Schroder Real Estate Investment Trust (LSE:SREI) — Half Year Results for the period ended 30 September

0:01 Good afternoon, ladies and gentlemen, and welcome to the SCHRODER REAL ESTATE INVESTMENT TRUST LIMITED half year results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged. They can be submitted at any time via the q and a tab that's just situated on the right hand corner of your screen. Please just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and part of your responses where it is appropriate to do so, and these will be available via your investor meet company dashboard. Before we begin, I would like to submit the following poll, which will just appear on your screens now. And I would now like to hand you over to head of UK real estate, Nick Montgomery. Good afternoon, sir. Good afternoon. Thank you, very much, Jake, and and welcome everybody to our interim results presentation for the six months ending September 3.

0:54 So it's usual tag team, myself and Bradley. So thank you for attending, and thank you for your support to those of you that are already shareholders. So alongside the results today, we have also announced a strategic evolution and a set of proposals that we will put into a shareholder vote in mid December. And and more on that in due course. But I think we want to just start by saying, and, hopefully, this has been consistent through various times we presented on this platform, that our overarching focus here is to deliver an attractive and sustainable dividend, by improving the portfolio quality, very much active asset management and and operational excellence. And and I have to say we we do feel like we've made good progress, and we hope that is reflected in the results today.

1:46 I guess just high level points on this first slide. We are well positioned, we believe, because we have high income yield and we have a low debt cost, notwithstanding, obviously, a slight fall in rates, or at least market rates, you know, we remain in a high interest rate environment, and we have a very low debt cost. We have a very significant portfolio reversion. So the market rents exceed the rents we're currently receiving by a very significant margin, and and more on that later on. We have a very robust balance sheet. So we have the lowest cost, longest duration debt pretty much in the peer group. Notwithstanding all those factors, our shares remain in today after these results at a discount in the region of of 29%.

2:34 So we're well placed, but the shares today, we believe, do look like very good value. The last point I'll make on this slide is we have made good progress in developing our strategy more focused on sustainability, and this is very much driven by enhancing further our approach, to, to driving net income growth and really ensuring that sustainability is at the center of our proposition, partly in responding, as I say, to to, the decarbonization required across the built environment, but also fundamentally because we think by doing so, we will have tenants that are prepared to pay us more rent for better quality buildings and enhance shareholder returns. So just focusing a little bit on the highlights over the six month period. So, again, we've we've been clear, I think, in giving you views on the market, and and we were quite early, I think, in, calling, at the top and expecting from mid last year, a correction off the back of principally rising interest rates given the high inflation environment, and and that clearly has persisted.

3:37 Having said that, we continue to outperform at a portfolio level. So our underlying portfolio, produced a total return including income of 1.9% over the six months period, which compared with the benchmarks of the MSCI benchmark index in which all of our peers, generally speaking, are are part of of minus naught point 6%. So good outperformance at portfolio level. And in fact, very encouragingly, all of our portfolio by underlying sector outperformed. So our industrial portfolio outperformed by 2%, our office portfolio outperformed by 3.4%, and our retail portfolio by 1.8. So the performance really was driven by industrials, particularly our multilayer industrials where we saw very, very strong levels of rental growth. In fact, from the middle of last year, up up to the end of September, our industrial rents have gone up by about eight percent. In the same way and in context during a period of time when average values, the rent values for industrial fell about 25%.

4:37 So we're in a very interesting market, and I'll I'll I'll elaborate on that later. Obviously, projects that have driven out rental growth is Stanley through Stanley Green Trading Estate in Manchester. And Bradley will give you an update on that in terms of letting progress. And we've also made further progress creating new industrial stock, another operational net zero scheme that we've completed in Milton Keynes. You can see there on the bottom right hand image on this page, which is surely to complete. And we hopefully will deliver some good lesson progress on that over the course of the next few months. Lots of progress across portfolio. So I I I actually can't remember a time where we've reported almost 60 lettings within a within a six month period. And an an interesting statistic is if we look at the terms agreed on those lettings, rent reviews, and other activity, it represented about a 7% increase compared with the values assessments or rental value at the start of the period. So we are creating more value in rent than the values are assuming, and, obviously, that in turn is feeding through to the valuation performance.

5:40 And importantly, although we have gone through the traditional summer low, we have a really positive pipeline of letting activity, particularly on our most industrial estates. We have a significant amount of the void that I've just touched on, is actually under offer. So alongside the the the financial performance, we've also continued to deliver in terms of our existing sustainability objectives. Most notably, within the the global real estate sustainability benchmark, the GRESB benchmark, which is now the globally recognized benchmark for real estate sustainability, we scored 77 out of a 100, which compares to 77 last year, and we retained a first position in our peer group of six diversified REITs. And REITs, many of you will will will be familiar with. So good good progress.

