Schroder Real Estate Investment Trust (LSE:SREI) — Half Year Results for the period ended 30th September 2022

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 of the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I'd now like to hand you over to head of UK real estate, Nick Montgomery. Good afternoon, sir. Good afternoon, Jake, and thank you for the introduction. And thank you very much, everybody, for for joining today on the investment company platform.

0:52 So as Jake has said, I'm Nick Montgomery. I'm head of UK real estate, but also alongside Bradley, who is with me on the line, responsible for SCHRODER REAL ESTATE INVESTMENT TRUST.

1:04 So we're delighted to have the opportunity to present the results to you today. It's a very interesting time in the market, capital markets more broadly, but particularly the real estate market. And we're trying to give you here a really good idea about how we see the landscape and the prospects for for for the company. So moving on, what we're proposing to do is probably have a forty minute or so presentation, a bit of a tag team between Bradley and me, and then we'd delighted to take questions, at the end. So just by way of introduction, so we've announced our results today. So these are the interim results for the six month period of September 30. With a slight tongue in cheek, I made a comment with our year end results that it was our best twelve months over the year to March we'd ever seen and that I was tempting fate.

1:52 And that was because we we knew that the market was going to slow. Yields were getting to very low levels, particularly in the prime industrial market. And so we were taking steps already to sort of manage that slowdown. Now, of course, what's happened in the wider markets, obviously culminating in the mini budgets, has led to significant volatility and we and we try to be really clear with shareholders within our report today about how we see, the outlook. So against the backdrop of a different environment, we've announced today a positive net asset value total return of 0.8%. That obviously includes dividend. The underlying NAV per share or the inline NAV fell by about 1.3%.

2:38 Very positively, we paid 20% more dividends over this six month period than the corresponding, comparative period a year ago. And almost more positively, that dividend is fully covered and we reported that per dividend cover today of 110%. So if you compare us to our peer group based on our very attractive share price yield today of 7%, that that that screens very well. But importantly, that is 7%. That is a 110% covered by recurring EPRA earnings. The other key point to note, I think this is a genuine differentiator, we have the lowest, longest duration debt in our peer group. And really importantly, it's fixed. So 90% of our debt is fixed. And later on in the presentation, Bradley will give you a lot more color on our debt stack and why we think we are so well placed.

3:32 Obviously, importantly is what's going on under the bonnet in terms of the underlying property portfolio and lots of asset management going on and a very encouraging pipeline of asset management. And again, Bradley will give you more color on later. So we've outperformed over the period quite meaningfully, albeit relatively low numbers. So 1.8% total return versus an index that actually delivered a negative total return over the six months of about 1.2%. I guess probably more relevant is a longer term performance track record. So over three years, our total return at portfolio level is 9.3% compared with the benchmark at 6.1%. I think very importantly, as we're looking forward into a market where we're going to see lower returns and income therefore making up a bigger part of that return. Over a three year period, our annualized income return was about 6.3 versus a benchmark of 4.2. So very significant premium over the benchmark.

4:23 And interestingly, that's the second highest income return out of a 160 funds in the benchmark over that three year period. And and amongst that 160 funds are funds that we know, for example, are on this platform, but also the the broader peer group that that people view as as being part of. I think the portfolio, as I say, has benefited from the active management across the portfolio. We've done a very significant new lease with one of our existing tenants called Buckinghamshire New University. At our university building in Upsbridge, they've extended their lease by five years at a higher rent. And and that's really important because they had a break option next year and so we protected that income. And again, more on that later. So I've mentioned income. Whatever metric you look at, we've had a higher income return, whether it's the initial income return, the reversionary yield, so the yield that reflects market rents rather than the rents we're currently receiving, and as well as obviously the actual pound notes received over the six months an increment of 2.8% compared to the benchmark of just under two.

