REG - Schroder Real Estate - Interim results for the period ended 30 September
16/11/2022 07:00
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RNS Number : 5280G Schroder Real Estate Inv Trst Ld 16 November 2022
For release 16 November 2022
Schroder Real Estate Investment Trust Limited
('SREIT' / the 'Company' / 'Group')
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2022
STRONG INCOME RETURN UNDERPINS POSITIVE TOTAL RETURN PERFORMANCE AND INCREASED
DIVIDEND, FULLY COVERED BY EPRA EARNINGS
Schroder Real Estate Investment Trust Limited, the actively managed UK
focussed REIT, today announces its unaudited interim results for the six month
period ended 30 September 2022.
Low cost, long-term debt profile supporting earnings growth and further
dividend increase
· Net Asset Value ('NAV') of £366.0 million or 74.8 pps (31 March
2022: £372.2 million, or 75.8 pps)
· EPRA earnings increased 3.6% to £8.6 million (30 September 2021:
£8.3 million)
· Dividends paid during the period increased 20% to £7.8 million, or
1.60 pps, reflecting dividend cover of 110% based on EPRA earnings
· Positive NAV total return performance of 0.8%, reflecting a strong
income return from the underlying portfolio of 2.8% vs. 1.9% for the MSCI
Benchmark Index (the 'Benchmark'), led by active asset management
· Long term debt maturity profile of 11.2 years at an average interest
cost of 2.7%, with 91% of drawn debt fixed rate or capped
· Loan to value, net of all cash, of 31.4% (31 March 2022: 28.6%)
· Continued total return outperformance of the underlying portfolio of
1.8% vs 1.2% for the Benchmark
· 1,969,725 shares acquired for £1.0 million as part of the Company's
share buyback programme
Portfolio outperformance driven by recent higher yielding acquisitions, a
disposal ahead of book value and active asset management
· Acquisition of St. Ann's House, a mixed-use office and retail
asset in Manchester City Centre, for £14.7 million, reflecting a net initial
yield of 7.8%, a reversionary yield of 9.1% and a low average capital value of
£283 per sq ft
· Disposal of a single let industrial asset at Southlink,
Portsmouth for £6.5 million, reflecting a net initial yield of 3.2% and a 33%
premium to the independent valuation as at 31 March 2022
· 33 new lettings, rent reviews and renewals completed since the
start of the period totalling £5.1 million in annualised rental income and
generating £1.9 million per annum of additional rent above the previous
level, including:
o Lease agreements completed at Langley Park Industrial Estate in
Chippenham and the Haywood House office in Cardiff totalling 280,000 sq ft
o 40,000 sq ft lease regear completed post period end with Buckinghamshire
New University in Uxbridge, extending the lease contract by five years at 13%
higher rent
· Rent collection rates remain high with 99% collected for the
quarter ended 30 September 2022
Increased focus on sustainability as a defining characteristic of future
strategy
· Further improvement in the Global Real Estate Sustainability
Benchmark ('GRESB') score, placing the Company first amongst a peer group
comprising seven diversified REITs
· Development of 80,000 sq ft, operational Net Zero Carbon industrial
scheme at Stanley Green, Manchester on track to complete in Q1 2023, with
strong occupier interest generated, further net zero industrial developments
in progress
· Company announced its 'Pathway to Net Zero Carbon', includes
operational whole buildings emissions to be aligned to a 1.5°C pathway by
2030
Alistair Hughes, Chairman of the Board, commented:
"The Company's portfolio is well positioned for this more challenging
environment, with high exposure to sectors and locations experiencing stronger
occupational demand, a granular and resilient tenant base, an above-average
income yield and a near term pipeline of asset management initiatives to
support returns. Crucially, we have a long-term, fixed-rate debt profile, with
no near-term maturities, which positions us favourably and gives us additional
confidence against the uncertain backdrop. Having increased the dividend
earlier this year ahead of the pre-pandemic level, we expect the dividend to
remain fully covered for the current financial year."
Nick Montgomery, Fund Manager, added:
"Despite a volatile and uncertain economic backdrop, good progress has been
achieved over the period delivering on the strategy, resulting in a positive
NAV total return, sustained outperformance of the underlying portfolio and a
further increase in the dividend level, which is fully covered. Whilst a
rising cost of capital will continue to put downward pressure on real estate
values and a recession will challenge businesses, our diversified, higher
yielding portfolio, robust occupier mix and strong balance sheet should
support continued income growth against the volatile and uncertain backdrop."
A webcast presentation for analysts and investors will be hosted today at
09.00am. In order to register, please visit:
https://registration.duuzra.com/form/SREITHalfYearResults2022
(https://registration.duuzra.com/form/SREITHalfYearResults2022)
For further information:
Schroder Real Estate Investment Management Limited 020 7658 6000
Nick Montgomery / Bradley Biggins
Schroder Investment Management Limited (Company Secretary) 020 7658 6000
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 2022 to 30 September 2022
Performance Summary
Property performance
Value of property assets and joint venture assets £532.0m £464.0m £523.5m
Annualised rental income £30.7m £28.7m £30.1m
Estimated open market rental value £35.4m £31.8m £33.8m
Underlying portfolio total return 1.8% 8.9% 23.5%
MSCI benchmark total return (1.2)% 7.7% 19.9%
Underlying portfolio income return 2.8% 3.2% 6.3%
MSCI Benchmark income return 1.9% 2.1% 3.9%
Financial summary
Net Asset Value ("NAV") £366.0m £323.4m £372.2m
NAV per Ordinary Share 74.8p 65.8p 75.8p
EPRA Net Tangible Assets2 (#_ftn1) £366.0m £323.4m £372.2m
IFRS profit for the period £2.7m £33.2m £89.4m
EPRA earnings(2) £8.6m £8.3m £15.7m
Capital values
Share price 46.4p 49.2p 57.8p
Share price discount to NAV(1) (38.0)% (25.2)% (23.7)%
NAV total return(2) 0.8% 11.3% 30.9%
FTSE All-Share Index 3,763.48 4,058.96 4,187.78
Earnings and dividends
IFRS earnings (pps) 0.5 6.8 18.2
EPRA earnings (pps)(2) 1.7 1.7 3.2
Dividends paid (pps) 1.60 1.33 2.83
Annualised dividend yield on 30 September/31 March share price(1) 6.9% 5.4% 4.9%
1 Based on the share price at 30 September 2022 of 46.4p and an annualised
dividend of 3.212 pps.
2 This is an Alternative Performance Measure (“APM”). Details of the
calculation are included in the APM section on page 40 of the 2022 Half Year
Reportof the 2022 Half Year Report .
Bank borrowings
On-balance sheet borrowings1 £175.9m £154.1m £162.3m
Loan to Value ratio ("LTV"), net of all cash2 31.4% 30.7% 28.6%
Ongoing charges
Ongoing charges (including fund and property expenses)(3) 1.99% 2.28% 2.21%
Ongoing charges (including fund only expenses)(3) 1.18% 1.31% 1.26%
1. On-balance sheet borrowings reflect the loan facilities with Canada Life
and RBSI without the deduction of unamortised finance costs of £0.9m.
2. This is an APM. Details of the calculation are included on page 40 of the
2022 Half Year Report.
3. This is an Alternative Performance Measure ("APM"). Details of the
calculation are included in the APM section on page 40 of the 2022 Half Year
Report.
Chairman's Statement
Overview
I am pleased to report the unaudited interim results for the six month period
to 30 September 2022, my first as the new Chairman of Schroder Real Estate
Investment Trust Limited ('SREIT', or 'the Company'). I would like to take
this opportunity to thank my predecessor, Lorraine Baldry, for her
contribution to the Company's success over the past eight years.
The results demonstrate continued progress executing our strategy, sustained
outperformance of the underlying portfolio compared with the MSCI Benchmark
Index (the 'Benchmark'), and a quarterly dividend now 4% ahead of the
pre-pandemic level.
Market conditions and the outlook for UK real estate changed markedly over the
period, with a 3.1% net like-for-like increase in the Company's underlying
portfolio value over the quarter to June contrasting with a 4.0% decline over
the quarter to September. Although a slowdown was expected, and follows a
period of strong growth in the real estate market, more persistent inflation,
political instability and the resultant impact on gilt rates has contributed
to a sharp change in sentiment and an associated decline in liquidity. More
generally, rising interest rates and tighter fiscal policy are squeezing
household real disposable incomes and will reduce business investment, leading
to weaker GDP growth and an increased risk of a prolonged recession.
At this stage, it is difficult to assess how far average UK real estate values
will fall in response to rising interest rates but, assuming the ten year gilt
yield settles at approximately 3.5%, then, based on historical averages,
investors may demand a yield from real estate of 5% to 5.5%. This would imply
a decline in average market values of approximately 15% to 20%. To date we
have indeed seen rapid yield expansion, with lower yielding assets such as
prime south-east industrial and logistics experiencing the sharpest declines.
The next phase of the correction will be more influenced by weaker GDP growth
impacting occupier demand and therefore rental values, leading to a greater
negative impact on secondary assets with poor fundamentals. Market conditions
have led to the listed real estate market experiencing severe share price
declines, with prices at wide discounts to NAV across both diversified and
specialist real estate strategies.
Against this uncertain backdrop, we benefit from owning good quality, higher
yielding, diversified assets focused on higher long term growth sectors. These
characteristics, combined with transaction and asset management activity,
mitigated the negative market valuation impact over the period, with a net
like-for-like capital value decline of the underlying portfolio of -1.0%,
compared with the Benchmark at -3.1%. This underlying movement resulted in a
Net Asset Value ('NAV') as at 30 September 2022 of £366.0 million or 74.8
pence per share ('pps'), a marginal decline of 1.0 pps, or 1.3%, compared with
the NAV as at 31 March 2022.
Encouragingly, an attractive income return of 2.8% (Benchmark 1.9%), combined
with efficient management of expenses, resulted in EPRA earnings of £8.6
million for the period (six months to 30 September 2021: £8.3 million).
Dividends paid during the period totalled £7.8 million or 1.6 pps, which
reflected dividend cover of 110% and, together with the movement in NAV, a
positive NAV total return for the period of 0.8%.
Finally, the Company has today separately announced a quarterly dividend of
0.803 pps, to be paid in the quarter ending 31 December 2022.
Balance sheet
At a time of greater uncertainty and rising interest rates, the Company is
benefitting from relatively low leverage and an average loan maturity of 11.2
years, with a low average total debt cost of 2.7%. This is a competitive
advantage versus peers and the fixed rate term loan's incremental positive
fair value benefit of £17.7 million is not reflected in the Company's NAV.
At the period end, the Company had a net loan to value ('LTV') ratio of 31.4%,
which is within the long-term strategic range of 25% to 35%. Whilst the
Company has significant headroom against loan covenants, a decline in
portfolio value could result in the net LTV ratio exceeding our long-term
strategic range, and this will continue to be closely monitored.