6:28 A little bit more on the numbers. So what we've announced today is a net asset value, you can see at the bottom there, of GBP $296,000,000 or GBP 64.5 share. That represented a decrease of 1.6, albeit with the impact of dividends paid over the period that actually resulted in a positive NAV total return of of 1.1%. So, you know, it is a negative number in headline NAV terms, and we're doing our best to mitigate that. But I would say that, actually, that does compare quite favorably with the rest of the peer group, and particularly given, obviously, the current prevailing discount to to NAV. The NAV, therefore, was principally driven by a fall in underlying property values. And over the six month period to September, our portfolio fell by 1.2% at property levels and pre leverage, which compared to the benchmark on a like for like basis of minus 2.9%.

7:22 So again, as I've noted, relative outperformance. We continue to invest capital expenditure in our key projects. So Standing Green Trading Estate being the main one. So you can see there the 4,800,000 of capital expenditure. And we have some other projects that have either completed over the period or ongoing, notably an industrial refurbishment in Swindon and an office refurbishment in Edinburgh, which Bradley will touch on later on. There is also a slightly interesting line there, gain related to interest rate hedging. That is actually a realized gain we made where we tore up an old hedge to put in place a new one, which was linked to an extension of our revolving credit facilities. Now moving on to income. Ultimately, we all own this for income. And positively, if we compare dividends paid for the half year, last financial year to the end of September, 2022, our dividends paid increased by 5%. And and really importantly, those dividends that we have just paid, and in fact, we've announced a further dividend payable in December, were a 102% covered by earnings over the period.

8:32 So the 7.7% or whatever it is on the share price yield today is a fully covered share price yield. There's a little bit of noise in these numbers, so I will spend a little bit of time just explaining some of the details. So rent and related income, you can see there in the gray bar, that was up one¢. The noise I mentioned is we actually benefited from what we call other income, which relates to payments from tenants or dilapidations, so payments in lieu of tenants reinstating their premises at lease expiry. And that money we have recycled into into the refurbishments we'll touch on a little bit later. We did see a reduction in our joint venture income. So that relates to two assets, one in Bloomsbury in London, another in Manchester. That was principally due to the fact that in 2022, we were still receiving arrears being paid following the pandemic.

9:21 Going forward, and because we'd also incurred some leasing fees for this most recent period, we think the steady state income for joint ventures is somewhere between 1.6 and 1,700,000 on a half year period. So I hope that's clear. And then rental income from a direct portfolio was flat. As Bradley will explain shortly, we are expecting some growth there off the back of a very encouraging pipeline of lettings under offer relating to new developments, but also leasing up our void rates. Moving down the income statement. Property operating expenses were up a little bit, largely down to less letting fees, legal fees associated with that positive income earning activity. Fund expenses were down. That's largely because our fees, in particular, are linked to NAVs, whereas we have seen now full the the underlying fees paid by the company fall.

10:14 Bad debt provisions, write offs, you know, we're in a very good position as it relates to rent collection. Rent collection rate for the six month period was actually 99%. So we are we are trending ahead of the pre pandemic levels largely actually because of the pandemic, and we're so much closer to our tenants and our systems and processes mean that we are very effective at getting the rent in. Obviously, with with rising rates and notwithstanding the fact that 91% of our debt is is hedged or fixed, we did see an increase in finance cost because of that unhedged piece that we have in relation to our revolving credit facilities. And the intention, and we have some active disposals in the process, is that we've through the sale of some smaller assets, we will use those proceeds to repay the unhedged components of our revolving credit facility. That ought actually to be accretive because the cost of that debt at the moment is probably higher than the assets selling.

11:10 And that will also serve to bring the net loan to value back in line with our long run target group with the board of 25 to 35%. Are just outside of that at the moment because we've been investing capital into some of the projects that we'll come on to talk about as as as we go through. But overall, from an earnings perspective, in line with expectations, and I think positive versus peers. That in turn has allowed us to continue paying what we believe to be attractive level of dividend. And we've been very clear in the past, and I'll reiterate that the perspective from the manager and the board is, as and when we believe we can pay a high dividend on a sustainable basis, we will increase it. Our aim here is to deliver a progressive dividend policy and strategic, evolution we've announced today, we hope, will allow us to continue doing that on an even more, sustainable basis.

12:04 Drawings and comparisons with the peer group. So, what what we've done here is provide snapshots based on the most recently published information for the companies that, you know, investors generally consider to be our peers. We've anonymized them, but we have actually given the actual underlying funds details in in the notes at the bottom there. But I think that, you know, the key point here is versus our peers, we have a higher income return supported by a lower cost, longer duration debt. And what we aren't showing you here, because actually it's quite hard to get behind the data with some of our peers, is alongside these characteristics, we have a significantly higher reversion, than than the average. So that reversion, all the rental potential in the portfolio, we believe is greater than our peers.

12:52 Even before that, you can see already, along the top there, we have the highest, dividend that is fully covered in our peer group. So a 7.7% dividend yield today, give or take, is a 102% covered. There are others in our peer group. There are one or two smaller companies who are paying high dividend yields, but those are uncovered. And we would argue that they don't have the inbuilt reversionary potential that we do that gives us visibility on on future earnings. Likewise, not because of that those factors, we think our share price discounts are now is genuinely compelling, so around 30% today. There are companies that have more, significantly wide discounts, but in most cases, that's because there is something quite significantly at a risk. So for example, it might be a near term refinancing. It might be much higher cost of debt.