5:24 That's been driven by some very high rent collection rates, in a funny way, actually ahead of the pre pandemic level, albeit actually, we we are looking at the economic outlook, the risk of a prolonged, perhaps not that deep, but nonetheless a prolonged recession. And we are very sort of acutely aware that there is some potential risk there and and staying on top of our tenants, maintaining that dialogue to keep those rent collection rates up will obviously be very important. That allowed us to pay the dividend. As I say, we've announced a dividend today of 0.8p. That's a quarterly dividend, for the period '2 or quarter two December. That's 4% above the pre pandemic level. I think we are still the only company in our peer group to now be paying a dividend that is ahead of the pre pandemic level. And as I say, with that dividend being fully covered over the period, it's worth noting that actually we're very confident that that dividend will be fully covered over the full financial year. So that's because we can see activity in the portfolio coverage that we had over the first half of the year as well as our fixed cost of debt that gives us the the the confidence to be able to say that.

6:27 Having said all of that, of course, because of broader sentiments, and direction of travel for values, our shares today at around 46 p represent almost a 40% discount to NAV. Now we find that very frustrating clearly and we have a strategy to try and address that. But we think that's a tremendous opportunity for shareholders, current and new shareholders, to buy in at a very attractive yield of 7%. And again, just to be my point of death, that is a fully covered 7% with the potential we hope to see further income growth. Now the final couple of points I'll make. Firstly, and we mentioned this when we last presented on this platform, we think there's a significant opportunity to evolve our strategy where there is more emphasis on demonstrating how we're actively managing with ESG being at the core of how we manage our buildings in terms of data to tenants, but more importantly, we can decarbonize our existing building stock and fully extract the green premium that we know is out there. And actually interestingly, also with our specialist expertise, perhaps extract mispricing where there's a brown discount and more on that as we go through the presentation.

7:35 And I guess last point to note is we've also announced today some changes to the board. We've we've taken on a new non executive director. We have a new chairman who stepped up from senior independent. They're they're very good changes and and and those directors also have an interest and direct experience looking at ESG as part of managing real estate portfolios. So I'll leave the summary there. Moving on to the results. I'm not gonna go through all these numbers, but obviously the headline here is that that we did have that positive NAV total return. It is an overused football analogy, but it really was a half year of two halves. Over the if you look at the top right hand corner of this slide, over the quarter to June, our portfolio went up by 3% versus the benchmark of 2%.

8:21 Over the quarter to September, for the reasons that are very clear, our valuations fell by about 4% compared with the market of just over 5%. So we have seen, the market churn. But as I say, because of the way that we're positioned, we think we're going to benefit from that, and we'll give you further examples of why that's the case as we go through. Looking at the table on the left hand side, I think the really important point there is to note the EPRA earnings of 8,600,000. That was 20% up from the same period a year ago. And the dividends paid there of GBP 7,800,000, which reflects that cover of 110%. We're also one of a number of companies in the sector that are undertaking share buybacks. We were the first over the most recent cycle going back about eighteen months. We bought about £10,000,000 of shares back. We bought most recently about £1,000,000 worth of shares at an average discount of 33%, which was at a small accretive effect to the NAV per share.

9:21 Moving on, looking at income in a little bit more detail. So you can see there, the operating earnings of GBP 8,600,000. If you look at the sort of the colored lines as we go down there, very positively, we saw a 10% increase in rent and related income. We saw a pickup, as I have said, net net earnings. That was for a couple of reasons, most notably because we've been very careful managing expenses. So the management fees reduced about eighteen months ago, so we're beginning to see the benefits of that coming through. But generally, across the portfolio, close management service charges, close management of rates, close management of expenses more generally. Finance costs went up because we had redrawn funds on our revolving credit facilities in order to carry out accretive acquisitions such as the assets in Manchester, Saint Anne's House, which we bought during the period for just under 15,000,000.

10:12 It's also worth noting, slightly technical accounting point, but actually, because the vast majority of our debt is a fixed rate loan, we're not, required to mark that loan to market even in our accounts. Just for noting, were we to, because that fixed rate loan is so attractive in the current environment, there would have been an incremental fair value positive adjustment of about 18,000,000 coming through the NAV. Now that's not reflected, but that just illustrates the value of that long term loan that we have. The other point to note, I guess, here is there is a line you can see bad debt provisions and write offs. We have about £600,000 of bad debts currently. We are starting to see COVID related arrears really come through now. We have a very low level of arrears, and that's reflected also in the rent collection rate, which we noted earlier on in the presentation, at around 98% in the most recent quarter.