During the period the Company acquired 1,969,725 shares under its share
buyback programme for £1.0 million, which reflected an average discount to
the 31 March 2022 NAV of 33%. The Board continues to review the potential for
further buybacks in the future depending on movements in the share price and
alternative uses for the Company's investment capacity.
Strategy
The strategy remains focused on delivering long term sustainable income growth
and improving the quality of the underlying portfolio through active
management and capital investment. The Manager is well positioned to drive
income and value growth for the portfolio given their 'hospitality' approach
in tenant management and operational excellence in all sectors, combined with
a strong track record in managing sustainability improvements. The market
correction and convergence of returns between the main sectors is
demonstrating the benefits of owning a diversified portfolio, with the ability
and expertise to invest across all sectors.
Transactional activity undertaken over recent years means the portfolio is
increasingly well positioned in terms of sector focus and quality, with a
46.2% weighting to multi-let industrial estates, an 11.8% weighting to retail
warehousing, and a 27.9% weighting to offices, of which 15.9% is concentrated
in London and Manchester, the UK's two dominant urban centres. Primarily due
to the market uncertainty, it has been a quieter period of transactional
activity, with one acquisition of a high yielding mixed used asset in
Manchester city centre, and one small disposal crystallising a material
premium to valuation. Whilst we remain alert to new opportunities, we expect
the investment market to be muted in the near-term.
Good progress has been made capturing rental growth across our multi-let
industrial estates in particular, where supply and demand dynamics remain
highly favourable, with an income return over the period of 2.4% compared with
the Benchmark 'All Industrial' average income return of 1.5%. Alongside
driving income growth, asset management activity has focused on improving the
portfolio's defensive qualities. This included agreeing lease extensions with
major tenants such as Buckinghamshire New University in Uxbridge and IXYS UK
Westcode Limited in Chippenham. Looking ahead, there is significant reversion
to capture across the portfolio, which will be key in partially offsetting the
abovementioned yield expansion.
The weaker economic outlook means we are alert to the potential affordability
challenges that UK business occupiers could face. Our tenant engagement
remains high, and we collected 98% of rent during the period. With our major
tenants operating strong businesses, and rent representing a small percentage
of our tenants' overall overheads, we remain confident that our income is
secure and our assets will remain in demand.
Sustainability
An increased focus on sustainability is a key pillar of our strategy, and
progress has been made over the period to codify this evolution. Our research
and the evidence across the portfolio demonstrates that there is a material
rental and value premium for buildings with green certifications, which should
grow as extreme weather events become more common, as additional regulation
with respect to the leasing of buildings with poor energy efficiency becomes
effective and potential forms of carbon taxation are introduced.
As part of this strategic evolution, the Manager is carrying out a
comprehensive review of the sustainability characteristics of the portfolio
encompassing building fabric, energy systems, services and utilities, climate
risk and resilience, water consumption, waste management, biodiversity and
green infrastructure, transport and mobility, health and wellbeing, community
and social integration. This analysis will inform a baseline score across a
range of quantitative and qualitative factors against which we will measure
future improvements at an asset level to enable us to provide transparent
reporting to stakeholders.
This exercise will also enable us to refine the modelled cost of improvements
required to achieve improved sustainability performance and inform asset
strategies. In addition, it will support progress on our 'Pathway to Net Zero
Carbon', which we announced during the period.
Our strategy to acquire and upgrade existing buildings means a significant
proportion of the portfolio will be undergoing transition whilst
sustainability performance is improved. This is an environmental necessity
and, importantly, should support delivery of enhanced returns through
acquiring, actively managing and transitioning mispriced assets. The Manager's
Report contains practical examples of how we are delivering on these
commitments, notably our operational Net Zero Carbon, 80,000 sq ft industrial
development in Cheadle, Manchester, the first of its type in the North West.
Our approach is already delivering positive results, with the Company
achieving a further improvement in its score in the Global Real Estate
Sustainability Benchmark ('GRESB'), placing it first amongst a group
comprising seven diversified REITs. The Company also retained its Gold level
compliance with the EPRA Sustainability Best Practice Recommendations for the
fifth successive year.
Board succession
Having joined the Board in September 2015, Graham Basham will retire as
independent Non-Executive Director and Chairman of the Management Engagement
Committee on 15 November 2022. Graham has made a significant contribution to
the Company, notably on matters relating to the Company's structure and
administration. On behalf of my fellow directors, I would like to thank Graham
for his service over the past seven years.
We are also today announcing the appointment of Alexandra Innes as an
independent Non-Executive Director, with effect from 16 November 2022.
Alexandra will be a member of the Audit and Nomination Committees, and will
Chair the Management Engagement Committee. Alexandra has a strong track record
across investment banking and investment management, and has relevant
non-executive roles with the Bank of England, Securities Trust of Scotland PLC
and Knight Frank LLP.
As part of the succession process, the Board also asked the appointed
specialist search firm to review Board remuneration levels, which were last
reviewed and increased in 2015. The search firm advised that the current
directors fees were below the level of comparable real estate investment
trusts. To align with recognised peers, directors fees have been increased to
£55,000 for the Chairman, £40,000 for the Senior Independent Director and
£35,000 for the other Directors, with an additional £5,000 be paid to the
Chairman of the Audit Committee and Management Engagement Committee
respectively to reflect additional responsibilities, with effect from 1
November 2022.
Independent valuers
It is expected that the Standards and Regulation Board of the Royal
Institution of Chartered Surveyors will adopt the recommendations relating to
governance and valuer rotation outlined in the independent review of January
2022, which includes mandatory rotation of valuers by clients after a period
of between five to eight years. In preparation for these changes, and given
the Company's independent valuer, Knight Frank LLP, has been in place since
IPO in 2004, notice of termination has been served with their final valuation
to be 31 December 2022. A comprehensive tender process is progressing for a
replacement valuer, with a new appointment to be confirmed by the Board before
the end of the calendar year.
Outlook
The UK economy is facing a recession, with rising interest rates and
government fiscal tightening intensifying the squeeze on consumers real
disposal incomes. This will most likely lead to a period of declining real
estate values, however, given the lower levels of new development in progress
and an apparent healthy banking system, the correction will be relatively
swift compared with past cycles.
The Company's portfolio is well positioned for this more challenging
environment, with high exposure to sectors and locations experiencing stronger
occupational demand, a granular and resilient tenant base, an above-average
income yield and a near term pipeline of asset management initiatives to
support returns.
Crucially, the Company has a long-term, fixed-rate debt profile, with no
near-term maturities, which positions the Company favourably versus the
immediate peer group and gives us additional confidence against the uncertain
backdrop. Having increased the dividend earlier this year ahead of the
pre-pandemic level, we expect the dividend to remain fully covered for the
current financial year.
Finally, as sustainability considerations become even more important for
investors and occupiers, we are making good progress evolving our strategy to
drive more sustainable, long-term returns.
Alastair Hughes
Chairman
Schroder Real Estate Investment Trust Limited
15 November 2022
Investment Manager's Report
Overview
"These resilient results are the outcome of disciplined investment decisions
and active management of the portfolio. Conviction in our strategy has
resulted in a good quality, diversified portfolio that is weighted towards
parts of the UK real estate market experiencing stronger occupier demand with
opportunities to add value through asset repositioning and development. Whilst
a rising cost of capital will continue to put downward pressure on real estate
values and a recession will challenge businesses, our diversified, higher
yielding portfolio, robust occupier mix and strong balance sheet should
support continued income growth against the volatile and uncertain backdrop."
Schroder Real Estate Investment Trust Limited's ('SREIT', or 'the Company')
Net Asset Value ('NAV') as at 30 September 2022 was £366.0 million or 74.8
pence per share ('pps'), compared with £372.2 million, or 75.8 pps, as at 31
March 2022. This reflected a marginal decrease over the interim period of 1.0
pps or -1.3%. During the period, dividends totalling £7.8 million were paid,
which resulted in a positive NAV total return of 0.8%. A detailed analysis of
the NAV movement is set out in the table below:
£m PPS
NAV as at 31 March 2022(4) 372.2 75.8
Unrealised change in the valuations of the direct real estate portfolio and (0.9) (0.2)
joint ventures(1)
Capital expenditure(2) (5.4) (1.1)
Acquisition costs (0.9) (0.2)
Realised gain on disposal, net of disposal costs 1.5 0.3
EPRA earnings(3) 8.6 1.7
Dividends paid (7.8) (1.6)
Others (0.3) -
NAV as at 30 September 2022 (excluding the share buyback) 367.0 74.7
Share buyback (1.0) 0.1
NAV as at 30 September 2022(5) 366.0 74.8
1. Prior to all capital expenditure, acquisition costs and movement in
IFRS 16 lease incentives.
2. Comprises capital expenditure of £5.2m on the directly held
portfolio and £0.2m invested for the joint ventures.
3. EPRA earnings as per the reconciliation on page 37 of the 2022 Half.
4. The calculation of pence per share is based on shares in issue as
at 31 March 2022 of 491,080,301.
5. The calculation of pence per share is based on shares in issue as
at 30 September 2022 of 489,110,576.
The underlying portfolio, including joint ventures, decreased in value by 1.0%
on a like-for-like, net of capex, basis over the six month period to 30
September 2022.
£5.4 million of capital expenditure was invested in asset management and
redevelopment projects, including joint ventures, that should drive capital
growth and future rental increases over the medium to longer term. Acquisition
costs totalling £900,000 were incurred in May 2022 relating to the £14.7
million gross headline purchase price of St. Ann's House, a mixed-use office
and retail asset in Manchester, which was subsequently valued at £14.8
million as at 30 September 2022.
In June 2022, Southlink, a single let industrial asset in Portsmouth, was sold
for £6.5 million, which compared with the 31 March 2022 independent valuation
of £4.9 million and reflected a net initial yield of 3.2%. The asset
generated an ungeared total return of 13.2% per annum since acquisition in
July 2004.
EPRA earnings for the period totalled £8.6 million, or 1.7 pps, an increase
of £300,000, or 3.6%, on the corresponding period in the prior financial year
of £8.3 million. This increase has been driven by asset management-led rental
value growth, a positive contribution from the off-market industrial portfolio
acquired in December 2021, and the St. Ann's House acquisition.
The total return from the underlying portfolio was 1.8% for the six month
period to 30 September 2022, compared with the MSCI Benchmark Index (the
'Benchmark') of -1.2%. The portfolio performance comprised a 2.8% income
return and a -1.0% net change in capital values, with both components
outperforming the Benchmark at 1.9% and -3.1% respectively. The portfolio is
ranked on the 10(th) percentile of the Benchmark since the Company's launch in
2004.
Between 28 July 2022 and 15 September 2022 the Company acquired 1,969,725
shares under its share buyback programme for £1.0 million, which reflected an
average of 50.6 pps and a discount to the 31 March 2022 NAV of 33%.