13:44 So we think we sit very nicely in relation to risk at versus discounts. And and and, really, that's sort of the main point on the bottom line there. You can see pretty much the lowest cost of debt. There's one that's a bit lower than us. But most importantly, from a risk perspective, our average duration of debt is over ten years. So very, we would argue, compelling in the context of the peer group and and the ways the way that the market is currently pricing that risk. Now I'm not gonna spend too long on this because the main purpose of today was to was to obviously communicate the results. But what we have done today, and and we will potentially do a separate session walking shareholders through this in a little bit more detail, is how we are proposing to formalize sustainability of a center of our investment proposition. So this is very much evolution, not revolution as it relates to the strategy.

14:46 And what we're trying to do is use the specialist resources we have within the real estate team and the Wirich Roads business to essentially make our portfolio even more resilient when it comes to our ability to lease space on the best terms in the most sustainable way. So how are going to do that? So two key things you can see set out there. The first thing is that we are proposing to update our investment policy, and this this is what the circular sets out ahead of the EGM on the December 15 to incorporate alongside the existing financial objectives, sustainability objectives, and KPIs that bind us and the team, which oblige us to set out how sustainability is part of the strategy and then measure and report on delivery of of those sustainability related objectives.

15:36 We're gonna have alongside that an enhanced governance structure. So this is something that we will be formalizing detail with the board in terms of setting out how we will be using our own proprietary ESG scorecard at asset level to have a quantitative approach to looking at the individual asset risk and then setting out how we're going to improve or mitigate asset risk, again, with the overarching objective of driving higher levels of net income growth. And and for some of our shareholders, increasingly some specialist wealth managers, having the ability to report those improvements will be very important to them achieving their own sustainability related objectives. So why do we think this is the right thing to do? Well, I think first and and very much most importantly is we think we will make more money for our shareholders.

16:26 We think Tenorflo pays more rent. We think we'll have more resilient assets. And therefore, the long term, both income and total returns should be more attractive. The second thing we think it will deliver in a in a relatively crowded peer group is it will begin to differentiate us from some of those other peers who we would argue don't actively manage our assets as well as we do. I've touched on it, but we we also believe this could attract new investors to the company who may have their own specific sustainability objectives And and to give ourselves the best chance of that when the FCA and we hope this will be this year, possibly next. When the FCA re release its final sustainable disclosure regulations, we will be looking to align SREI with what we believe will be called a sustainable improver category, which is essentially what we're already doing, which is improving transitioning assets.

17:22 But in doing so and getting that category, we hope we can drive more demand for the shares. And that's really the last point. And it's not a cynical point. We do believe that by differentiating ourselves in this way, alongside continued outperformance, we will hopefully be able to drive more demand for the shares and do something to address that rating in order that long term, if there are accretive growth opportunities out there, and there is one or two examples in the portfolio where if we were bigger, we would have much more potential to exploit them, is potentially facilitate that growth. Now the last point I'll just flag is we've had a few questions saying, well, okay. What does that mean for returns other than simply saying it should enhance them? And we're using this as a sort of a case study on this slide. So what this shows you the performance of our underlying portfolio on a rolling three year basis to, the most recent quarter end, September 30.

18:18 On the left hand side, we can use data, and this is independently calculated by MSCI showing the expenditure that we have made in the underlying portfolio. So over the September 3, 20% of our total value today has effectively been new investments. That comprises 16% acquisitions, notably, Standard Green and and Chippenham, which both of which we'll come on to later, but also how much money has gone in through developments and improvement. And I think the key point we're making here is this strategy will probably mean we're investing more in our existing assets. We will be delivering more by way of asset improvements. And the reason we'll be doing that, and this is really illustrated on the right hand side, is because we believe that will drive higher levels of rental growth, higher income, and more attractive total returns. And, you know, and again, I'm sort of tempting fate. But, actually, if if you look at the performance on the last three years because of all that activity, our total return of almost 7% compared to the benchmark of just over two. So that active management approach is working.

19:20 What we're saying is we will evolve that approach, more explicit focus on sustainability because we think it will deliver us more by way of sustainable rental and income growth. So moving on to the market. I'm I've only got a couple of slides on the market, and then I'll hand over to to to Bradley to go through a bit more detail on portfolio. I guess the first point to note is we are, I guess, describe it as cautiously optimistic about about the outlook. And that and this is talking very much from the perspective of of our portfolio. We obviously had a a a favorable or more favorable CPI print last week at 4.6%, And and and the markets have reacted relatively positively to that, obviously, with and notably, the the ten year gilt yield, what we would call the risk free rate falling from about four and a half percent pre that announcement down to about 4% today.

20:16 The reason I say we are we remain cautious is, of course, we are a very long way still from the Bank of England's 2% target. And as one analyst put it, it could be a long last mile to that 2% number, notably with wage growth still up or about 88%. But nonetheless, real estate values are closely linked to what's happening particularly in relation to interest rates. And and the the fact that we have seen that with lower inflation prints, the fact we have seen a positive reaction in money markets means that we are moving towards, we believe, real estate looking fairly priced. So just to put it in context onto the next slide, on the left hand side here, we're showing the capital value movement from the top of the markets in mid twenty two.