11:09 Now dividends, we own the company for dividends. And you can see here, following the eight consecutive uplifts, following the pause on the immediate onset of the pandemic, We've continued to increase the dividend on the basis that we will continue doing so where we think it is sustainable. Our aim is to continue to adopt a progressive dividend policy. We are advising the board, and the board agreed, felt that given the current volatility, we should just pause. We were very confident paying 0.8p. And as I've said earlier on, we expect to be fully covered for the financial year. To be absolutely clear, our number one objective is to continue to grow the dividend. And as we go through the presentation, there's lots of activity which we hope will enable us to do that. But just at the moment, reasons that I hope are clear, we have paused.

12:02 Property performance. So a lot of you will know that companies like ours and peers compare the performance of their underlying assets to an MSCI property benchmark so you can look at proper like for like performance on a relative basis. And I and I won't spend too long on this, but you can see in the bottom right hand corner there the relative performance versus our peer group. And again, that peer group includes companies that are on this platform as well as a wider REIT universe. And you can see over every period now, right away over the six months, but also going back at IPO, sustained outperformance. And that's come from active management, and it's come from a higher income return. Just to do the point to death, if you look at the top left hand bar chart, you can see there the brown bars representing the total return over the twelve months of September, which gives you that 4.9% relative outperformance. But importantly, the income return that we generated over that twelve month period of 5.9% compared to the benchmark average for The UK just under 4%. So we've got a significant yield pickup as well as a higher income potential in the portfolio as we deliver on the asset management.

13:16 Now again, briefly, this is normally sort of your house is at risk slide, but I think there's an important point to make here, which we've highlighted in the in the red dotted square there. So

13:28 again, some of you would have heard this before, but going back almost exactly three years, we refinanced our principal loan with Canada Life. So that was a fixed rate loan, which had eight and a half years left to go at that point and had an interest rate of about 4.4%, which was high versus peers, and it was acting as a bit of an anchor on on dragging our returns. Now we made the decision back then, and I have to say it wasn't an easy one, to refinance that loan. We paid Canada Life 27,000,000, basically, tear that loan up, reset that loan for sixteen and a half years, so eight and a half years to sixteen and a half years, and reset the interest rate from 4.4 to 2.5%, and that is fixed for the duration. So the reason we flagged this is that a lot of investors and analysts will screen companies based on a three year NAV total return.

14:20 And of course, because this was done in October 19, it still sits in within our three year period. That will not be the case next quarter and so we made that point because it's important people understand that that is the reason for the negative return but equally why we're now benefiting from having the lowest cost, longest duration debt within the peer group. Now moving to the market. So what this chart shows, and some of you would have seen this before, the blue bars show the monthly capital value movements on the MSCI monthly index. So the average for all property and and and that includes our data and a myriad of other funds data. And then what we're showing with those orange dumbbells, if you like, is the spread between best performing sector and the worst performing sector.

15:12 And really, ever since the Brexit vote, the referendum, because of those very strong structural tailwinds, particularly through the pandemic, that were driving, retail online and as retailers and and pure play Internet retailers, obviously had a war for space, the industrial market has delivered absolutely stellar returns. And our view, and certainly when we presented earlier in the year, was clearly that wasn't going go on forever. And interestingly, we got to the point in April May time where it was clear it was gonna turn principally because parts of that market were moving into deficit financing. So the cost of borrowing to buy those industrial assets was in a was above the initial income return that investors were getting from buying those in the first place.

16:04 Now, of course, what's happened is the unexpected sharp rise in gilt rates has exacerbated that. And so the cost of borrowing has jumped quite significantly, and we'll come to that slide in a moment. But what that has meant is very sharp change in sentiment towards the industrial sector, and that's obviously been compounded, by, the mini budget, of course, but then selling across pension funds, some of those open ended funds suffering from redemptions and investors needing to sell. Now the key point here is we are benefiting from this in a sense because we are diversified. You know, we are not a pure play industrial owner. We own 50% of the portfolios in very good quality multi letter states and we'll give you a flavor of those in a moment. But what it means is when you've got, for example, retail warehousing performing somewhat better than the industrial sector, we're an owner of retail warehousing. When you've got offices in places like Bloomsbury, which is benefiting from life science demand, Manchester City Centre where we've got a very large mixed use asset, again, we are benefiting from being diversified both in terms of not experiencing the full decline in values because smooth across portfolio, but also because by owning some of those alternative asset types, we we are enjoying the higher income return.