Strategy
The Company aims to provide shareholders with an attractive level of income
with the potential for long term, sustainable income and capital growth. The
strategy to deliver this includes:
- Applying a research-led approach to determine attractive sectors
and locations in which to invest in commercial real estate;
- Maximising performance by increasing exposure to larger assets
with strong fundamentals and inherent opportunities for active management and
development;
- Driving income and value growth through a hospitality approach in
tenant management (optimising tenant services and lease terms) and operational
excellence in all sectors (optimising operations in the assets, minimising use
of scarce resources and waste);
- Applying our integrated sustainability and ESG approach at all
stages of the investment process and asset lifecycle, targeting improvement in
the sustainability performance of assets to manufacture the green premium for
shareholders; and
- Controlling costs and maintaining a strong balance sheet with a
loan to value, net of cash, within the long term target range of 25% to 35%.
The following progress has been made delivering on the strategy:
- Increased allocation to higher growth sectors, with the industrial
sector representing 46.2% of the portfolio value, largely through exposure to
multi-let estates (Benchmark 33.5%). The remaining portfolio is comprised of
retail warehousing of 11.8% (Benchmark 9.7%) and good quality offices located
in higher growth Winning Cities such as in London, Manchester and Edinburgh of
27.9% (Benchmark 25.2%);
- The acquisition of St. Ann's House, a higher yielding, mixed-use
office and retail asset in Manchester City Centre, which demonstrates the
benefits of being able to source investment opportunities across all sectors;
- Portfolio outperformance driven by active asset management,
including completion of major lease agreements at Langley Park Industrial
Estate in Chippenham and the Haywood House office in Cardiff, conditional
lease agreements also exchanged for two new Starbucks drive-thru restaurants
at retail parks in Bedford and Milton Keynes, and letting all warehouse space
at Valley Park, Birkenhead which was acquired with void in December 2021. Post
period end, a major lease regear was completed with Buckinghamshire New
University in Uxbridge, which extended the lease contract by five years at a
higher rent;
- In aggregate, 33 new lettings, rent reviews and renewals completed
since the start of the period totalling £5.1 million in annualised rental
income and generating £1.9 million per annum of additional rent above the
previous level;
- Rent collection rates at pre-pandemic levels, proving the
resilience of the portfolio. Good progress has been made collecting historical
arrears through constructive engagement with tenants;
- Continued investment to deliver operational excellence in larger
assets offering higher returns, with progress on key initiatives such as the
construction of an operational Net Zero Carbon warehouse scheme at Stanley
Green Trading Estate in Cheadle, Manchester and planning secured for a new
operational Net Zero Carbon warehouse at Stacey Bushes in Milton Keynes;
- Enhanced ESG performance across the portfolio with
sustainability-led building improvements, improved tenant data collection, and
positive engagement with occupiers;
- This led to a further improvement in the Global Real Estate
Sustainability Benchmark ('GRESB') score to 77 out of 100 in 2022 (2021: 75),
achieving the maximum possible result for the Management aspects of the
assessment and placing SREIT first amongst a group comprising seven
diversified REITs (2021: second of eight);
- Announcement of the Company's pathway to Net Zero Carbon;
- Opportune timing of refinancing the revolving credit facility
('RCF'), fixing a margin of 1.65% (previously 1.60%), increasing the facility
size to £75 million and extending the maturity by four years; this reduces
refinancing risk and further enhances the Company's already strong balance
sheet; and
- Efficient cost control leading to ongoing charges (including fund
and property expenses) declining to 1.18% compared to 1.31% for the
corresponding period in the prior financial year.
Rent collection
The diversification and granularity of the underlying rental income, and a
high level of occupier engagement, has supported improving rent collection
rates with 99% of the contracted rents collected for the quarter to 30
September 2022. The breakdown between sectors is 99% of office rent collected,
98% of industrial rent collected and 98% of retail, leisure and other rent
collected.
The Company remains in active dialogue with its tenants for historical arrears
which totalled £3.2 million, net of VAT, at the period end, of which
£600,000 is categorised as a bad debt. This compares to £4.2 million and
£800,000 respectively as at 30 September 2021.
Portfolio performance
As noted above, the underlying portfolio continues to outperform the
Benchmark, driven by portfolio sector allocations, active management and a
high income return. The table below shows performance to 30 September 2022:
SREIT Total Return MSCI Benchmark Total Return Relative
Period to 30 September 2022 Six months (%) Three years (% p.a.) Since IPO* (% p.a.) Six months (%) Three years (% p.a.) Since IPO* (% p.a.) Six months (%) Three years (% p.a.) Since IPO* (% p.a.)
Retail 4.3 3.0 4.6 0.6 0.7 3.7 3.7 2.3 0.9
Office 0.0 4.9 7.7 -1.1 2.0 6.8 1.2 2.9 0.8
Industrial 1.8 18.3 11.1 -3.2 16.7 10.1 5.2 1.4 0.9
Other 4.5 4.5 3.8 0.0 3.3 7.2 4.5 1.1 -3.2
All sectors 1.8 9.3 7.9 -1.2 6.1 6.5 3.1 3.0 1.3
*IPO in July 2004
Real estate portfolio
As at 30 September 2022, the portfolio comprised 42 properties valued at
£532.0 million. This includes the share of joint venture properties at City
Tower in Manchester and the University of Law in Bloomsbury, London.
The portfolio generated rental income of £30.7 million per annum, reflecting
a net initial yield of 5.4%, which compared with the Benchmark of 4.1%. The
portfolio also benefits from fixed contractual annualised rental income
uplifts of £900,000 per annum over the next 24 months.
The independent valuers' estimated rental value ('ERV') of the portfolio is
£35.4 million per annum, reflecting a reversionary income yield of 6.6%,
which compares favourably with the Benchmark at 4.8%. As an asset under
development, the independent valuer is yet to reflect the expected rent of
£1.3 million per annum to be generated by the operational Net Zero Carbon
scheme at Stanley Green Trading Estate in Cheadle, Manchester.
At the period end the portfolio void rate was 8.8%, calculated as a percentage
of estimated rental value. This compares with the Benchmark void rate of 7.9%.
The portfolio weighted average lease length, calculated to the earlier of
lease expiry or break, is 5.1 years.
Approximately 15% of the portfolio by contracted rent is inflation linked,
typically structured as five yearly reviews to either the Retail Price Index
('RPI') or the Consumer Price Index ('CPI'). In some cases these
inflation-linked leases can also be reviewed to open market value, if higher,
or include fixed guaranteed increases. A further 5% of rent benefits from
fixed uplifts without an inflation link. The proportion of the portfolio with
inflation-linked leases should increase with ongoing asset management
activity.
The tables below summarise the portfolio information as at 30 September 2022.
The property values and weightings represent the period end valuations as
determined by the independent valuers as at 30 September 2022:
Top 15 properties by value Sector Value (£m) 1 (#_ftn2) % of portfolio value
1 Milton Keynes, Stacey Bushes Industrial Estate Industrial 61.1 11.5
2 Leeds, Millshaw Park Industrial Estate Industrial 56.0 10.5
3 London, Bloomsbury, The University of Law Campus (50% share) Office/university 41.5 7.8
4 Manchester, City Tower (25% share) Office/hotel/retail/leisure/car park 38.7 7.3
5 Bedford, St. John's Retail Park Retail Warehouse 34.7 6.5
6 Cheadle, Stanley Green Trading Estate Industrial 29.5 5.5
7 Chippenham, Langley Park Industrial Estate Industrial 26.8 5.0
8 Norwich, Union Park Industrial Estate Industrial 24.9 4.7
9 Leeds, Headingley Central Retail/hotel/leisure 23.8 4.5
10 Manchester, St Ann's House Office/retail 14.8 2.8
11 Telford, Horton Park Industrial Park Industrial 14.7 2.8
12 Uxbridge, 106 Oxford Road Office/university 13.1 2.5
13 Birkenhead, Valley Park Industrial Estate Industrial 13.0 2.4
14 Edinburgh, The Tun Office 11.9 2.2
15 Salisbury, Churchill Way Retail Warehouse 10.7 2.0
Total as at 30 September 2022 415.2 78.0
Sector weighting by value as at 30 September 2022 Like-for-like net of capex capital growth for the six month period ended 30
September 2022
SREIT(1) Benchmark(1) SREIT Benchmark
South East 11.5% 20.9%
Rest of UK 34.7% 12.6%
Industrial 46.2% 33.5% -0.5% -4.5%
City 0.0% 3.6%
Mid-town and West End 7.8% 6.6%
Rest South East 4.4% 7.9%
Rest of UK 15.7% 7.2%
Offices 27.9% 25.2% -3.1% -2.9%
Retail warehouse 11.8% 9.7% 3.5% -0.3%
South East 0.7% 6.4%
Rest of UK 7.3% 3.2%
Standard retail 7.9% 9.6% -2.1% -3.5%
Standard retail by ancillary/single use
- Retail ancillary to main use 5.1% -
- Retail single use 2.8% -
Other 6.1% 16.8% -0.5% -2.0%
Shopping centres - 1.8%
Unattributed indirects - 3.4%
Regional weighting by value as at 30 September 2022
SREIT Benchmark
Central London 7.8% 19.1%
South East excluding Central London 18.5% 34.1%
Rest of South 10.4% 15.5%
Midlands and Wales 21.6% 13.1%
North 39.5% 14.0%
Scotland 2.2% 4.1%
Northern Ireland 0.0% 0.2%
1. Columns do not sum due to rounding.
Rental income is diverse and as at 30 September 2022 comprised 314 tenants,
including the tenants of properties held by joint ventures. The largest and
top fifteen tenants represent 6.51% and 32.15% respectively of the portfolio,
calculated as a percentage of annual rent:
Top 15 tenants by annual rent Annual rent £ million % of total annual rent(1)
University of Law Limited 2.00 6.51%
Siemens Mobility Limited 1.22 3.97%
Buckinghamshire New University 1.15 3.75%
The Secretary of State 0.59 1.92%
Matalan Retail Limited 0.57 1.86%
Express Bi Folding Doors Limited 0.54 1.76%
TJX UK t/a HomeSense 0.51 1.66%
Jupiter Hotels Limited 0.46 1.50%
Premier Inn Hotels Limited 0.42 1.37%
Lidl Great Britain Limited 0.42 1.37%
Schneider Electric Limited 0.41 1.34%
Ingeus (UK) Limited 0.41 1.34%
Wickes Building Supplies Limited 0.40 1.30%
Balfour Beatty Group Limited 0.39 1.27%
Morgan Sindall Construction & Infrastructure Limited 0.38 1.24%
Total as at 30 September 2022 9.87 32.15%
1. Column does not sum due to rounding.
Transactions
Manchester, St. Ann's House (Mixed-Use Office and Retail)
St. Ann's House in Manchester was acquired on 27 May 2022 for a gross headline
price of £14.7 million, reflecting a net initial yield of 7.8%, a
reversionary yield of 9.1% and a low average capital value of £283 per sq ft.
The mixed-use office and retail asset generates £1.22 million per annum of
headline rent compared with an ERV of £1.27 million.