21:06 And you can see average values there, the dotted line, are down already about 22 and a half percent. That's the property level. Our values as it happens are down about 15, so we've we've done a bit better than that, but it but it's still been pretty painful. And industrial values, interestingly, we think they are still the favored sector in terms of rental growth, but because they had such low yields to start with, they were more adversely impacted by the rising rate environment, which is why they saw a 27% decline up to now from the peak. Albeit, as you can see with that dark blue line there, which is industrial sector average, we are beginning to start to see monthly positive upticks in in in the main industrial index. Now to put it in context, the GFC, we saw a a peak to trough valuation decline of around 44%.

21:53 So if we're down about 22% now, we think with the fact that the long run gap between property yields and gilts is about one and a half percent, we're currently about one, we think there is a potential to still see a third of decline in values, but we are a long way through the correction. And if you do, as we do, own majority industrial assets, you're going to do better than the average. But as I say, we are expecting a further reduction in valuations, but not material and certainly not in the context of our current share price discount. The other key difference with what we saw during the global financial crisis is on the right hand side, which is in contrast with sharp value declines, rents, at least in nominal terms, are still going up. So for example, since June 22, average value is falling 22%.

22:44 Average rents have actually gone up by 4%. And in our case, because of that higher industrial weighting and notably because of Stanley Green Estate, our rents have actually gone up by 8%, double the market against the backdrop of that quite sharp correction in capital values. The other point to note, which I think is is why we are more cautiously optimistic, is contrast to previous downturns, there is nothing like the same leverage in the market. So going into the GFC, you know, average loan to values in the real estate market were around 60%. Today, they're about 35. So there isn't that same leverage effect. And, again, as a related point, and, again, those of you that that travel across UK, in the major cities outside of residential towers, very little stuff is being built. No one's building mostly industrial estates.

23:34 No one has really built retail for the last ten years. And and city center offices that, you know, there is a there is now a shortage of the best quality space. And and interestingly, you know, in in the strongest in cities and looking across city rather now, but also in the regions, prime office rents are getting to levels we've just not seen before in nominal terms. So I think there are reasons to be still be cautious, but I think there are also reasons to be cautiously optimistic given given the the the relative health of the occupational market, particularly as office tenants are increasingly requiring their employees to spend at least three days a week in the office. So with that, I will hand over to Bradley.

24:21 Thanks very much, Nick, and good afternoon, everybody. Thank you for joining. Clearly, with the end of the ultra low interest rate environment and no sign of that returning anytime soon, it's our view that future returns in real estate will be led by income and rental growth, and we believe that is best generated through active asset management. We're gonna touch on some examples of that in our portfolio as we spin through the deck. First, we thought we'd show you some portfolio level metrics. So in the table on the left hand side, you can see we've highlighted some rows. So the first rows we've highlighted speak to the diverse and granular nature of our portfolio. 40 properties, more than 300 tenants. You know, we think that spreads risks, particularly, as we're in this tough environment where interest rates are beginning to bite for consumers and businesses, we think this makes our tenant base, our portfolio overall resilient.

25:18 And the second set of rows you've highlighted speaks to the higher yielding nature of our portfolio. So our net initial yield is 5.8%, which compares favorably to the benchmark of 4.9%. But, also, we have this staggeringly high reversion, which is 8.1% compared to the benchmark of around 5.9. Now to put that reversion you know, to put some numbers around it, that's an additional 9,000,000 of rent that we have to aim for. And to put that £9,000,000 into context, our annualized dividend is around £16,000,000 per annum. So, you know, clearly, if we can capture some of that reversion, there may be the potential for us to continue to push that dividend on. Looking at the right hand side of the chart, it sets out the structure of our portfolio in terms of sector weightings, And the key point to note here are the overweight allocations to industrial, which is almost entirely multi industrial estates where we see really favorable supply demand dynamics as as Nick mentioned earlier, but also retail warehouses, which is another area where we see rental growth coming through.

26:23 So those two sectors account for around 60% of the portfolio weighting. Other sectors, we have an you know, our offices are good quality. They're they've got good fundamentals. They're in good locations, city centers where we see opportunities to push the rents on. And then our retail is mainly part of multi multi sector schemes with really good footfall, good catchment. Finally, in the other segment, we've got two hotels, a car park, and a single small leisure scheme. Next, I thought I'd touch on briefly our tenant base. Our 15 largest tenants are listed here. We believe these are household names, really strong names, and we're really happy with this list. Only two tenants in our book represent more than two and a half percent of the annualized rent.

27:13 Probably one name that we'd mentioned here on the list that may raise eyebrows is Cineworld. We have just agreed a deal with Cineworld to slightly reduce their rent in return to avoid any CVAs in the future. But, otherwise, the list is very strong. Those two names I mentioned at the start that are above two and a half percent are University of Law, which is the largest external provider of legal education in The UK. It's a growing business, and they're actually taking more space with us in Manchester. And secondly, we've got Siemens Mobility Limited. Now these are part of the global conglomerate Siemens, so clearly a very strong business overall. Now on to void, and Nick did mention our void is, 11.2%.