17:21 So that's the key point in that slide. We are benefiting from diversification. Now in terms of the market, unsurprisingly, as I've noted, we've seen a sharp fall in liquidity in the market. So over Q1 to Q3, about 40,000,000,000 of investments were traded across The UK market. That was actually the most since about 2015. But no surprises that the majority of that was in the first quarter, first and early in the second quarter. Interestingly, there are steel deals happening. And although we are expecting further capital value declines, and of course, valuations are lagging prices in the markets, prices in parts of the markets are getting to levels where we are beginning to see some investor interest. So we are expecting at the moment the current correction to be quite quick.

18:12 That is qualified, of course, by the autumn statement tomorrow and no more surprises. But if we do see gilt rates settle at or around three and a half, they're about 3.3 for ten year, then it's reasonable if you look at historic averages to assume that the average real estate yields might land between five and five and a half. And that implies that we may see a capital value decline perhaps in average terms up to 20. Now that's an average. Average is misleading. We may I would hope we would do better than the average, but that's effectively what is baked into the market currently. And in fact, interestingly, if you look at the most recent MSCI data, so the monthly data I just shared with you, the most recent data for October showed a single month capital value decline of about 7%.

19:05 So we are seeing that correction come through. But to be clear, this is not something we see as being remotely comparable to the GFC, even the early nineties or the dot com bubble bursting. This is a correction which at the moment is principally being driven by the risk free rate effectively. And that's really what we're showing on the right hand side here. And you can see on the chart, the dark gray bars you can see represent the yield spread effectively between average property yields and the ten year gilts. And it's on average over the long long run, it trends anywhere between sort of 12%. And therefore you can see how the sharp uptake uplift in the ten year bond yield, the blue line, which we think will settle around three and a half, maybe a little bit less.

19:51 The real estate yields, think, are going to move in line with that historic average for the premium over that risk free rate. And that's where we think the market is heading. And to a certain extent, that appears to already be being baked into prices. I guess the qualifying statement I make is things remain very volatile. I think the first point to note is, and this would work in our favor, interest rate swap trees, I believe, over the course of the last month, have fallen by about a 150 basis points. So that I think that that's the first important point. The second point, think, is, you know and we think we're well placed given asset quality, but clearly, the next phase of the correction could be more influenced by,

20:31 you know, tenants' affordability, potentially seeing some distress in the retail market. But again, we think we're well positioned for that. And the last point I'd note is, you know, and and this is the reason I think why I'm I'm sort of drawing distinction between the GFC and previous periods. We don't have the issues we've had in historic cycles. We don't have a significant pipeline of new development, which we did obviously going into the downturn of 2008 where banks have been pretty prolific at lending to the sector. You know, we we we so we the only areas, I guess, where you guys are little bit more suppliers and logistics. But again, we don't own any. Our exposure to industrial is limited to most of our industrial estates. The the other point to note is, again, we've sort of remembered our lesson the lessons from the GFC.

21:16 The banks have not lent anything like the same levels of LTV that they did pre GFC. Most companies in real estate in The UK now, their borrowings are they're thereabouts anywhere between sort of 30%,

21:30 a little bit high in some cases, but we don't have that leverage in the system, which again, for those reasons, we think any correction would would would, you know, as along the lines that I've outlined. Obviously, with a big caveat. Now moving on to to to to the industrial sector because because we are 50% weighted, so it is something we wanted to focus on. Just in high level terms before Bradley gives you bit more color on our assets, whilst we are expecting the industrial sector to see further value declines ahead of the wider market, it is very much yield driven. We have equal confidence, but actually looking forward, once we are through that correction, the attractive demand and supply imbalance, particularly for multilayer industrial states, will probably mean that the industrial sector enjoys higher than average rental growth.

22:22 So we remain confident, and in fact, it's what we're seeing on the ground still, that there is good demand for industrial, there is a structural in the supply, and if you can create the right space, increasingly space that is to a particular sort of sustainability standard, then then the leasing market, you know, is is As I say, for reasons that will be clear on the right hand side, we we have we are more cautious about logistics. Logistics. The reason we favor Multilayer Industrial is you have a very granular diverse tenant base, lots of different businesses. Whereas you can see, obviously, within ecommerce, there's a lot of demand from retail. And clearly, with a consumer slowdown as we go through the winter, that market we think that will be more adversely impacted.

