICS Valuation - Global Standards, which incorporate the
International Valuation Standards, and the RICS UK National Supplement issued
by the Royal Institution of Chartered Surveyors (the "Red Book").
The properties have been valued on the basis of "Fair Value" in accordance
with the RICS Valuation - Professional Standards VPS4(7.1) Fair Value and
VPGA1 Valuations for Inclusion in Financial Statements which adopt the
definition of Fair Value used by the International Accounting Standards Board.
The valuation has been undertaken using appropriate valuation methodology and
the Valuer's professional judgement. The Valuer's opinion of Fair Value was
primarily derived using recent comparable market transactions on arm's length
terms, where available, and appropriate valuation techniques (The Investment
Method).
The properties have been valued individually and not as part of a portfolio.
6. Investment property (continued)
All investment properties are categorised as Level 3 fair values as they use
significant unobservable inputs. There have not been any transfers between
Levels during the year. Investment properties have been classed according to
their real estate sector. Information on these significant unobservable inputs
per class of investment property is disclosed below:
Quantitative information about fair value measurement using unobservable
inputs (Level 3) as at 30 September 2021 (unaudited)
Industrial Retail (incl retail warehouse) Office Other Total
Fair value (£'000) 192,400 90,450 84,075 17,450 384,375
Area ('000 sq ft) 1,963 506 414 177 3,060
Net passing rent psf per annum Range £0 - £13.23 £5.03 £0 - £32.85 £12.26 £0 - £29.10 £15.92 £0 -£13.00 £0 - £32.85 £7.84
Weighted average £7.39
Gross ERV psf per annum Range £3.00 - £14.00 £7.40 - £32.85 £13.35 £10.00-£24.00 £2.10 -£13.00 £2.10 - £32.85 £8.87
Weighted average £4.81 £17.66 £7.98
Net initial yield (1) Range 3.94% - 7.19% 4.81% 2.27% -8.24% 6.42% 3.63%-11.19% 7.34% 4.76%-10.23% 2.27% - 11.19% 5.84%
Weighted average 7.04%
Equivalent yield Range 4.84% - 7.21% 5.72% 5.71%-10.08% 7.07% 5.79%-9.47% 7.79% 4.76% -9.27% 4.76%-10.08% 6.37%
Weighted average 7.31%
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 2021 (audited)
Industrial Retail (incl retail warehouse) Office Other Total
Fair value (£000) 170,400 87,050 85,350 16,500 359,300
Area ('000 sq. ft) 1,963 506 414 177 3,060
Net passing rent per sq. ft per annum Range £4.20 - £8.36 £5.16 £0 - £32.85 £11.46 £0 - £29.10 £16.46 £0 -£13.00 £0 - £32.85 £7.55
Weighted average £6.95
Gross ERV per sq. ft per annum Range £3.50 - £13.00 £7.40 - £32.85 £13.40 £12.00-£24.00 £2.10 -£13.00 £3.50 - £32.85 £8.40
Weighted average £5.70 £17.59 £7.98
Net initial yield ((1)) Range 4.40% - 7.02% 5.57% 2.72% -9.45% 6.24% 5.77%-11.00% 7.47% 4.75%-9.27% 2.72% - 11.00% 6.25%
Weighted average 7.00%
Equivalent yield Range 5.10% - 7.41% 6.16% 5.80%-10.04% 7.38% 5.72%-9.25% 7.74% 4.75% -8.96% 4.75%-10.04% 6.65%
Weighted average 7.25%
Notes: ((1)) Yields based on rents receivable after deduction of head rents,
but gross of non-recoverables.