The freehold, 51,885 sq ft building, is 97% occupied by ERV and comprises
40,277 sq ft of office space over five upper floors with five retail units at
the ground floor level and ancillary basement space. It is prominently located
on St. Ann's Square, near to the prime retail core. St. Ann's Square features
a listed church, the Royal Exchange theatre, a mix of office occupiers and
high-quality luxury retail as well as leisure operators. The building benefits
from its close proximity to two tram stations.
The office space is fully let to four office tenants at an average rent of
£18.48 per sq ft, with the potential to increase rental levels through
refurbishment and improving sustainability performance. There is also the
opportunity to enhance income by offering fitted out office space.
The appeal of St. Ann's Square to high quality luxury retailers is reflected
in the current tenant mix with complementary retailers located in close
proximity. During the pandemic rents were rebased by the previous landlord and
there are currently no arrears. At acquisition, the tenants were Watches of
Switzerland, Russell & Bromley and Space NK. Since acquisition, we have
let a unit to David M Robinson Limited, a north-west based retailer of luxury
watches and jewellery, for £70,000 per annum, or £76.75 per sq ft, which is
in line with ERV and reflects 69% of the pre-pandemic rent on a per square
foot basis.
The weighted average unexpired lease term is 2.8 years to earliest termination
and 5.3 years to lease expiries. 58% of the property by floor area currently
has an EPC rating of 'B' with the remainder rated 'C'.
The strategy is to undertake a rebranding of the building, introduce
additional amenities for the offices such as bike and shower facilities and
refurbish the property as floors become available with a focus on improving
sustainability performance. This will increase the rental tone of the offices.
We will aim to leverage the close proximity of luxury jewellers and watch
retailers to attract similar occupiers to the subject asset at higher rents.
Portsmouth, Southlink (Industrial)
Southlink, a 26,975 sq ft single let industrial asset in Portsmouth, was sold
on 24 June 2022 for £6.5 million. The price compares with the 31 March 2022
independent valuation of £4.9 million and reflects a net initial yield of
3.2%.
Situated within the Walton Road Industrial area, Southlink was acquired in
July 2004. The asset produced a net rent of £225,000 per annum with a lease
term of 2.4 years. Based on the disposal price, the asset has generated an
ungeared total return of 13.2% per annum since acquisition, compared with the
All Property MSCI Benchmark for the same period of 6.8% per annum, and MSCI
All Industrial for the same period of 10.6% per annum.
Active asset management
Set out below are examples of ongoing active management initiatives that
should support continued outperformance of the underlying portfolio from both
a financial and sustainability perspective.
Manchester, Cheadle, Stanley Green Trading Estate (Industrial)
Asset overview and performance
Stanley Green Trading Estate in Cheadle, Manchester was acquired in December
2020 for £17.3 million. The asset comprises 150,000 sq ft of trade counter,
self-storage and warehouse accommodation across 14 units on a nine acre site,
with an adjoining 3.4 acre development site. The site was acquired with a
historic planning consent for 48,000 sq ft of trade counter and warehouse
space, which we have subsequently increased to 80,000 sq ft.
As at 30 September 2022 the valuation was £29.5 million, reflecting a net
initial yield of 3.1% and a reversionary yield of 3.6% (4.7% and 5.8%
respectively excluding development land). Over the interim period the asset
delivered a total return of 3.9% which compared with MSCI All Industrial over
the same period of -3.2%.
Asset strategy
The strategy over the interim period was to crystallise higher rents, develop
an 80,000 sq ft, operational Net Zero Carbon ('NZC') scheme on the adjoining
3.4 acre site and begin marketing to pre-let the new accommodation.
Key activity
- The speculative development of 11 warehouse and trade units is
progressing with £4.9 million of capital expenditure incurred to the period
end, with a further £3.8 million allocated. The development is on budget and
scheduled to complete in early 2023. The target rental income is £1.3 million
per annum, or £16.00 per sq ft. Pre-lettings are in legal negotiations with
prospective tenants relating to 28% of the floor space, on terms that exceed
the original underwriting assumptions.
- Negotiations are progressing with a number of occupiers to re-gear
their leases across the existing trading estate which should support continued
income growth.
Chippenham, Langley Park Industrial Estate (Industrial)
Asset overview and performance
Langley Park Trading Estate in Chippenham was acquired in December 2020 for
£19.3 million and comprises a multi-let industrial estate comprising 400,000
sq ft of warehouse and ancillary office accommodation on a large site of 28
acres located close to Chippenham town centre. As at 30 September 2022, the
valuation of £26.8 million reflected a net initial yield of 6.9% and a
reversionary yield of 7.3%. Over the period the asset delivered a total return
of 0.9%, which compared with the MSCI All Industrial Benchmark over the same
period of -3.2%.
Asset strategy
The strategy over the period was to drive net income growth, the average
unexpired lease term, and quality of accommodation across the estate.
Key activity
- Siemens Mobility Limited ('Siemens') rent review completed at
£1.2 million per annum or £4.64 per sq ft, reflecting a 26% increase in
contracted rental income. Following completion of the rent review, which was
backdated to June 2021, Siemens became the Company's second largest tenant.
- A new ten year lease renewal without breaks has completed with
IXYS UK Westcode Limited ('IXYS'), the UK subsidiary of Littelfuse, a global
manufacturer which has provided a parent company guarantee. The rent is
£465,000 per annum, or £5.50 per sq ft, reflecting a 31% increase over the
current contracted rent of £355,000 per annum. IXYS receive 12 months' rent
free which ends in December 2023, and will receive a contribution to repair
works up to the value of £250,000 if undertaken within two years of lease
completion. The lease includes a rent review at year five to the higher of
open market value or RPI, with a collar of 1% per annum and a cap of 5% per
annum.
- The next phase of the business plan at Langley Park is to consider
longer term development plans which could involve the creation of new space
for existing tenants. Any development of new warehouse units would be to an
operational Net Zero Carbon ("NZC") standard and a pre-planning application to
develop 130,000 sq ft of space has been submitted to Wiltshire County Council.
Valley Road Industrial Estate, Birkenhead (Industrial)
Asset overview and performance
Valley Road Industrial Estate in Birkenhead was acquired in November 2021 for
£11.4 million, which reflected 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 ten-acre
estate comprises 190,000 sq ft of warehouse space and ancillary offices across
15 units. The estate is located close to Junction 1 of the M53 and features a
manned secure access, low site cover and good circulation. As at 30 September
2022, the valuation of £13.0 million reflected a net initial yield of 4.8%
and a reversionary yield of 6.7%. Over the period the asset delivered a total
return of 1.7%, which compared with the MSCI All Industrial Benchmark over the
same period of -3.2%.
Asset strategy
The strategy during the period was to let the void warehouse space at or above
ERV and finalise a plan to develop the ancillary offices to enable them to be
let.
Key activity
- A new five-year lease has been agreed with Balfour Beatty Group
Limited for six units totalling 10,577 sq ft, at a total rent of £84,616 per
annum, or £8.00 per sq ft. At year five, the lease includes a tenant only
break option and a rent review to the higher of open market value or CPI, with
a collar of 1.5% and a cap of 3.5% per annum. This letting is in line with the
30 September 2022 ERV.
- A new five-year lease has been agreed with Transport for Wales
Rail Ltd for a 6,275 sq ft unit at £44,000 per annum, or £7.01 per sq ft, in
line with the 30 September 2022 ERV.
- A new five-year lease has completed with SM Service Centre Limited
for a 1,605 sq ft unit at £13,700 per annum, or £8.54 per sq ft, in line
with the 30 September 2022 ERV.
- As a result of the above, the warehouse element of the site is
fully let, completing a key objective of the business plan at acquisition.
106 Oxford Road, Uxbridge (Office being used as a university)
Asset overview and performance
106 Oxford Road in Uxbridge is let to the Company's third largest tenant, the
Buckinghamshire New University ('BNU'), generating £1.15 million per annum
with a tenant break option in November 2023. BNU is a public university with
campuses in High Wycombe, Aylesbury and the subject asset, where teaching is
focussed on nursing and healthcare, including a range of working wards,
simulation labs and operating theatres. As at 30 September 2022, the valuation
of £13.1 million reflected a net initial yield of 8.24% and a reversionary
yield of 6.8%, due to the independent valuers adopting an office rental value
of £950,000. Over the period the asset delivered a total return of -8.4%,
which compared with the MSCI All Office Benchmark over the same period of
-1.1%. This was due to risk associated with the tenant break option.
Asset strategy
The strategy during the period was to understand the tenant's longer term
strategy and mitigate the risk of the tenant break option in November 2023.
Key activity
- Lease variation completed on 25 October 2022 that removes the
tenant break option in November 2023 and provides certainty of income until
lease expiry in November 2028. The tenant received nine months rent free, and
the rent increases from £1.15 million per annum to a guaranteed £1.3 million
in January 2024, becoming the Company's second largest tenant. The independent
valuer estimated that the value on completing the lease regear, net of the
rent free, would be in the region of £14 to £14.5 million.
- Having completed the regear, we are exploring the potential for a
longer term lease commitment in return for the Company carrying out more
significant sustainability improvements to the building, which would be in
line with BNUs own ESG-related commitments.
Sustainability and Responsible Investment
The Board and Schroders Capital Real Estate believe that a successful
sustainable investment programme should deliver enhanced returns to investors,
improved business performance to tenants and tangible positive impacts to
local communities, the environment and wider society.
Offering occupiers resource-efficient and flexible space is critical to ensure
our investments are fit for purpose and sustain their value over the long
term. As a landlord, we have the opportunity to help reduce running costs for
our occupiers, increase employee productivity and wellbeing, and contribute to
the prosperity of a location through building design and public realm.
The 80,000 sq ft warehouse development under construction at Stanley Green,
Cheadle is an example of our sustainability led approach. The scheme will be
delivered to BREEAM Excellent, EPC A+ rating and operational NZC specification
and expected to be the first to achieve this status in the North West.
Operational NZC will be driven by the use of photovoltaics, recycled
materials, insulated cladding to mitigate heat loss and installation of LED
lighting. Electric vehicle charging and cycle storage facilities will be
installed to promote active travel. As part of the Investment Manager's
Sustainable Refurbishment and Redevelopment guide, the contractor is
encouraged to use local suppliers to boost local employment. Eight
apprenticeship schemes have been undertaken and work experience opportunities
are being advertised to local students. Local community projects and charities
have been supported through donations and industry talks.
Active management at Haywood House, an office in Cardiff, has led to occupancy
increasing from 77% to 93% during the period, at higher rents and with
improved sustainability performance. Following a refurbishment of part of the
asset, where we installed a dedicated variable refrigerant flow ('VRF')
air-conditioning system and LED lighting, increasing the EPC rating from an
'E' to a 'B', we moved an existing tenant from elsewhere in the property to
this space at a rent 45% ahead of the ERV at the beginning of the period. The
space vacated has now been let to the University of Wales at a rent 9% ahead
of the ERV at the beginning of the period.
As previously noted, a continuing focus on sustainability will be a defining
characteristic of our future strategy. As described in the Chairman's
Statement, progress has been made over the period to codify this evolution. In
addition, during the period we announced our 'Pathway to Net Zero Carbon',
this includes the following commitments:
· Operational whole buildings emissions to be aligned to a 1.5°C
pathway by 2030.