23:08 To compound that, below you can see, there's much more significant supply of distribution warehouses than anyone that drives up the M 1 or the M 6 could can see that very clearly. Whereas there is very little new supply, as I said earlier on, of multilet, which which which is what we own. So my last slide before I hand over to Bradley. So, again, this is a recap. So we have effectively five columns for our strategy. The first is a diversified approach, and we think we will really benefit from that because of the way that the market has converged. And in fact, now, clearly, the the industrial sector is likely to suffer greater capital value

23:49 declines compared with, as I say, value retail warehousing, good quality offices in in in major cities, which is where the majority of our exposure is outside of industrial. The other point to note is we have a specialist team. So Bradley and I work with a team of about a 100 people based both in London and in Manchester where we have our second office and we have boots on the ground that really can add value across the different sectors of the market. So we have industrial specialists, retail specialists, office specialists. So we can tap and change between sectors and do that do that ourselves.

24:22 That talks to the point about operational excellence. Tenants are increasingly demanding, in terms of what they want from their landlord, data, ESG data, service levels, and we're well placed to deliver that. I think you will see us undertake some further sales, small sales probably, but I think we will be trimming the portfolio as we see opportunities both within our portfolio to invest in assets that we think we can improve, but also looking into next year, it'd be nice to think we have some capacity possibly having sold assets to get back in to buy the sorts of assets we've typically done well on, where we can add value, where we have our own initial yield, particularly where we add value through repositioning through that sustainability lens. Balance sheet, Bradley will talk to you in a moment. And then finally, ESG, that is an absolute key focus.

25:11 We are planning on coming back to shareholders early next year with a more clearly defined strategy that specifically talks to how we can capitalize on the green premium, but also recognizing the need for decarbonizing our existing Delta states, how there is an opportunity we think to buy mispriced brown buildings, use our expertise to drive returns and be better known for for delivering that that that performance with part of that coming from being best in class from sustainability perspective. So with that, I'll hand over to Bradley. Thanks, Nick. And it's a pleasure to be here talking to you all about SREI today.

25:50 So I'll dive straight in on the in the table on the left hand side, we show some important data points on our portfolio. And the and the first two rows we've highlighted illustrate the diverse and granular nature of our portfolio, which in our view, we think it makes it more, resilient, which I think is a characteristic that will be important as we enter a recessionary environment over the next few months and potentially longer. The second set of rows we've highlighted show that our portfolio is higher yielding than the benchmark. And in addition to that, we have a higher reversionary yield. So there's potential for rental growth to come through there.

26:32 And we think that positions us well for an environment where interest rates are rising. So our properties yield higher than finance costs. So we think they may be more resilient value wise as well compared to the average. Now looking on the right hand side, what we've shown there is the breakdown of the sectors that we hold in the portfolio compared to the benchmark. As Nick says, around half of our portfolio is in the industrial sector, and our industrial assets are almost all multi industrial estates. And that's an area where we consider the supply and demand dynamics to be very favorable. So moving on to the next slide.

27:15 We've got good quality assets with good fundamentals in higher growth locations. And to provide you with transparency of our portfolio, on the left hand side, we show our 15 largest assets by value. These represent almost 80% of the value of the portfolio. And on the right hand side, we're just gonna spin through three mini case studies to give you a flavor of the sorts of assets we hold in our portfolio, other than mostly industrial estates, which we will talk to on a later slide in more detail. But at the top, we're showing you Headley Central in Leeds. This is a prominently located asset in a densely populated area, very popular with students and young professionals. What's interesting about this asset is we've completed some key asset management initiatives already.

28:03 So what you can see in the photo is a Premier Inn hotel. That used to be an office block, but we converted it to a hotel. And we've let it to Premier Inn on a twenty five year lease that links to inflation. Interestingly, the rent here will increase from 420 k per annum to almost 500,000 per annum from December, and there'll be twenty years left on that lease. There was a second office of office unit that we converted into a gym. So it's a really nice modern gym. I've been there. It's very impressive. And that gym is also on a long term lease, that's on a lease of twenty years. And there are fixed up lists, so every ten years, sorry, every five years, the rent will go up by 10%.