6. Investment property (continued)
Sensitivity of measurement to variations in the significant unobservable
inputs
The significant unobservable inputs used in the fair value measurement
categorised within Level 3 of the fair value hierarchy of the Group's property
portfolio, together with the impact of significant movements in these inputs
on the fair value measurement, are shown below:
Unobservable input Impact on fair value measurement of significant increase in input Impact on fair value 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 investment properties at 30 September 2021 Industrial Retail Office Other Total
(unaudited)
£'000 £'000 £'000 £'000 £'000
Increase in ERV by 5% 9,209 2,611 3,878 738 16,436
Decrease in ERV by 5% (9,055) (3,420) (3,788) (455) (16,718)
Increase in net initial yield by 0.25% (9,507) (3,390) (2,771) (598) (15,773)
Decrease in net initial yield by 0.25% 10,549 3,664 2,967 643 17,183
Estimated movement in fair value of investment properties at 31 March 2021 Industrial Retail Office Other Total
(audited)
£'000 £'000 £'000 £'000 £'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 0.25% (7,320) (3,355) (2,763) (569) (13,821)
Decrease in net initial yield by 0.25% 8,008 3,635 2,954 611 14,973
7. Investment in joint ventures
For the period 1 April 2020 to 30 September 2020 (unaudited)
£000
Opening balance as at 1 April 2020 77,985
Share of net rental income 1,276
Distributions received/receivable (1,276)
Share of valuation loss (394)
Amounts recognised as joint ventures at 30 September 2020 77,591
For the year 1 April 2020 to 31 March 2021 (audited)
£000
Opening balance as at 1 April 2020 77,985
Share of valuation gain 1,135
Amounts recognised as joint ventures at 31 March 2021 79,120
For the period 1 April 2021 to 30 September 2021 (unaudited)
£000
Opening balance as at 1 April 2021 79,120
Share of net rental income 1,583
Distributions received/receivable (1,583)
Purchase of units in City Tower Unit Trust to fund capital expenditure 620
Share of valuation profit 224
Amounts recognised as joint ventures at 30 September 2021 79,964
8. Trade and other receivables
Six months to Six months to Year to
30/09/2021 30/09/2020 31/03/2021
£000 £000 £000
Rent receivable 4,072 4,343 4,094
Sundry debtors and prepayments 5,982 4,823 3,422
Lease Incentives 9,063 9,369 9,512
19,117 18,535 17,028
£5.03 million (gross) was owed by tenants as at period end and a net bad debt
provision of £0.8m was made with regard to expected credit losses (31 March
2021 £1.1m; 30 September 2020: £1.04m) .
When determining an appropriate bad debt provision the following key factors
were considered: the tenants' rent deposits held; the tenants' covenants;
financial strength and rent and service charge-paying histories; and the
current trading situation of the tenants.
Sundry debtors and prepayments includes £9,063,000 (31 March 2021:
£9,512,000; 30 September 2020: £9,369,000) in respect of lease incentives,
which are spread over the term of the lease.
9.Cash and cash equivalents
As at 30 September 2021 the group had £10.6 million in cash (31 March 2021:
£12.2 million; 30 September 2020: £78.7 million) and none of this sum was
held with Canada Life (31 March 2021: Nil; 30 September 2020: £18.3 million).
10. Interest-bearing loans and borrowings
The Group has in place a £129.6 million loan facility with Canada Life and
the loan is split in to two equal tranches of £64.8m as follows:
- Facility A matures in October 2032 and attracts an interest rate
of 2.36%; and
- Facility B matures in October 2039 and attracts an interest rate
of 2.62%.
The Canada Life facility has a first charge security over all the property
assets in the ring-fenced Security Pool which at 30 September 2021 contained
properties valued at £290.8 million. Various restraints apply during the term
of the loan although the facility has been designed to provide significant
operational flexibility.
The Company also has in place a revolving credit facility ('RCF') with Royal
Bank of Scotland International, which expires in July 2023, and the current
RCF limit stands at £52.5 million. As at 30 September 2021, there was a
balance of £24.5m drawn (March 2021: £24.5m; September 2020: £52.5m).
The RBS facility has a first charge security over all the assets held in SREIT
No.2 Limited which at 30 September 2021 contained properties valued at £133.8
million.
The interest rate as at the period end was 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 periods, the Loan to Value has remained at
less than 60%. Since this loan has variable interest, an interest rate cap for
£32.5m 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%.
Post the period end the RBS facility has transitioned from LIBOR to SONIA for
interest payments due post October 2021.
As at 30 September 2021, the Group has total loan balances drawn of £154.09
million and £0.6 million of unamortised arrangement fees (31 March 2021:
£154.99 million and £0.7 million of unamortised arrangement fees; September
2020: £182.09 million and £0.7 of unamortised arrangement fees).
The fair value of the fixed-interest Canada Life debt is based on the present
value of future cash flows discounted at a market rate of interest. As at 30
September 2021, the fair value of the Group's £129.59 million loan with
Canada Life was £129.4 million (31 March 2021: £131.1 million, 30 September
2020: £150.6 million).