27:59 This is within the ten year range of five to 13%, but that 11.2% is kind of artificially boosted because we've just recently completed the development of Sandy Green Trading Estate in Manchester, which added a, a big chunk of ERV to our portfolio. Now if we adjust for those vacant units, then the vacancy is 8.9%, which compares, I guess, more consistently with our past void. So that 8.9% is right in the middle of our ten year range of five to 13. Not only that, we do have lots of activity underway since the period end. For example, we have 4.2% of the 11.2% either let or under offer or in advanced negotiations, and 1.2% is under refurbishment at Swindon, and we'll touch on that shortly.

28:51 But we'd hope to let that at a higher rental tone when complete. I thought I'd touch on briefly Stanley Green. So just taking a step back, we acquired this asset in December 2020 for around £17,000,000. And of that £17,000,000, 3,000,000 related to a three acre development site. So it's just a brownfield piece of land, you know, no real estate on it. Since we acquired the asset, we spent 9,000,000 in CapEx to build, 11 new units of really sustainable warehouse accommodation. So that's over 80,000 square feet. So build cost was around a £110 per square foot. These have been built to BREIAM Excellent and EPC a plus. They're the first a plus EPCs we have in the portfolio and is a, a sign of the direction we're heading. So we made a conscious decision here in spending that £9,000,000 to, you know, pay 10 to 20% higher to get those, certifications such as BRIAM excellent e and EPCA plus.

29:56 And as a result of producing this really excellent accommodation, we've been able to attract good tenants on really good terms ahead of our underwrite and ahead of time. So for example, a unit in this estate, the rents are 21% ahead of the units on the existing estate just next door. Now, clearly, some of that 21 is because units are newer, but we believe a large element of that is because they are more sustainable. The energy bills for our tenants are lower, and it's a much better place for their staff to work. Now, you know, what what does the 17,000,000 and the 9,000,000 mean? Well, the valuation is 39,500,000 at the period end. That's more than doubled what we paid for it. And the returns in the bottom table on the slide show we've strongly outperformed benchmark.

30:43 So since we acquired the asset, we've made 21 per annum, and that compares to 7% per annum for the benchmark. So whilst Sandy Green is largely complete, subject to fully letting, we have highlighted here three, three initiatives that we have in the pipeline and underway. So the first column shows our Starbucks initiative, and we've spoke about this before. But in summary, we've got 1,700,000 to spend, and Starbucks are building the pods. And when they're complete, that's when we pay the money, which will be early twenty twenty four. And we believe that would increase the value of the assets by around 2,500,000 roughly, give or take, and we'll get another 250,000 in rent.

31:32 Now that rent is linked to inflation. It's on fifteen year leases. So it's a good example of us generating these long term leases with inflation kickers, which would be very expensive to buy. The yield to to buy that would be very low, and, it's activity like this that enables us to pay the high dividend and push it on over time. In the center, we show the town in Edinburgh. So this is a recently refurbished, office unit in in the asset. This is a well located city center office with you know, we saw the opportunity to improve the sustainability performance of the asset and push the rents on. We've spent as part of a project, we've got a budget to spend £2,000,000. It's almost complete. We've got about 200,000 left to spend.

32:18 And once that's spent and once we let the units and they're all let except for one, which is under offer, then we believe we can push the value on here by around £2,000,000. And the unit that's under offer is actually the unit you can see in the photo. The ERV of the asset overall is around £23 per square foot, but we've been able to push terms to £27 and beyond on on this on this, unit, obviously, subject to completion. On the right hand side is an example of one of our multi industrial assets. This one is in Swindon, a on a well established industrial estate. So this is comprised of three units. In the last twelve months, all three have come back to us. One of them, we were able to let almost immediately at an attractive rent of £7 per square foot well, just just over £7 per square foot.

33:14 And the other two, we've been refurbishing. And in in undertaking the refurbishment, we have again focused on sustainability. We've pushed the specification on. We're aiming for a minimum of EPCP. We're gonna put PVs on there and make it a really attractive space for an occupier. And we believe we can let these at around £7.50 per square foot. And to put that into perspective, the previous tenants were paying around £6, so that's a 25% increase. We believe spending the extra bit of cash to get the better spec is gonna pay off here. Moving on. So I'll briefly touch on Langhi Park in Chippenham. So just to step back again briefly, we acquired this asset in December 2020. We paid £19,300,000.

34:02 Post acquisition, we've been really active on the site, and we've completed a regear with one of the major tenants for a ten year straight lease. The rent's almost 30 percent higher than the previous passing. And we also agreed and completed a rent review with another major tenant, Siemens, for, again, a rent rental increase of around 30%. So that means that the passing rent is now or the contracted rent is now 2,200,000 per annum, which represents a yield on cost of around 11%, so clearly very attractive. Now this asset is twenty twenty eight acres. It's right in Chippenham Town Center next to the train station, so it's a really interesting location and interesting site. And there is scope to increase the mass in that site.