28:49 So, again, very attractive, long term leases there.

28:53 And this is an example of where we acquire assets and add value to them through active management. The asset in the center there is Store Street located in Bloomsbury in the West End Of London near Tottenham Court Road. We own two freehold buildings there. They provide 85,000 square foot of educational space. And this is an area of Central London that benefits from significant infrastructure improvements such as the nearby Crossrail station. And if you hadn't had a chance to go into Crossrail yet, it really is very impressive. It's really good. We think it's gonna transform parts of London. It's also benefiting from the new developments surrounding Tottenham Court Road who have been attracted to the Crossrail station. There have been public realm improvements as part of the West End product project, such as those taken undertaken in Alfred Place. There's a small pocket pocket park that's been opened just next to Store Street.

29:49 And there's been increasing demand from life science, technology, and education occupiers. So this site has a lot of potential. So there's potential for higher value and alternative uses. That's supported by the low site density that underpins the value for future redevelopment. So you can basically build more on on on the footprint of the site. This is currently led to the University of Law who are very have been a very successful business. They're opening new sites across the country. They're the largest provider of legal education in The UK. So that lease is until December 26, and they have said that they would like to stay longer. The asset at the bottom is St John's Retail Park in Bedford.

30:35 This is our largest retail exposure by value, and this is the catchment dominant scheme in the area. This asset is fully let at sustainable rents and anchor tenants such as Liddell drive footfall. During the period, we completed a fifteen year pre let with Starbucks for a new drive through that they're going that they're going to construct on the site, and this fifteen year lease would also be linked to inflation. At the same time as that, Starbucks are gonna construct another drive through on another of our retail parks, this time in Bletchley, Milton Keynes. So again, here's an example of us adding value to the portfolio. On to the next slide. So given the volatility in the industrial market that Nick's described, we thought it might be helpful just to provide you with some data of our industrial portfolio.

31:30 There is a lot of data on this slide as well as some very nice aerial photos, so please feel free to look at those afterwards. But what we want to draw out here is the average capital value per square foot of the portfolio is a £106. Now we know from experience that it costs around a £110 to build high quality multi industrial estates. So we think our portfolio represents excellent value. In addition, within our portfolio, the most expensive asset we hold by capital value is Stacy Bush's in Milton Keynes. So that's a photo in the top left hand corner. So that's a £150 per square foot. And bear in mind that just a few months ago, at the peak of industrial values, industrial estates in London were traded for £500 per square foot.

32:22 In addition, in our portfolio, we've got excellent, opportunities. There's some development land available for us to add value, and we'll come on to an example at Langley Park shortly. But overall, we think our industrial portfolio represents excellent value, is high yielding, and should be more resilient in the face of rising interest rates. On to the next slide. Here, we list our 15 largest tenants by annual rent as at the September 30. Just from scanning down the list, you'll see well known names, household names. We think this is a result of the quality of our portfolio and our approach to operational excellence. We think this means our income is more resilient, and it's pleasing to report our rent collection for the September quarter was 99%.

33:17 We're not currently seeing any signs of this changing, but we are monitoring it closely given the recessionary environment we're about to enter. So just spinning down and highlight a few names on the list. I mentioned University of Law, a growing business, been very successful, taking up new space, including within our portfolio. Siemens are a very strongly performing business, and we regained with them during the period. Buckinghamshire University, another successful business. So at Uxbridge, they train nurses and, you know, very popular course. On this, we've also got Lidl, Premier Inn, Balfour Beatty, you know, FTSE two fifty International Group, and Balfour Beatty are also taking more space within our portfolio.

34:05 Moving on to the next slide, Slide 18. Our void did increase marginally through the period, but actually at 8.8%, it's right in the middle of our ten year range of five to 13%. There's a lot of activity that we're undertaking to reduce this void, and we summarize that in the table here. So 1.4% of the void space is under refurbishment, and 2.5% is under offer. Onto the next slide. So with returns, you know, as as Nick explained at the start, returns within real estate sectors are converging. And, it was a complete reversal in October where industrial was the worst performer and retail was at the top end.