· Embodied emissions for all new developments and major renovations to
be net zero by 2030.
· Operational Scope 1 and 2 (landlord) emissions to be net zero by
2030.
· Operational and embodied whole building (scope 1, 2 and 3 - landlord
and tenant) emissions to be net zero by 2040.
These are ambitious targets, as our strategy to acquire and upgrade existing
buildings means a proportion of the portfolio will be undergoing a transition
whilst sustainability performance is improved.
Finance
The Company has two loan facilities, a £129.6 million term loan with Canada
Life and a £75.0 million RCF with Royal Bank of Scotland International
('RBSI'), of which £46.3 million was drawn at the period end. The RBSI loan
has an interest rate cap for £30.5 million that comes into effect if GBP 3
month SONIA exceeds 1.5%. The cap became effective in August and expires on 3
July 2023. Properties with combined values of £314.4 million and £140.4
million are secured against the Canada Life and RBSI loan facilities
respectively.
In addition to the properties secured against the Canada Life and RBSI loan
facilities, there are unsecured properties with a value of £77.3 million and
cash of £8.9 million(1). This results in a loan to value ratio, net of cash,
of 31.4% at an average interest cost of 2.7% (including the benefit of the
cap), and a long weighted maturity profile of 11.2 years.
£129.6 million term loan with Canada Life
The Company has significant headroom with loan to value ('LTV') and interest
cover ratio ('ICR') covenants as summarised below.
Lender Loan (£m) Maturity Total interest rate (%) Asset value (£m) Cash LTV ratio (%)(6) LTV ratio covenant (%)(6) ICR (%)(7) ICR covenant (%)(7) Projected ICR (%)(4) Projected ICR covenant (%)(4)
(£m)
Facility A 64.8 15/10/2032 2.4 314.4 0.0 41.2 65 530 185 502 185
Facility B 64.8 15/10/2039 2.6
Canada Life Term Loan 129.6 2.5(5)
- Net LTV on the secured assets against this loan is 41.2%. On
this basis the properties charged to Canada Life could fall in value by 37%
prior to the 65% LTV covenant being breached;
- The interest cover ratio is 530% based on actual net rents for
the quarter to 30 September 2022. A 65% fall in net income could be sustained
prior to the loan covenant of 185% being breached; and
- The projected interest cover ratio is 502% based on projected
net rents for the year to 30 September 2023. A 58% fall in net income could be
sustained prior to the loan covenant of 185% being breached; and
- After utilising available cash and uncharged properties, the
valuation and actual net rents could fall by 53% and 71% respectively prior to
either the LTV or interest cover ratio covenants being breached.
£75.0 million revolving credit facility ('RCF') with RBSI
The Company has headroom with both LTV and ICR covenants as summarised below:
Lender Loan/ amount drawn (£m) Maturity Total interest rate (%) Asset value (£m) LTV ratio (%)(6) LTV ratio covenant (%)(6) Projected ICR (%)(8) Projected ICR covenant (%)(8)
RBSI RCF 75.0/ 46.3(9) 06/06/2027 3.8(10) 140.4 33.0 65(11) 310 250
- Net LTV on the secured assets against this loan is 33.0%. On
this basis the properties charged to RBSI could fall in value by 49% prior to
the 65% LTV covenant being breached;
- The projected interest cover ratio is 310% based on actual net
rents for the quarter to 30 September 2022. A 19% fall in net income could be
sustained prior to the loan covenant of 250% being breached, however, five
additional assets are in the process of being secured against the RBSI loan
facility which will increase the projected interest cover ratio materially;
- After utilising available cash and uncharged properties, the
valuation and actual net rents could fall by 74% and 54% respectively prior to
either the LTV or projected interest cover ratio covenants being breached; and
- Replacement hedging options are being considered for the interest
rate cap that expires in July 2023.
1. Cash held at the balance sheet date includes £700,000 of cash that
is held within the joint ventures.
2. Loan balance divided by the property values as at 30 September 2022.
3. For the quarter preceding the Interest Payment Date ('IPD'), (rental
income received - void rates, void service charge and void insurance)/interest
paid.
4. The projected ICR covenant for the contracted four quarters following
the IPD deducting assumed non-recoverable costs (void rates, void service
charge and void insurance)/interest paid, based on the average of the past
four quarters.
5. Fixed total interest rate for the loan term.
6. Loan balance divided by the property values as at 30 September 2022.
7. For the quarter preceding the IPD, (rental income received - void
rates, void service charge and void insurance)/interest paid.
8. The projected ICR covenant of the contracted four quarters following
the IPD deducting assumed non-recoverable costs (void rates, void service
charge and void insurance)/interest paid) based on the average of the past
four quarters.
9. Facility drawn as at 30 September 2022 from a total available
facility of £46.3 million.
10. Total interest rate as at 30 September 2022 comprising a three-month
SONIA rate of 2.19% and the margin of 1.60% at a LTV below 60%. Should the LTV
be above 65%, the margin increases to 1.90%.
11. LTV ratio covenant of 65% for years one to three, then 60% for years
four and five.
Outlook
Despite a volatile and uncertain economic backdrop, good progress has been
achieved over the period delivering on the strategy, resulting in a positive
NAV total return, sustained outperformance of the underlying portfolio and a
further increase in the dividend level, which is fully covered.
Higher yielding acquisitions in sectors and regions with stronger occupier
demand, sustainability led value add investments into the existing portfolio,
and an active approach to asset management should lead to further income
growth. We have a robust and diverse tenant base that we expect to be
resilient through a recessionary period.
The strength of the balance sheet, with long term, mainly fixed rate, debt is
a key competitive advantage and there will be limited impact on the Company
from rising interest rates.
We are in a challenging period with persistent inflation leading to higher
interest rates, market volatility and lower levels of economic growth. Whilst
valuations will decline, the combination of a clear strategy with increased
emphasis on sustainability, a diversified portfolio and a strong balance sheet
should enable us to maintain relative outperformance compared with our peers
and continue delivering an attractive and growing income return.
Nick Montgomery
Fund Manager
15 November 2022
Responsibility Statement of the Directors in respect of the Interim Report
The Board is responsible for preparing the Interim Report and Consolidated
Financial Statements.
The Board is also responsible for the Company's system of risk management and
internal controls, and for reviewing its effectiveness.
Principal risks and uncertainties
The principal risks and uncertainties with the Company's business relate to
the following risk categories: investment policy and strategy; implementation
of investment strategy, economic and property market; custody; gearing and
leverage; accounting, legal and regulatory; valuation; service provider; and
health and safety. A detailed explanation of the risks and uncertainties in
each of these categories can be found on pages 26 to 29 of the Company's
published Annual Report and Consolidated Financial Statements for the year
ended 31 March 2022.
Since the Company's Annual Report and Consolidated Financial Statements was
published in June 2022, the Board has noted that property market risk and
interest rate risk have increased materially. Other than as outlined above,
the principal risks and uncertainties have not materially changed during the
six months ended 30 September 2022.
Going concern
The Board believes it is appropriate to adopt the going concern basis in
preparing the financial statements. A comprehensive going concern statement
setting out the reasons the Board considers this to be the case is set out in
note 1 on page 27.
Related party transactions
There have been no transactions with related parties that have materially
affected the financial position or the performance of the Company during the
six months ended 30 September 2022. Related party transactions are disclosed
in note 14 of the condensed consolidated interim financial statements.
We confirm that to the best of our knowledge:
• the condensed set of financial statements has been prepared in accordance
with IAS 34 Interim Financial Reporting; and
• the interim management report (comprising the Chairman's and the
Investment Manager's report) includes a fair review of the information
required by:
(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an
indication of important events that have occurred during the first six months
of the financial year and their impact on the condensed set of financial
statements; and a description of the principal risks and uncertainties for the
remaining six months of the year; and
(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, related
party transactions that have taken place in the first six months of the
current financial year and that have materially affected the financial
position or performance of the entity during that period; and any changes in
the related party transactions described in the last Annual Report that could
do so.
We are responsible for the maintenance and integrity of the corporate and
financial information included on the Company's website, and for the
preparation and dissemination of financial statements. Legislation in Guernsey
governing the preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
By order of the Board
Alastair Hughes
Chairman
15 November 2022
Condensed Consolidated Statement of Comprehensive Income
Notes £000 £000 £000
(unaudited) (unaudited) (audited)
Rental income 12,729 11,832 23,859
Other income 76 270 558
Property operating expenses (1,077) (806) (1,919)
Net rental and related income, excluding joint ventures 11,728 11,296 22,498
Share of total net income in joint ventures 2,063 1,583 2,740
Net rental and related income, including joint ventures 13,791 12,879 25,238
Gain on disposal of investment property 1,513 - 3,165
Net unrealised valuation (loss)/gain on investment property 6 (3,718) 24,689 66,536
Expenses
Investment management fee 2 (1,561) (1,397) (2,994)
Valuers' and other professional fees (901) (759) (1,547)
Administrator's fee 2 (37) (60) (82)
Auditor's remuneration (100) (102) (190)
Directors' fees (92) (75) (157)
Other expenses (103) (161) (442)
Total expenses (2,794) (2,554) (5,392)
Net operating profit before net 6,729 33,431 86,807
finance costs
Interest receivable 1 - -
Finance costs (2,418) (2,041) (4,139)
Refinancing costs (247) - -
Net finance costs (2,664) (2,041) (4,139)
Share of total net income in joint ventures 7 2,063 1,583 2,740
Share of net valuation (loss)/profit in joint ventures 7 (3,446) 224 3,960
Profit before taxation 2,682 33,197 89,368
Taxation 4 - - -
Profit and total comprehensive income for the period attributable to the 2,682 33,197 89,368
equity holders of the parent
Basic and diluted earnings per share 0.5p 6.8p 18.2p
All items in the above statement are derived from continuing operations. The
accompanying notes 1 to 16 form an integral part of the condensed interim
financial statements.
Condensed Consolidated Statement of Financial Position
Investment property 6 445,131 377,301 433,486
Investment in joint ventures 7 80,254 79,964 83,700
Non-current assets 525,385 457,265 517,186
Trade and other receivables 8 18,378 19,117 16,169
Cash and cash equivalents 9 8,236 10,626 11,601
Current assets 26,614 29,743 27,770
Total assets 551,999 487,008
544,956
Issued capital and reserves 403,121 359,472 408,286
Treasury shares (37,101) (36,103) (36,103)
Equity 366,020 323,369 372,183
Interest-bearing loans and borrowings 10 174,973 153,510 161,791
Lease liability 6 1,860 1,987 1,987
Non-current liabilities 176,833 155,497 163,778
Trade and other payables 11 9,146 8,142 8,995
Current liabilities 9,146 8,142 8,995
Total liabilities 185,979 163,639 172,773
Total equity and liabilities 551,999 487,008 544,956
Net Asset Value per ordinary share 12 74.8p 65.8p 75.8p
The financial statements on pages 23-36 were approved at a meeting of the
Board of Directors held on 15 November 2022 and signed on its behalf by:
Alastair Hughes
Chairman
The accompanying notes 1 to 16 form an integral part of the condensed interim
financial statements.