34:49 So we have, been speaking with a major tenant. I won't go into too much detail, but if we do pull this deal off, it will be accretive to the fund. And if we don't do this deal, which would be to again, with the theme on sustainability, will be to produce a operation net zero carbon, new headquarters for the tenant with, you know, BREIMAX and EPCA plus, etcetera. But if we don't pull that off, we have the opportunity to put RESI on the scheme. So there's some good optionality there at this site. We've discussed reversion throughout this presentation and talked through some examples of where we've already achieved high rental tones and where we have opportunities to push the rents on post activity.

35:35 But before we set out on a slide, you know, the steps to get us from our current passing rent as at September 30, so that's the 28,800,000, net and insured of 5.8% through to our ERV. Now the first step we think about are fixed up lifts in the next twenty four months. So this is where the the lease contracts, stipulate that rents will increase. We see 2,300,000 there coming through in the next two years, but, actually, almost half of that relates to just two tenants, which will come through much sooner. So we have Littelfuse who are at Langhi Park in Chippenham. Their rent's gonna come in at almost 500,000. And we also have New Buckinghamshire University who occupy our office in Uxbridge. Their rent's going to increase by around another 500,000 as well. So almost half of this figure is from '2 leases, and it's going to come through imminently.

36:27 The second step, so we mentioned Stanley Green. It was completed during the period. There's 1,300,000 ERV to go for. We've let 300,000 of that. There's a million left to go, of which 60% is either under offer or in advanced negotiations. And once that comes through, you know, that'll bring in another million pounds to our to our rent, which would be great for the fund. The second two bars summarize where there are, you know, units and assets where the current passing rent is below the market value. So as we get those units back and as we execute rent reviews, we expect to be able to push the rents on there. And finally, we've got the vacant space, 3,300,000. And as you can see on the void slide, there's lots of activity there to bring the void percentage down and bring the rent up.

37:19 And then the final point to note, there's a couple of developments that we've, touched on for this portfolio. So I spoke for you Starbucks, 250,000 of rent, and Nick mentioned Hodden Lane, which is, another initiative at one of our multi industrial estates, and that will bring in another 0.25 per million of rent when complete. So that 500,000 of rent is not actually within our ERV. So that's a sort of bonus once it comes through and is let beyond the 8.1% ERV. So lots to go after in terms of capturing that reversion and lots of activity to do so. The final point I'd like to make in the slides is just to really emphasize the strength of our balance sheet. So the the key kind of stats are on the right hand side there. The average interest rate on our drawn debt is 3.5%, and the maturity across all of our drawn debt is ten point two years.

38:14 And what underpins that strong balance sheet is the long term loan we have with Canada Life, which is a fixed average interest cost of 2.5%, so extremely attractive in the current environment. And the maturity of that loan is more than twelve years, and that loan represents about 75% of the drawn debt. So as we execute the strategy to bring down the net loan to value, which is currently 36.6%, we would pay down the unhedged RCF and expect that interest cost to come down. So really strong balance sheet there, and, it really underpins our our earnings. Moving on to the summary, and I'll hand back to Nick here for some closing comments, and, hopefully, we'll have some questions to address at the end. Thanks, Bradley. Great. My mic is no longer muted. So, yeah, thank you.

39:06 That very clear. So just just to summarize, I think, again, we're pleased with the progress that we've made, over the period. Our returns continue to be supported by having a higher income return, and a sector leading debt profile that it that is underpinning current earnings with the portfolio reversion that Brad has articulated, hopefully, giving us potential to to deliver a further progressive dividend, in in the future. We have a fully covered dividend. We had a 5¢ uplift year on year or half year on half year, and we have conviction that by evolving our strategy still with the same income focus, but with an even more rigorous focus on sustainability considerations, will allow us to the the four things, which I will just recap at the bottom. We got real conviction that this will allow us to enhance our long term returns to shareholders. It will allow us to differentiate ourselves more from our peers.

40:04 There are certain wealth management groups who are keen to find investments that achieve a certain sustainability standard, and that's our aim once SDR is made clear. But also, importantly, hopefully, this approach and all the other engagement that we're doing, content on the websites, getting out there and seeing more shareholders will drive demand for the shares, more liquidity, and ultimately, an improvement in the share price rating. So I'll I'll pause there, Jake, and, hand back to you. Perfect. Nick Bradley, thank you very much indeed, for your presentation this afternoon. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab that's situated on the right hand corner of your screen. But just while the team take a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard.

40:59 Bradley, Nick, we have received a number of questions from investors. And if I may, I'll just hand back to you just to read out those questions and give your responses where it's appropriate to do so, and then I'll pick up from you at the end. Thank you. Right. Okay. Thanks, Jake. So and thank you for the questions. So the the first one which we've touched on, but it's worth going back to, is if interest rates have nearly peaked but will remain roughly at these rates for the foreseeable future, what are the implications for the medium to long term? So I guess just just to add a bit of color to that. So as it relates to the bank rate at five and a quarter today, I I I think probably with the questioner, there's an expectation here that the bank rate will remain at its current level at least until the second half of next year.