34:52 So the purpose of this slide is to give you a flavor of the activity we have underway or on the drawing board to drive asset level performance because we think future outperformance will be asset led. So the first asset you see there in the left hand column is is our office in Uxbridge. Now that's not actually a photo of Uxbridge if you're from there. This is a CGI of a planning consent that we have, and that will be relevant in a second. Because during the year, with the tenant at this asset, are Buckinghamshire University, we completed a lease variation to keep them at the site until November 28 and increase their rent by 13% per annum. But positively, we're currently in talks with them to execute a longer term regear in return for us enhancing their site, particularly with respect to sustainability performance, which is an important characteristic for them, for their own goals.

35:53 In the second column, we show our development site at Stanley Green Trading Estate. We expect to complete the works here in January, and we have 28% of the new floor space currently under offer. We've estimated conservatively the value of this estate to be $20,000,000 once it's complete, and that's assuming around a 6% yield. The valuation within our portfolio value as at the September 30 was just 10,000,000. Now we need to spend 2,900,000 to get this site finished. So in a sense, we're spending 2,900,000 to make 10,000,000 gain on our valuation. Similarly, in the third column, this is this is a project we have underway with Starbucks, as I briefly mentioned before.

36:42 We're at the position now where we need to spend 1,700,000 in order to generate an additional 2,200,000 of value. The reason the jump isn't quite as large as Danny Green Trading Estate is because we are getting the benefit in our valuation of the rents that we expect to get from Starbucks. So the way of looking at that is basically some of the juice has been taken out of the project already, but there's still more to come. Then the final column, just a bit of background. We acquired this asset, which is Langley Park in Chippenham in December 2020 for £19,250,000. This is a 28 acre site in Chippenham. It's next to the train station in the town center, and there's excellent long term opportunities for development and alternative uses.

37:29 The first phase of the business plan, once we acquired the asset, was to crystallize the reversion potential. That is there were tenants paying low rents with outstanding rent reviews and upcoming lease expiries where we could push the rents on. So we completed a rent review with Siemens, increasing rent by 26%, and we executed a lease renewal with IXYS, and we increased their rent by 31%. In addition with IXYS, we secured a ten year straight lease with RPI linked rent review. So, again, another room for long term longer term inflation linked lease. And then as a result of of just those two deals, the yield on the acquisition costs that I mentioned of 19,250,000 is over 10%.

38:19 So it just shows how attractive an acquisition that was and how we target these higher yielding assets to drive income. And as Nick described, our income return is significantly higher than almost all peers. Now the next phase of the business plan, phase two, is to, take advantage of the development space that we have. This is on the drawing board at the moment. It's not a firm plan just yet, we've had encouraging talks with the council to build a further 130,000 square feet on land that currently has no apportion value. So if we assume we spend a £110 per square foot, it would cost us £14,000,000 to build that new accommodation.

39:05 And we, again, conservatively estimate that will be valued at 18,000,000 on completion. However, there is a larger scheme possible, and this would involve us engaging with our tenants who may wish to move into the new accommodation, which would then enable us to redevelop their former accommodation. So what you end up doing is developing 350,000 square feet of new space at a cost of 60,000,000, and 20,000,000 of that is the existing value of the land. So part of it is construction cost, part of it is to recognize that there's value on that land already. But then you'd have a site worth 74,000,000. So the the these are the options we're considering at the moment.

39:53 On to the next slide. You know, Nick mentioned that we have a very strong balance sheet, and we can't really emphasize that enough. It's a competitive advantage versus our peers, and in fact, almost all real estate companies. So on the left hand side, you see we've got two debt facilities, a term in Canada life of a 130,000,000 and an RCF of RBS 75,000,000. The term loan is fully drawn. The RCF is partially drawn, so we've drawn 46,300,000 of the available 75,000,000. Now the key stat here is 91% of our drawn debt is at a fixed interest cost at the moment or capped. But actually, with regard to the cap, the reference interest rate is above our cap, so our cap is currently in the money.