Condensed Consolidated Statement of Changes in Equity
For the period from 1 April 2021 to 30 September 2021 (unaudited)
Balance as at 31 March 2021 219,090 (35,967) 113,721 296,844
Profit for the period - - 33,197 (33,197)
Dividends paid 5 - - (6,536) (6,536)
Share buyback 12 - (136) - (136)
Balance as at 30 September 2021 219,090 (36,103) 140,382 323,369
For the year ended 31 March 2022 (audited) and for the period from 1 April
2022 to 30 September 2022 (unaudited)
Balance as at 31 March 2021 219,090 (35,967) 113,721 296,844
Profit for the year - - 89,368 89,368
Dividends paid 5 - - (13,893) (13,893)
Share buyback - (136) - (136)
Balance as at 31 March 2022 219,090 (36,103) 189,196 372,183
Profit for the period - - 2,682 2,682
Dividends paid 5 - - (7,847) (7,847)
Share buyback 12 - (998) - (998)
Balance as at 30 September 2022 219,090 (37,101) 184,031 366,020
The accompanying notes 1 to 16 form an integral part of the condensed interim
financial statements.
Condensed Consolidated Statement of Cash Flows
Operating activities
Profit for the period/year 2,682 33,197 89,368
Adjustments for:
Profit on disposal of investment property (1,513) - (3,165)
Net valuation loss/(gain) on investment property 3,718 (24,689) (66,536)
Share of loss/(profit) of joint ventures 1,383 (1,807) (6,700)
Net finance cost 2,664 2,041 4,139
Operating cash generated before changes in working 8,934 8,742 17,106
capital
(Increase)/decrease in trade and other receivables (2,209) (2,072) 859
Increase in trade and other payables 391 244 1,098
Cash generated from operations 7,116 6,914 19,063
Finance costs paid (2,158) (1,918) (3,847)
Interest received 1 - -
Net cash from operating activities 4,959 4,996 15,216
Investing activities
Net proceeds from the sale of investment property 6,413 - 12,835
Additions to investment property (5,245) (836) (4,924)
Acquisitions of investment property (15,146) - (19,850)
Additions to joint ventures - (620) (620)
Net income distributed from joint ventures 1,663 1,583 2,598
Net cash (used in)/from investing activities (12,315) 127 (9,961)
Financing activities
Share buyback (998) (136) (136)
Additions to external debt 13,600 - 21,200
Repayment of external debt - - (13,000)
Loan arrangement fees paid (764) - -
Dividends paid (7,847) (6,536) (13,893)
Net cash from/(used in) financing activities 3,991 (6,672) (5,829)
Net decrease in cash and cash equivalents for the period/year (3,365) (1,549) (574)
Opening cash and cash equivalents 11,601 12,175 12,175
Closing cash and cash equivalents 8,236 10,626 11,601
The accompanying notes 1 to 16 form an integral part of the condensed interim
financial statements.
Notes to the Interim Report
1. Significant accounting policies
Schroder Real Estate Investment Trust Limited (the "Company") is a
closed-ended investment company incorporated in Guernsey. The condensed
interim financial statements of the Company for the period ended 30 September
2022 comprise the Company, its subsidiaries and its interests in joint
ventures (together referred to as the "Group").
Statement of compliance
The condensed interim financial statements have been prepared in accordance
with the Disclosure Guidance and Transparency Rules of the United Kingdom
Financial Conduct Authority and IAS 34 Interim Financial Reporting. They do
not include all the information required for the full annual financial
statements, and should be read in conjunction with the consolidated financial
statements of the Group as at and for the year ended 31 March 2022. The
condensed interim financial statements have been prepared on the basis of the
accounting policies set out in the Group's annual financial statements for the
year ended 31 March 2022. The financial statements for the year ended 31 March
2022 have been prepared in accordance with International Financial Reporting
Standards ("IFRS") as issued by the International Accounting Standards Board,
and interpretations issued by the International Financial Reporting
Interpretations Committee.
Going concern
The Directors have examined significant areas of possible financial risk,
including the non-collection of rent and service charges; potential movements
in property valuations; have reviewed cash flow forecasts; and have analysed
forward-looking compliance with third party debt covenants, in particular the
Loan to Value covenant and interest cover ratios in a rising interest rate
macroeconomic environment.
Overall, after utilising available cash, excluding the cash undrawn against
the RBSI facility, and uncharged properties and units in Joint Ventures, and
based on the reporting period to 30 September 2022, property valuations would
have to fall by 37% before the relevant Canada Life Loan to Value covenants
were breached, and actual net rental income would need to fall
by 65% before the interest cover covenants were breached.
The Company's office sector weighting has remained just below its minimum
requirement of 20% as at the interim period end. The Company has received a
waiver from Canada Life on this until June 2023.
Furthermore, the properties charged to RBSI could fall in value by 49% prior
to the 65% LTV covenant being reached and, based on actual net rents for the
quarter to September 2022, a 46% fall in net income could be sustained prior
to the RBSI loan covenant of 185% being breached.
As at the period end, the undrawn capacity of the RBSI facility was £28.7
million. This facility is an efficient and flexible source of funding due to
its ability to be repaid and redrawn as often as required. The facility was
refinanced in June 2022 with a new five-year term to 2027 and with an increase
in the amount that can be drawn from £52.5m to £75m.
The Board and Investment Manager continue to closely monitor the Company's
rental collection in a continually changing macroeconomic environment and the
requirement to distribute dividends in accordance with the REIT regulations.
All future dividends will be kept under constant review to ensure the
Company's liquid resources will be sufficient to cover any working capital
requirements.
The Directors have not identified any matters which would cast significant
doubt on the Group's ability to continue as a going concern for the next
twelve months from the date of approval of the financial statements.
The Directors have satisfied themselves that the Group has adequate resources
to continue in operational existence for at least the next twelve months from
the date of approval of the financial statements. After due consideration, the
Board believes it is appropriate to adopt the going concern basis in preparing
the interim financial statements.
Notes to the Interim Report (continued)
1. Significant accounting policies (continued)
Use of estimates and judgements
The preparation of financial statements requires management to make
judgements, estimates and assumptions that affect the application of policies
and the reported amounts of assets and liabilities, income and expenses.
Actual results may differ from these estimates. The estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to accounting
estimates are recognised in the period in which the estimates are revised and
in any future periods affected. There have been no changes in the key
judgements and estimates used by management as disclosed in the last Annual
Report and financial statements for the year ended 31 March 2022.
Segmental reporting
The Directors are of the opinion that the Group is engaged in a single segment
of business, being property investment, and in one geographical area, the
United Kingdom. There is no one tenant that represents more than 10% of the
Group's revenue. The chief operating decision-maker is considered to be the
Board of Directors who are provided with consolidated IFRS information on a
quarterly basis.
2. Material agreements
Schroder Real Estate Investment Management Limited is the Investment Manager
to the Company. The Investment Manager is entitled to a fee, together with
reasonable expenses incurred in the performance of its duties. The fee is
payable monthly in arrears at currently one twelfth of the aggregate of 0.9%
of the Net Asset Value ("NAV") of the Company. The Investment Management
Agreement can be terminated by either party on not less than twelve months
written notice or on immediate notice in the event of certain breaches of its
terms or the insolvency of either party.
The fee covers all of the appointed services of the Investment Manager and
there are standard provisions for the reimbursement of expenses. Additional
fees can be agreed for out-of-scope services on an ad hoc basis.
The current tiered fee structure is as follows:
NAV Management fee percentage per annum of NAV
<£500 million 0.9%
£500 million - £1 billion 0.8%
£1 billion+ 0.7%
The total charge to the Consolidated Statement of Comprehensive Income during
the period was £1,561,000 (year to 31 March 2022: £2,994,000; six months to
30 September 2021: £1,397,000). At the period end no amount was outstanding
(31 March 2022: £nil; 30 September 2021: £nil).
Langham Hall (Guernsey) Limited and Langham Hall UK Depositary LLP provided
Administration, Designated Manager and Depositary services to the Group, with
effect from 1 October 2021. The Administrator was entitled to an annual fee
equal to £57,000 of which no sum (31 March 2022: £37,000; 30 September 2021:
£nil) was outstanding at the period end.
Schroder Investment Management Limited also provides with effect from 1
October 2021 company secretarial services to the Company with an annual fee
equal to £50,000. Company secretarial fees for the period were £25,000 (year
to 31 March 2022: £25,000; six months to 30 September 2021: £nil). At the
period end £25,000 was outstanding (31 March 2022: £25,000; 30 September
2021: £nil).
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 £2,682,000 (31 March 2022: profit of £89,368,000; 30
September 2021: profit of £33,197,000) and the weighted average number of
ordinary shares in issue during the period of 490,784,091 (31 March 2022:
491,085,850 and 30 September 2021: 491,086,039).
Notes to the Interim Report (continued)
4. Taxation
Tax expense in the period/year - - -
Reconciliation:
Profit before tax 2,682 33,197 89,368
Effect of:
Tax using the UK corporation tax rate of 19% 510 6,307 16,980
Revaluation loss/(profit) not taxable 706 (4,691) (12,642)
Share of revaluation loss/(profit) of joint ventures not taxable 263 (43) (1,273)
Profit on disposal of investment property not taxable (287) - (601)
UK REIT exemption on non-capital income (1,192) (1,573) (2,464)
Current tax expense in the period/year - - -
SREIT has elected to be treated as a UK real estate investment trust ("REIT").
The UK REIT rules exempt the profits of SREIT and its subsidiaries' (the
"Group") UK property rental business from corporation tax. Gains on UK
properties are also exempt from tax, provided they are not held for trading or
sold in the three years after completion of development. The Group is
otherwise subject to corporation tax.
As a REIT, SREIT is required to pay Property Income Distributions equal to at
least 90% of the Group's exempted net income. To retain UK REIT status there
are a number of conditions to be met in respect of the principal company of
the Group, the Group's qualifying activity and its balance of business. The
Group continues to meet these conditions.
Notes to the Interim Report (continued)
5. Dividends paid
Q/e 31 March 2022 (dividend paid 30 June 2022) 491.08 million 0.795 3,904
Q/e 30 June 2022 (dividend paid 19 August 2022) 491.02 million 0.803 3,943
1.598 7,847
Q/e 31 March 2021 (dividend paid 25 June 2021) 491.08 million 0.656 3,221
Q/e 30 June 2021 (dividend paid 13 August 2021) 491.08 million 0.675 3,315
1.331 6,536
Q/e 31 March 2021 (dividend paid 25 June 2021) 491.08 million 0.656 3,221
Q/e 30 June 2021 (dividend paid 13 August 2021) 491.08 million 0.675 3,315
Q/e 30 September 2021 (dividend paid 17 December 2021) 491.08 million 0.726 3,565
Q/e 31 December 2021 (dividend paid 25 March 2022) 491.08 million 0.772 3,792
2.829 13,893
A dividend for the quarter ended 30 September 2022 of 0.803 pence per share
(totalling £3.93 million) was approved on 15 November 2022 and will be paid
on 9 December 2022.