11. Trade and other payables
Six months to Six months to Year to
30/09/2021 30/09/2020 31/03/2021
£000 £000 £000
Deferred income 3,812 3,351 3,701
Rental deposits 1,480 1,245 1,448
Interest payable 807 915 780
Other payables and accruals 2,043 1,836 1,968
8,142 7,347 7,897
12. NAV per ordinary share and share buyback
Between the 1 April 2021 to 12 April 2021 the Company purchased a further sum
of 338,340 shares for a sum of £0.14m at an average price of 40 pence per
share.
As a consequence of the buyback, the number of ordinary shares in issue fell
from 491,418,641 to 491,080,301 during the reporting period.
The NAV per ordinary share is based on the net assets of £323,368,806 (31
March 2021: £296,844,000; 30 September 2020: £296,774,000) and 491,080,301
ordinary shares in issue at the Statement of Financial Position reporting date
(31 March 2021: 491,418,641 and 30 September 2020: 511,364,955).
13. Financial risk factors
The Directors are of the opinion that there have been no significant changes
to the financial risk profile of the Group since the end of the last annual
financial reporting period ended 31 March 2021. 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 is only directly
exposed to sterling and hence is not exposed to currency risk. The Board
regularly reviews and agrees policies for managing each of these risks.
14. Related party transactions
Material agreements are disclosed in note 2. The Directors' remuneration for
the six month period for services to the Group was £75,000 (31 March 2021:
£150,000, 30 September 2020: £75,000) of which £nil was outstanding at
period end (31 March 2021: £nil; 30 September 2020: £nil). Transactions with
joint ventures are disclosed in note 7.
15. Capital commitments
At 30 September 2021 the Group had capital commitments for capital expenditure
of £4.1 million (31 March 2021: £3.2 million; 30 September 2020: £3.1
million).
16. Post balance sheet events
On 17 November 2021 the Group exchanged with regard to four industrial
acquisitions in Haydock, Sandbach and Birkenhead.
The asset in Haydock completed on 19 November 2021 for a net purchase price of
£4.86m.
Two assets in Sandbach also completed on 19 November 2021 for a net purchase
price of £3.59m.
The asset in Birkenhead will complete in December 2021 for a net price of
£11.40m.
On 18 November 2021 the Group drew down a further £9.0m on its RBS revolving
credit facility which has since increased the total balance drawn from £24.5m
to £33.5m as at the signing date. A further £12.2m is intended to be drawn
down ahead of the Birkenhead completion.
EPRA Performance Measures (unaudited)
As recommended by the European Public Real Estate Association ('EPRA'), key
performance measures are disclosed in the section below.
a. EPRA earnings and EPRA earnings per share
Represents total IFRS comprehensive income excluding realised and unrealised
gains/losses on investment property and the share of net valuation profit/loss
in joint ventures, divided by the weighted average number of shares.
Six months to Six months to Year to
30 September 30 September 31 March
2021 2020 2021
£000 £000 £000
(unaudited) (unaudited) (audited)
Total IFRS comprehensive income 33,197 (8,776) 4,542
Adjustments to calculate EPRA earnings:
(Gain)/loss on the disposal of investment property - - (121)
Net unrealised valuation (gain)/loss on investment property (24,689) 13,500 8,286
Share of net valuation profit/(loss) in joint ventures (224) 394 (1,135)
EPRA earnings 8,284 5,118 11,572
Weighted average number of ordinary shares 491,086,039 518,056,505 508,699,880
EPRA earnings per share (pence per share) 1.7 1.0 2.3
b. EPRA Net Reinstatement Value
Six months to
30 September
2021
£000
(unaudited)
IFRS equity attributable to shareholders 323,369
Adjustment in respect of real estate transfer taxes and costs 31,137
EPRA Net Reinstatement Value 354,506
Shares in issue at the end of the period 491,080,301
EPRA NRV per share (pence per share) 72.2
c. EPRA Net Tangible Assets
Six months to
30 September
2021
£000
(unaudited)
IFRS equity attributable to shareholders 323,369
EPRA Net Tangible Assets 323,369
Shares in issue at the end of the period 491,080,301
EPRA NRV per share (pence per share) 65.8
EPRA Performance Measures (unaudited)
d. EPRA Net Disposal Value
Six months to
30 September
2021
£000
(unaudited)
IFRS equity attributable to shareholders 323,369
Adjustment for the fair value of fixed interest rate debt 223
EPRA Net Disposal Value 323,592
Shares in issue at the end of the period 491,080,301
EPRA NRV per share (pence per share) 65.9
Glossary
Alternative performance measure ("APM") please see page 41 for full details of the key APMs used by the Company.