41:47 As I mentioned earlier on, you know, the the risk of higher core inflation driven by the the employment market means that 2% target is still some way off. And and and for that reason, we will be cautious about expecting a further step down in the actual bank rates ahead of time. Having said that, and this is relevant to real estate specifically, investors that are borrowing to buy real estate will typically use interest rate swaps, and the typical duration might be five years for those interest rate swaps. And the expectation that rates will fall is already, being felt in the swap market. So, for example, over the course of the last four weeks or so, the cost of, or or the cost of fixing effectively on a five year basis has gone from a swap rate of about four and a half percent down to about four.

42:42 So if you overlay the margin on top of that, that would mean a fixed rate effectively for the five year period of around five and a half, 4% fixed rate, one and a half percent margin. So so that has already come down from the very high levels that we saw, so sort of earlier this year and, again, obviously, having peaked after the mini budget last last September. So I I I think, you know, what I said earlier on holds true in that, ultimately, as a hybrid asset class, you know, real estate has the characteristics of a bond, but also an equity in terms of the rental growth that you can extract, particularly for active management and investing in the asset. If we look at the long run relationship between property yields and gilts, the ten year risk free rate, you'd expect that over the last twenty years to average at about one and a half percent, and the gap is currently 1%.

43:35 So really simplistically, to get to fair value, either real estate yields have to move up another half a percent or gilt yields have to fall another half a percent. And the answer is probably they will both move a little bit. So that's why I think we're guiding to expect a further smaller step down in values before the average values bottom out and we see a recovery. But that's also why we made the point about rental growth, you like, the equity part of the the hybrid asset class. Because whilst we have seen this capital market volatility, rents are still going up. And it may mean, therefore, that long term relationship means that investors are prepared to accept a slightly smaller premium because in the expectation that they will get rental growth. And in fact, that's what we're already seeing in the industrial market, where we are seeing industrial transactions trade in the, you know, low fives, high fours in some cases because investors are expecting that with growth, they will see that yield increase to five or six percent over the over the short to medium term.

44:34 So I hope that that answers that question. Now the next question, if you put yourself in the shoes of a typical institute real estate, institutional real estate investor, why would you not be buying SREI on such an attractive discount dividend? Well, that is a very good question. And that's what we're trying to remedy, because we do think the company represents great value, and and and we're trying to demonstrate that quarter on quarter, but also the strategic evolution is there to hopefully, have more focus on us. I think sort of outside of that, I think partly scale. I think I think, for lots of the wealth management groups, as they get bigger and reference, obviously, the INVESTMENT TRUST merger, they typically want big companies as they themselves get bigger.

45:31 And so I think if we were twice the size, we probably would have more demand for our shares. That's also back to what we're trying to do in terms of strategic evolution because if we can make ourselves more attractive, more differentiated, then we will hopefully create those those those growth opportunities. I also think there is nervousness in the market. I think amongst institution investors, we are in the middle of a a paradigm shift really of DB investors, defined benefit investors, derisking because of the interest rate environment, moving into fixed income effectively. And a number of those DB investors own real estate funds. And so there are more sellers of real estate funds at the moment and and and both institutional, but also retail as well. A number of would have read the headlines about Saint James's Place, for example, where property funds.

46:22 And I would say in response to that, yes, that that is a sort of a structural change. But but, actually, at the same time, trust like this were a really efficient way to own real estate. So as part of that transition, we would hope that we may see investors who perhaps previously would have invested within open ended property funds coming into closed ended funds where you don't have those same liquidity pressures. Yes. You have the discount, but we would argue at this point in the cycle that discount looks, looks good value. So, again, I hope that answers the question. I will I'll just the next question, Bradley, you may want to take it just to if you can read it from there, in relation to Chippenham. Yeah. So the question says, the figures mentioned that last the the picture the the figures mentioned last time seem to have a very low increase in value considering the amount needed to be invested. So this is at Chippenham.

47:20 Could you go over these again, please, and clarify the expected valuation creation? So, you know, as I mentioned in the presentation, we're not going to go into detail on the numbers today, but it is a very accretive initiative for the fund. And because it's such a large initiative, it would really move the needle as well for the overall fund performance, and the appraisal stacks up from our perspective. Yeah. I think the only thing I'd add to that, Bradley, and you did touch on it, but I think it's worth reiterating as we did last time is Chippenham has been a great deal for us. We're running on a property level cash on cash return over 10% because of the asset management.

48:06 The the initiative Bradley's talked to could be very accretive, But at the moment, it is arguably too big for us. And so we are considering if if that transaction looks like it could proceed, we are looking at ways that we could potentially fund it. And it may be through disposals, could be through joint venture arrangements. But equally, it may still not happen, Bradley has said. So I think we're giving you as an really an example of the types of opportunities that we can create on these estates. And the great thing about Chippenham asset because it's a well located in the town center is even if the transaction we guided doesn't happen, we're clipping 10%. And actually, down the line, there could be alternative issues like residential that we we choose to proceed with as a as as an alternative. Bradley, do you want to just take that that last question before we we come back to to Jake?