6. Investment property
For the period 1 April 2021 to 30 September 2021 (unaudited)
Fair value as at 1 April 2021 36,376 315,400 351,776
Additions - 836 836
Fair value leasehold adjustment - - -
Net valuation gain on investment property 1,082 23,607 24,689
Fair value as at 30 September 2021 37,458 339,843 377,301
Notes to the Interim Report (continued)
6. Investment property (continued)
For the year 1 April 2021 to 31 March 2022 (audited)
Fair value as at 1 April 2021 36,376 315,400 351,776
Additions 118 3,669 3,787
Acquisitions - 19,850 19,850
Acquisition costs - 1,138 1,138
Disposal of asset held at fair value - (9,600) (9,600)
Fair value leasehold adjustment (1) - (1)
Net unrealised valuation gain on investment property 3,300 63,236 66,536
Fair value as at 31 March 2022 39,793 393,693 433,486
For the period 1 April 2022 to 30 September 2022 (unaudited)
Fair value as at 1 April 2022 39,793 393,693 433,486
Additions 33 5,212 5,245
Acquisitions - 14,289 14,289
Acquisition costs - 857 857
Net proceeds on disposal - (6,413) (6,413)
Realised gain on disposal - 1,513 1,513
Fair value leasehold adjustment (128) - (128)
Net valuation gain/(loss) on investment property 173 (3,891) (3,718)
Fair value as at 30 September 2022 39,871 405,260 445,131
The fair value of investment property, as determined by the valuer, totals
£451,900,000 (31 March 2022: £440,100,000; 30 September 2021:
£384,375,000). None of this sum was in relation to an unconditional exchange
of contracts (31 March 2022: £nil; 30 September 2021: £nil).
As at 30 September 2022, £8,630,000 (31 March 2022: £8,602,000; 30 September
2021: £9,062,304) in connection with lease incentives is included within
trade and other receivables. Furthermore, included in non-current liabilities
is a sum of £1,860,000 (31 March 2022: £1,987,117; 30 September 2021:
£1,987,395) relating to the fair value of the leasehold element of The
Galaxy, Luton.
The fair value of investment property has been determined by Knight Frank LLP,
a firm of independent chartered surveyors, who are registered independent
appraisers. The valuation has been undertaken in accordance with the current
editions of RICS Valuation - Global Standards, which incorporate the
International Valuation Standards, and the RICS UK National Supplement issued
by the Royal Institution of Chartered Surveyors (the "Red Book").
The properties have been valued on the basis of "Fair Value" in accordance
with the RICS Valuation - Professional Standards VPS4(7.1) Fair Value and
VPGA1 Valuations for Inclusion in Financial Statements which adopt the
definition of Fair Value used by the International Accounting Standards Board.
The valuation has been undertaken using appropriate valuation methodology and
the Valuer's professional judgement. The Valuer's opinion of Fair Value was
primarily derived using recent comparable market transactions on arm's length
terms, where available, and appropriate valuation techniques (The Investment
Method).
The properties have been valued individually and not as part of a portfolio.
Notes to the Interim Report (continued)
6. Investment property (continued)
All investment properties are categorised as Level 3 fair values as they use
significant unobservable inputs. There have not been any transfers between
levels during the year. Investment properties have been classed according to
their real estate sector. Information on these significant unobservable inputs
per class of investment property is disclosed below:
Quantitative information about fair value measurement using unobservable
inputs (Level 3) as at 30 September 2022 (unaudited)
Fair value (£'000) 245,950 113,000 74,300 18,650 451,900
Area ('000 sq ft) 2,310 550 369 177 3,406
Net passing rent psf per annum Range £0 - £14.00 £0 - £32.85 £4.93 - £29.10 £15.55 £1.00 - £13.00 £0 - £32.85
Weighted average £5.07 £13.61 £7.39 £7.71
Gross ERV psf per annum Range £2.50 - £14.50 £7.74 - £29.83 £14.73 £10.00 - £24.00 £2.10 - £13.00 £2.10 - £29.83 £8.92
Weighted average £6.17 £17.96 £7.91
Net initial yield (1) Range 2.61% - 7.74% 4.46% 0% -10.43% 2.84% - 11.68% 7.24% 4.49% - 8.43% 0% - 11.68% 5.44%
Weighted average 6.21% 6.58%
Equivalent yield Range 4.71% - 8.49% 5.49% 5.00% - 9.37% 6.37% 6.51% - 9.24% 7.81% 4.77% - 9.23% 4.71% - 9.37% 6.42%
Weighted average 7.28%
Notes: ((1)) Yields based on rents receivable after deduction of head rents,
but gross of non-recoverables.
Quantitative information about fair value measurement using unobservable
inputs (Level 3) as at 31 March 2022 (audited)
Fair value (£000) 248,950 97,450 75,450 18,250 440,100
Area ('000 sq. ft) 2,338 499 369 177 3,383
Net passing rent per sq. ft per annum Range £0 - £14.00 £4.93 £0 - £32.85 £12.77 £0 - £29.10 £16.49 £1.00 - £13.00 £0 - £14.00
Weighted average £4.93
Gross ERV per sq. ft per annum Range £2.50 - £14.00 £7.40 - £29.83 £13.86 £10.00 -£27.50 £2.10 - £13.00 £2.10 - £29.83 £8.50
Weighted average £5.93 £17.80 £7.91
Net initial yield ((1)) Range 3.29% - 7.25% 4.34% 0% - 9.26% 4.33% -12.80% 7.56% 4.75% - 8.55% 3.29% - 7.25% 4.34%
Weighted average 6.12%
Equivalent yield Range 4.20% - 7.76% 5.17% 4.99% - 9.97% 6.37% 5.79% - 9.36% 7.50% 4.75% - 9.21% 4.20% - 7.76% 5.17%
Weighted average
Notes: ((1)) Yields based on rents receivable after deduction of head rents,
but gross of non-recoverables.
Notes to the Interim Report (continued)
6. Investment property (continued)
Sensitivity of measurement to variations in the significant unobservable
inputs
The significant unobservable inputs used in the fair value measurement
categorised within Level 3 of the fair value hierarchy of the Group's property
portfolio, together with the impact of significant movements in these inputs
on the fair value measurement, are shown below:
Passing rent Increase Decrease
Gross ERV Increase Decrease
Net initial yield Decrease Increase
Equivalent yield Decrease Increase
There are interrelationships between the yields and rental values as they are
partially determined by market rate conditions. The sensitivity of the
valuation to changes in the most significant inputs per class of investment
property is shown below:
Increase in ERV by 5% 11,268 3,947 3,447 504 19,166
Decrease in ERV by 5% (10,703) (4,961) (3,316) (325) (19,305)
Increase in net initial yield by 0.25% (13,055) (4,374) (2,481) (682) (20,592)
Decrease in net initial yield by 0.25% 14,605 4,741 2,659 736 23,741
Increase in ERV by 5% 11,240 3,307 3,378 605 18,530
Decrease in ERV by 5% (11,372) (3,462) (3,609) (416) (18,859)
Increase in net initial yield by 0.25% (13,574) (3,825) (2,416) (645) (20,460)
Decrease in net initial yield by 0.25% 15,236 4,152 2,582 694 22,664
Increase in ERV by 5% 9,209 2,611 3,878 738 16,436
Decrease in ERV by 5% (9,055) (3,420) (3,788) (455) (16,718)
Increase in net initial yield by 0.25% (9,507) (3,390) (2,771) (598) (16,266)
Decrease in net initial yield by 0.25% 10,549 3,664 2,967 643 17,823
Notes to the Interim Report (continued)
7. Investment in joint ventures
For the period 1 April 2021 to 30 September 2021 (unaudited)
Opening balance as at 1 April 2021 79,120
Share of net rental income 1,583
Distributions received/receivable (1,583)
Purchase of units in City Tower Unit Trust to fund capital expenditure 620
Share of valuation profit 224
Closing balance as at 30 September 2021 79,964
For the year 1 April 2021 to 31 March 2022 (audited)
Opening balance as at 1 April 2021 79,120
Purchase of units in City Tower Unit Trust 620
Share of valuation profit 3,960
Closing balance as at 31 March 2022 83,700
For the period 1 April 2022 to 30 September 2022 (unaudited)
Opening balance as at 1 April 2022 83,700
Share of net rental income 2,063
Distributions received/receivable (2,063)
Share of valuation loss (3,446)
Closing balance as at 30 September 2022 80,254
8. Trade and other receivables
Rent receivable 3,028 4,072 3,608
Sundry debtors and prepayments 6,720 5,982 3,959
Lease incentives 8,630 9,063 8,602
18,378 19,117 16,169
£3.78 million (gross of VAT) was owed by tenants as at the period end and a
net bad debt provision of £0.6m was made with regard to expected credit
losses (31 March 2022: £0.9m; 30 September 2021: £0.8m).
When determining an appropriate bad debt provision the following key factors
were considered: the tenants' rent deposits held; the tenants' covenants;
financial strength and rent and service charge-paying histories; and the
current trading situation of the tenants.
Notes to the Interim Report (continued)
9. Cash and cash equivalents
As at 30 September 2022 the Group had £8.2 million in cash (31 March 2022:
£11.6 million; 30 September 2021: £10.6 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 into two equal tranches of £64.8 million as follows:
- Facility A matures in October 2032 and attracts an interest rate
of 2.36%; and
- Facility B matures in October 2039 and attracts an interest rate
of 2.62%.
As at the period end, the Canada Life interest cover ratio was 530% (31 March
2022: 650%; 30 September 2021: 563%) against a covenant of 185%; the forecast
interest cover ratio was 502% (31 March 2022: 487%; 30 September 2021: 441%)
against a covenant of 185%; and the Loan to Value ratio was 41.2% (31 March
2022: 40.1%; 30 September 2021: 44.6%) against a covenant of 65%.
The Canada Life facility has a first charge of security over all the property
assets in the ring-fenced security pool which at 30 September 2022 contained
properties valued at £314.4 million (31 March 2022: £322.9 million; 30
September 2021: £290.8 million). Various restraints apply during the term of
the loan although the facility has been designed to provide significant
operational flexibility.
At the period end the Group also had in place a £75m revolving credit
facility ("RCF") with the Royal Bank of Scotland with £46.3m drawn down (31
March 2022: £32.7 million; 30 September 2021: £24.5 million). The facility
carries an interest rate of a 1.65% margin plus three-month SONIA rate with a
0.62% non-utilisation fee. An interest rate cap for £30.5 million of the loan
has been entered into and this comes in to effect if the three-month SONIA
rate reaches 1.5%. The three-month SONIA rates exceeded 1.5% in August 2022.