Annualised dividend yield being the dividend paid during the period annualised and expressed as a
percentage of the period end share price.
Articles means the Company's articles of incorporation, as amended from time to time.
Companies Law means the Companies (Guernsey) Law, 2008.
Company is Schroder Real Estate Investment Trust Limited.
Directors means the directors of the Company as at the date of this document.
Disclosure Guidance and Transparency Rules means the disclosure guidance and transparency rules contained within the
FCA's Handbook of Rules and Guidance.
Earnings per share ("EPS") is the profit after taxation divided by the weighted average number of shares
in issue during the period.
Estimated rental value ("ERV") is the Group's external valuers' reasonable opinion as to the open market rent
which, on the date of valuation, could reasonably be expected to be obtained
on a new letting or rent review at a property.
EPRA is the European Public Real Estate Association.
EPRA Earnings per share is the EPRA earnings divided by the weighted average number of shares in issue
during the period.
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 ("NAV") is shareholders' funds divided by the number of shares in 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.
Alternative Performance Measures (unaudited)
The Company uses the following Alternative Performance Measures ("APMs") in
its Interim Report and Consolidated Financial Statements. The Board believes
that each of the APMs provides additional useful information to the
shareholders in order to assess the Company's performance.
Dividend Cover - the ratio of EPRA Earnings (note 3) to dividends paid (note
5) in the period. Earnings excludes capital items such as revaluation
movements on investments and gains or losses on the disposal of investment
properties.
Dividend Yield - the dividends paid, expressed as a percentage, relative to
the share price. To note that for six monthly interim periods this is
annualised.
EPRA Earnings - earnings excluding all capital components not relevant to the
underlying net income performance of the Company, such as the unrealised fair
value gains or losses on investment properties and any gains or losses from
the sales of properties. See note 3 for a reconciliation of this figure.
EPRA Net Tangible Assets - the IFRS equity attributable to shareholders
adjusted to reflect a Company's tangible assets and assumes that no selling of
assets takes place.
EPRA Net Disposal Value - the IFRS equity attributable to shareholders
adjusted to reflect the NAV under an orderly sale of business, where any
deferred tax, financial instruments and certain other adjustments are
calculated to the full extent of their liability.
EPRA Net Reinstatement Value - IFRS equity attributable to shareholders
adjusted to represent the value required to rebuild the entity and assumes
that no selling of assets takes place.
Gross LTV - the value of the external loans unadjusted for unamortised
arrangement costs (note 10) expressed as a percentage of the market value of
property investments as at the Balance Sheet date. The market value of
property investments includes joint venture investments and are as per
external valuations and have not been adjusted for IFRS lease incentive
balances or the fair value of the head lease at Luton.
LTV Net of Cash - the value of the external loans unadjusted for unamortised
arrangement costs (note 10) less cash held (note 9) expressed as a percentage
of the market value of the property investments as at the Balance Sheet date.
The market value of property investments includes joint venture investments
and are as per external valuations and have not been adjusted for IFRS lease
incentive balances or the fair value of the head lease at Luton.
Ongoing Charges (including fund only expenses) - all fund costs expected to be
regularly incurred and that are payable by the Company expressed as a
percentage of the average quarterly NAVs of the Company for the financial
period. Any capital costs, including capital expenditure or
acquisition/disposal fees, are excluded.
Ongoing Charges (including fund and property expenses) - all 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.
Share Discount/Premium - the share price of the Company is derived from buyers
and sellers trading their shares on the stock market. This price is not
identical to the NAV per share of the underlying assets less liabilities of
the Company. If the share price is lower than the NAV per share, the shares
are trading at a discount. Shares trading above the NAV per share are said to
be at a premium. The discount/premium is calculated as the variance between
the share price as at the Balance Sheet date and the NAV per share (page
25 of the 2021 Interim Report and Condensed Consolidated Financial Statements
) expressed as a percentage.
NAV total return - the return to shareholders calculated on a per share basis
by adding dividends paid (note 5) in the period on a time-weighted basis to
the increase or decrease in the NAV per share (page 25 of the 2021 Interim
Report and Condensed Consolidated Financial Statements).