48:59 How is our performance being compared to our peers? I actually, I've I've just seen that pop up. You can take you can take both, actually. Why don't you take the the Stanley Green question and then the performance question? So at Stanley Green, there's a question. Can we talk about the incentives for new rentals at Stanley Green on on the new estate? And are there significant rent free periods? So looking at Stanley Green specifically, we've actually you know, the team have done a good job in where we have done deals. Now for longer term, so we've actually got a couple of ten year leases straight and where the rent free period is commensurate with that length of lease. So for example, there's a ten year lease with a nine month rent free period. We've got some leases out of ten years with a five year break with, you know, sort of three months rent free period. So and these are with good tenants.

49:53 And, also, often, we've got some inflation kickers in these leases as well, which is really interesting, and some deposits as well. So I think, overall, the terms are very strong, and the incentive that we're having to provide is, you know, fairly fairly limited for the quality of the lease that we're agreeing. Anything you'd add, Nick? Only as a related point, actually. There's another question that's come in just when you say that 60% of Standard Green is under offer or in advanced negotiations, is that on top of the 40% let's? It it is on top of what is let. What is let is actually 30%. So so we've completed 30% of the lettings, and there are an additional 60% of lettings, which, as Bradley has said, are either under offer or or or are in advanced negotiations.

50:43 So that that that is a key focus for us over the rest of this calendar year and into the first quarter of or last quarter of this current financial year. So just a couple more points here. So how has performance been compared to peers? So I guess just firstly, the MSCI benchmark data I gave you. So within our MSCI benchmark are all of the immediate peer groups, so the other investment companies, but also the internally managed REITs, the British Landsland Securities, and also a plethora of other property funds. And on on any period at property level, we've outperformed. And, actually, if you if you draw down and look at the immediate peer companies, and we've named some of them in the in the chart, the likes of AW, Picton, Standard Life, etcetera, etcetera.

51:38 Our performance scrubs up well, particularly over the course of the last twelve months as we started to see the benefit of, you know, positioning more towards states like Standing Green and and other examples. At share price level, recently, and particularly since we have done the refinancing, our rating relative to peers has improved. So our rating now high 20 discounts compares favorably with one or two now who are trading at as wide as minus 40, where those companies have more refinancing risk. But, really, our objective is to do much more to close that discount. And and, again, going back to the strategic evolution, that's a key part of it, trying to be more differentiated, trying to drive, you know, a wide range of shelled demand, to to try and improve the rating, and that in turn potentially, creating growth opportunities.

52:27 And I guess that that's a neat segue into the question here. You you've mentioned a few times that you're too small for particular deals. Would you look at remerge to get bigger? Look. I it's a great question. The answer is yes. We would. But we are unable to issue equity at a discount. So any sort of, m and a activity, would need to be probably on a NAV to NAV basis. That, you know, is not completely out of the question, but we are in a position of strength. And therefore, if we were to look at M and A activity in that way, then, you know, it could mean that our dividend per share will be diluted. Now that might be something that is in the long term interest of shareholders if we can do bigger transactions, create more money over the medium term.

53:24 But but there are those issues around growth, mean that we've been much more focused on, if you like, plan a, which is growing net income, improving the rating, and now, of course, the strategic evolution. And if we get those bits right, then at least in theory, our rating should improve, and that puts us over in a stronger position if there are those m and a opportunities down the line. But we're trying you know, we are trying hard not to get distracted and to, you know, to to ensure that we we we we focus on the priorities of growing net income. So, Jake, I think that's we've covered all of the questions, I think, Jake. So just give me about five minutes to go. Shall we hand back to you before we wrap up? Absolutely, Nick. Bradley, thank you very much indeed for addressing all of those questions that came in, from investors this afternoon. And, of course, if there are any further questions that do come through, we'll make these available to you immediately afterwards, just for you to review to then add any additional responses, of course, where it's appropriate to do so. But, Nick, perhaps before really just looking to redirect those on the call to provide you their feedback, which I know is particularly important to yourselves and the company, if I could please just ask you for a few closing comments just to wrap up with, that'd be great.

54:38 Yeah. Thanks, Jake. Well, first of all, most importantly, thank you everybody for joining and for engaging so much with those questions. It is appreciated. And as we did previously or have done previously, if we get questions in that we haven't answered, we will we will answer those post meeting. Just very briefly, you know, we believe we are well positioned. We do have a high income yield. We have a very significant reversion potential, and we have a very low cost of debt. We are pulling all the levers we can do to deliver high levels of income for you as our shareholders. The strategic announcement today in relation to evolution the evolution of a strategy is not a revolution. Don't worry that things are gonna change fundamentally. It is the same investment objective, but we believe that being much more upfront about how sustainability is a critical part of that asset management process, we will be able to drive, again, medium, long term, higher income, higher total returns for our shareholders. So for those that are holders, thank you for your support, and, we hope to give you further updates on activity, in the not too distant future.

55:45 That's great. Nick Bradley, thank you once again for updating investors this afternoon. Could I please ask investors not to close this session as you'll now be redirected for the opportunity to provide your feedback in order that management team can really better understand your views and expectations. This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of SCHRODER REAL ESTATE INVESTMENT TRUST LIMITED, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all. Thank you.