As at the period end, the forecast interest cover ratio was 310% (31 March
2022: 538%; 30 September 2021: 1079%) against a covenant of 250%; and the Loan
to Value ratio was 33.0% (31 March 2022: 24.0%; 30 September 2021: 18.3%)
against a covenant of 65%.
The RBSI facility has a first charge security over all the assets held in
SREIT No.2 Limited which at 30 September 2022 contained properties valued at
£140.4 million (31 March 2022: £136.5 million; 30 September 2021: £133.8
million).
As at 30 September 2022, the Group has total loan balances drawn of £175.89
million and £0.9 million of unamortised arrangement fees (31 March 2022:
£162.25 million and £0.5 million of unamortised arrangement fees; 30
September 2021: £154.09 million and £0.6 million of unamortised arrangement
fees).
The fair value of the fixed-interest Canada Life debt is based on the present
value of future cash flows discounted at a market rate of interest. As at 30
September 2022, the fair value of the Group's £129.59 million loan with
Canada Life was £111.8 million (31 March 2022: £125.8 million; 30 September
2021: £129.4 million).
Non-current liabilities
Loan facilities 175,885 154,085 162,252
Unamortised arrangement fees (912) (575) (461)
174,973 153,510 161,791
Notes to the Interim Report (continued)
11. Trade and other payables
Deferred income 4,145 3,812 4,123
Rental deposits 2,038 1,480 1,744
Interest payable 1,034 807 840
Other payables and accruals 1,929 2,043 2,288
9,146 8,142 8,995
12. NAV per ordinary share and share buyback
On 27 July 2022 the Company announced that it was recommencing a share buyback
programme. Between 28 July 2022 and 15 September 2022 the Company purchased a
sum of 1,969,725 shares for a sum of £1.0 million at an average price of 51
pence per share.
As a consequence of the buyback, the number of ordinary shares in issue fell
from 491,080,301 to 489,110,576 during the reporting period.
The NAV per ordinary share is based on the net assets of £366,020,000 (31
March 2022: £372,183,000; 30 September 2021: £323,369,000) and 489,110,576
ordinary shares in issue at the Statement of Financial Position reporting date
(31 March 2022: 491,080,301 and 30 September 2021: 491,080,301).
13. Financial risk factors
Since the Company's Annual Report and Consolidated Financial Statements was
published in June 2022, the Board has noted that property market risk and
interest rate risk have increased materially. Other than as outlined on page
22, the principal risks and uncertainties have not materially changed during
the six months ended 30 September 2022.
The Board regularly reviews and agrees policies for managing all key risks.
14. Related party transactions
Material agreements are disclosed in note 2. The Directors' remuneration for
the six-month to 30 September 2022, for services to the Group was £88,000 (31
March 2022: £156,927; 30 September 2021: £75,000) of which £nil was
outstanding at period end (31 March 2022: £nil; 30 September 2021: £nil).
Transactions with joint ventures are disclosed in note 7.
15. Capital commitments
At 30 September 2022 the Group had capital commitments for capital expenditure
of £9.1 million (31 March 2022: £12.3 million; 30 September 2021: £4.1
million).
16. Post balance sheet events
There were no significant events occurring after the balance sheet date.
EPRA Performance Measures
As recommended by the European Public Real Estate Association ("EPRA"), key
performance measures are disclosed in the section below.
a. EPRA earnings and EPRA earnings per share
Represents total IFRS comprehensive income excluding realised and unrealised
gains/losses on investment property and the share of net valuation profit/loss
in joint ventures, divided by the weighted average number of shares.
Six months to Six months to Year to
30 September 30 September 31 March
2022 2021 2022
£000 £000 £000
Earnings per IFRS income statement 2,682 33,197 89,368
Adjustments to calculate EPRA earnings:
Profit on the disposal of investment property (1,513) - (3,165)
Net unrealised valuation loss/(gain) on investment property 3,718 (24,689) (66,536)
Refinancing costs 247 - -
Share of valuation loss/(gain) in joint ventures 3,446 (224) (3,960)
EPRA earnings 8,580 8,284 15,707
Weighted average number of Ordinary Shares 490,784,091 491,086,039 491,085,850
EPRA earnings per share (pence) 1.7 1.7 3.2
b. EPRA Net Reinstatement Value
Six months to
30 September
2022
£000
IFRS equity attributable to shareholders 366,020
Adjustment in respect of real estate transfer taxes and costs 35,680
EPRA Net Reinstatement Value 401,700
Shares in issue at the end of the period 489,110,576
EPRA Net Reinstatement Value per share (pence) 82.1
c. EPRA Net Tangible Assets
Six months to
30 September
2022
£000
IFRS equity attributable to shareholders 366,020
EPRA Net Tangible Assets 366,020
Shares in issue at the end of the period 489,110,576
EPRA Net Tangible Assets per share (pence) 74.8
EPRA Performance Measures (continued)
d. EPRA Net Disposal Value
Six months to
30 September
2022
£000
IFRS equity attributable to shareholders 366,020
Adjustment for the fair value of fixed interest rate debt 17,735
EPRA Net Disposal Value 383,755
Shares in issue at the end of the period 489,110,576
EPRA Net Disposal Value per share (pence) 78.5
Glossary
Alternative performance measure ("APM") please see page 40 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.
EPRA Net Tangible Assets is the IFRS equity attributable to shareholders adjusted for items including
deferred tax, the fair value of financial instruments and intangible assets.
EPRA Net Disposal Value is the IFRS equity attributable to shareholders adjusted for items including
goodwill as a result of deferred tax and the fair value of interest rate debt
EPRA Net Reinstatement Value is the IFRS equity attributable to shareholders adjusted to represent the
value required to rebuild the entity and assumes that no selling of assets
takes place
FCA is the UK Financial Conduct Authority.
Gearing is the Group's net debt as a percentage of adjusted net assets.
Group is the Company and its subsidiaries.
Initial yield is the annualised net rents generated by the portfolio expressed as a
percentage of the portfolio valuation.
Interest cover is the number of times Group net interest payable is covered by Group net
rental income.
Listing Rules means the listing rules made by the FCA under Part VII of the UK Financial
Services and Markets Act 2000, as amended.
MSCI (formerly Investment Property Databank or "IPD") is a Company that produces an
independent benchmark of property returns.
Net Asset Value ("NAV") and NAV per share is the IFRS equity attributable to shareholders 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
The Company uses the following Alternative Performance Measures ("APMs") in
its Interim Report and Consolidated Financial Statements. The Board believes
that each of the APMs provides additional useful information to the
shareholders in order to assess the Company's performance.
Dividend Cover - the ratio of EPRA Earnings (page 37) to dividends paid (note
5) in the period. Earnings excludes capital items such as revaluation
movements on investments and gains or losses on the disposal of investment
properties.
Dividend Yield - the dividends paid, expressed as a percentage, relative to
the share price. To note that for six-monthly interim periods this is
annualised.
EPRA Earnings - earnings excluding all capital components not relevant to the
underlying net income performance of the Company, such as the unrealised fair
value gains or losses on investment properties and any gains or losses from
the sales of properties. See page 37 for a reconciliation of this figure.
EPRA Net Tangible Assets - the IFRS equity attributable to shareholders
adjusted to reflect a Company's tangible assets and assumes that no selling of
assets takes place.
EPRA Net Disposal Value - the IFRS equity attributable to shareholders
adjusted to reflect the NAV under an orderly sale of business, where any
deferred tax, financial instruments and certain other adjustments are
calculated to the full extent of their liability.
EPRA Net Reinstatement Value - IFRS equity attributable to shareholders
adjusted to represent the value required to rebuild the entity and assumes
that no selling of assets takes place.
Gross LTV - the value of the external loans unadjusted for unamortised
arrangement costs (note 10) expressed as a percentage of the market value of
property investments as at the Balance Sheet date. The market value of
property investments includes joint venture investments as per external
valuations and have not been adjusted for IFRS lease incentive balances or the
fair value of the head lease at Luton.
LTV Net of Cash - the value of the external loans unadjusted for unamortised
arrangement costs (note 10) less cash held (note 9) expressed as a percentage
of the market value of the property investments as at the Balance Sheet date.
The market value of property investments includes joint venture investments as
per external valuations and have not been adjusted for IFRS lease incentive
balances or the fair value of the head lease at Luton.
Ongoing Charges (including fund only expenses) - all fund costs expected to be
regularly incurred and that are payable by the Company expressed as a
percentage of the average quarterly NAVs of the Company for the financial
period. Any capital costs, including capital expenditure or
acquisition/disposal fees, are excluded.
Ongoing Charges (including fund and property expenses) - all fund and property
costs expected to be regularly incurred and that are payable by the Company
expressed as a percentage of the average quarterly NAVs of the Company for the
financial period. Any capital costs, including capital expenditure and
acquisition/disposal fees, are excluded.
Share Discount/Premium - the share price of the Company is derived from buyers
and sellers trading their shares on the stock market. This price is not
identical to the NAV per share of the underlying assets less liabilities of
the Company. If the share price is lower than the NAV per share, the shares
are trading at a discount. Shares trading above the NAV per share are said to
be at a premium. The discount/premium is calculated as the variance between
the share price as at the Balance Sheet date and the NAV per share (page 24)
expressed as a percentage.
NAV total return - the return to shareholders calculated on a per share basis
by adding dividends paid (note 5) in the period on a time-weighted basis to
the increase or decrease in the NAV per share (page 24).
Corporate information
Registered Address Independent Auditor
Town Mills Ernst & Young LLP
North Suite 2 Royal Chambers
Rue Du Pre St. Julian's Avenue
St. Peter Port St. Peter Port
Guernsey GY1 1LT Guernsey GY1 4AF
Directors (All Non-Executive) Property Valuers
Alastair Hughes (Chairman) Knight Frank LLP
Lorraine Baldry (resigned 26 July 2022) 55 Baker Street
Graham Basham (resigned 15 November 2022) London
Stephen Bligh W1U 8AN
Priscilla Davies (appointed 7 June 2022)
Alexandra Innes (appointed 16 November 2022) Sponsor and Broker
J.P. Morgan Securities plc
Investment Manager and Accounting Agent 25 Bank Street
Schroder Real Estate Investment Management Limited Canary Wharf
1 London Wall Place London E14 5JP
London
EC2Y 5AU Tax Advisers
Deloitte LLP
Administrator 2 New Street Square
Langham Hall (Guernsey) Limited London
Town Mills EC4A 3BZ
North Suite 2
Rue Du Pre Receiving Agent and UK
St. Peter Port Transfer/Paying Agent
Guernsey GY1 1LT Computershare Investor Services
(Guernsey) Limited
Company Secretary 13 Castle Street
Schroder Investment Management Limited St. Helier
1 London Wall Place Jersey
London JE1 1ES
EC2Y 5AU
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
1 (#_ftnref1) Based on the share price at 30 September 2022 of 46.4p and an
annualised dividend of 3.212 pps.
(2) This is an Alternative Performance Measure ("APM"). Details of the
calculation are included in the APM section on page 40.
1 (#_ftnref2) As per third party valuation reports unadjusted for IFRS lease
incentive amounts.
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