Corporate information
Registered Address Independent Auditor
North Suite 2 Ernst & Young LLP
Town Mills Royal Chambers
Rue Du Pre St. Julian's Avenue
St. Peter Port St. Peter Port
Guernsey GY1 1LT Guernsey GY1 4AF
Directors (All Non-Executive) Property Valuers
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 Broker
Schroder Real Estate Investment Management Limited J.P. Morgan Cazenove
1 London Wall Place 25 Bank Street
London Canary Wharf
EC2Y 5AU London E14 5JP
Administrator Tax Advisor
Langham Hall (Guernsey) Limited Deloitte LLP
North Suite 2 2 New Street Square
Town Mills London
Rue Du Pre EC4A 3BZ
St. Peter Port
Guernsey GY1 1LT Receiving Agent and UK
Transfer/Paying Agent
Company Secretary Computershare Investor Services
Schroder Investment Management Limited (Guernsey) Limited
1 London Wall Place 1st Floor
London Tudor House
EC2Y 5AU Le Bordage
St. Peter Port
Guernsey GY1 1DB
Solicitors to the Company
as to English Law: as to Guernsey Law: Depositary
Stephenson Harwood LLP Mourant Langham Hall UK Depositary LLP
1 Finsbury Circus Royal Chambers 8th Floor
London St. Julian's Avenue 1 Fleet Place
EC2M 7SH St. Peter Port London
Guernsey GY1 4HP EC4M 7RA
ISA
The Company's shares are eligible for Individual Savings Accounts ('ISAs').
FATCA GIIN
5BM7YG.99999.SL.831
Endnotes:
(( i ))( )Winning Cities defined as higher growth locations - Source: Oxford
Economics/Schroders.
(( ii ))( )This is an APM, please see page 42 for details.
iii This is an Alternative Performance Measure ("APM"). Details of the
calculation are included in the APM section on page 42 of the 2021 Interim
Report and Condensed Consolidated Financial Statements.
iv This is an APM. EPRA calculations are included in the EPRA Performance
measures section on page 39 of the 2021 Interim Report and Condensed
Consolidated Financial Statements .
v On-balance sheet borrowings reflect the loan facilities with Canada Life
and RBS without the deduction of unamortised finance costs of £0.6m.
vi This is an APM. Details of the calculation are included on page 42 of
the 2021 Interim Report and Condensed Consolidated Financial Statements.
vii Cash held at balance sheet date including £800,000 of cash held within
the joint ventures.
viii Note Central London is defined by MSCI as City, Mid-Town, West End and
Inner London.
ix The Company listed in July 2004.
x Cash held at balance sheet date including £0.8m of cash held within the
joint ventures
xi Loan balance divided by property value as at 30 September 2021.
xii For the quarter preceding the Interest Payment Date ('IPD'), (rental
income received - void rates, void service charge and void insurance)/interest
paid.
xiii The projected ICR covenant for the contracted four quarters following
the IPD deducting assumed non-recoverable costs (void rates, void service
charge and void insurance)/interest paid) based on the average of the past
four quarters.
xiv Fixed total interest rate for the loan term.
xv Loan balance divided by property value as at 30 September 2021.
xvi For the quarter preceding the Interest Payment Date ('IPD'), (rental
income received - void rates, void service charge and void insurance)/interest
paid.
xvii The projected ICR covenant of the contracted four quarters following
the IPD deducting assumed non-recoverable costs (void rates, void service
charge and void insurance)/interest paid) based on the average of the past
four quarters.
xviii Facility drawn at 30 September 2021 from a total available facility of
£52.5 million.
xix Total interest rate as at 30 September 2021 comprising 3 months LIBOR of
0.082% and the margin of 1.6% at an LTV below 60% and a margin of 1.90% above
60% LTV.
xx This covenant drops to 60% after year three of the five-year term.
xxi Loan balance divided by property value as at 30 September 2021.
xxii For the quarter preceding the Interest Payment Date ('IPD'), (rental
income received - void rates, void service charge and void insurance)/interest
paid.
xxiii The projected ICR covenant of the contracted four quarters following
the IPD deducting assumed non-recoverable costs (void rates, void service
charge and void insurance)/interest paid) based on the average of the past
four quarters.
xxiv Facility drawn at 30 September 2021 from a total available facility of
£52.5 million.
xxv Total interest rate as at 30 September 2021 comprising 3 months LIBOR of
0.082% and the margin of 1.6% at an LTV below 60% and a margin of 1.90% above
60% LTV.
xxvi This covenant drops to 60% after year three of the five-year term.
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