40:42 So in effect, our interest is our interest cost is fixed, 91% of it. Not only is it fixed, it's also a very low rate. So our all in average cost of debt is 2.7%. And not only is it a low rate and fixed, it's also for a very long duration at eleven point two years. So very attractive and strong position to be in, particularly as we enter an uncertain period. Onto the next slide. Now there is sensitivity around loan to values at the moment. And the first point we'll make here is we have material headroom on all of our loan covenants. So, you know, we're it's highly unlikely we'll ever have to be a false seller.

41:27 But at the same time, we have our own strategic loan to value range that we like to operate within over the long term, and that's 25 to 35%. So what you can see in the table in the top right hand corner is how far portfolio values would have to decline before we exceed our strategic loan to value range, and that would be more than 10%. And then at the bottom, what we're showing here is the is really the impact of our strong balance sheet. So we've shown what our interest cost would be for the current full year to March 23 and for the following full year to March 24. So that'll be 5,000,006 million respectively based on the current forward interest curve, the Sony curve. Now if that increases by half a percent or 1%, as you can see, our current year interest costs will barely move and it's also a very low sensitivity in the in the following year. So what this means is our earnings are protected, and that's why, you know, we're we're confident to say that the current dividend will remain fully the current year dividend will will remain fully covered, and, it puts us in a strong position for the future.

42:41 Onto the next slide. So our research and the evidence across our portfolio demonstrates that there is a material rental and value premium for buildings with green certifications. And actually, we expect this premium to grow as extreme weather events become more common, as additional regulation with respect to the leasing of buildings with poor energy performance becomes effective. And also, there may be forms of carbon taxation introduced as it becomes clear that the net zero carbon pathway isn't being achieved. These sort of structural trends support our direction of travel to make sustainability a defining attribute of our strategy.

43:30 And this isn't an evolution we're starting kind of right now, but it's been a journey that we've been on over the last seven or eight years where we've been continually improving our approach to sustainability in real estate. But the focus for us today is on decarbonization, and this has to be led by energy demand and efficiency first. So that means reducing the use of resources. Therefore, we need a deep understanding of individual asset performance from a sustainability perspective and also the potential performance that an asset could achieve across the whole portfolio. And we're currently undertaking a comprehensive review of the sustainability characteristics of our portfolio, and this covers the building fabric, energy systems, services and utilities, climate risk, water consumption, waste management, biodiversity, and green infrastructure.

44:23 So it's a very comprehensive review that we're undertaking. And the result of that review will be that we can have a very well informed model looking at our portfolio, what it will cost to upgrade assets, and, you know, whether where the where the improvements are required and where we should sell. So with that, I'll hand back to Nick for some closing. Sorry there. Thanks, buddy. That that that that's great. So so just very briefly because we've got some great questions. As I said, I think we we are well placed. We've got a very granular, good quality tenant base. We've got a very good quality portfolio that importantly has got some really interesting long term asset management opportunities, which should allow us to continue to see growth in our net income.

45:14 On the other side, of course, we've got some fantastic long term debts, which means that, you know, in an environment where we are seeing interest rates rise, we should be less adversely impacted versus a lot of our peers. And the final point, of course, is, as I said earlier, the shares do represent, we believe, very, very strong value at the moment, and particularly given that 7% dividend yield that, as reported today, is 110% covered from recurring earnings. So I will pause there before so I'll hand back. Nick, Bradley, that's great. And 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.

46:15 Bradley, Nick, we obviously received a number of presubmitted questions ahead of today's event as well as, as you can see in the q and a tab, there are a number of questions that have made their way through during your presentation itself. So firstly, thank you to everyone on the call for taking the time to submit their questions. And Nick Bradley, if I could just hand back to you to respond to those where it's appropriate to do so, and then I'll pick up from you at the end. Thank you. Yeah. Thanks, Jake. That's great. And thank you everyone for submitting questions. That's great. So if I start, and I'll I'll I'll hand some of these over to to Bradley as we go through. So so the first question is a good one. There have been media reports of false sellers in The UK market, including UK pension funds, selling down property to meet collateral demand in a volatile market.

47:02 Have you seen evidence of this? And is this something SREI can take advantage of? The first answer is yes. We have seen that. There was an acceleration of redemptions in the open ended fund world, obviously, immediately after the the mini budgets. Interestingly, I think as well, those have slowed significantly. And we are beginning to see, obviously, NAVs in those funds adjust. So So as Bradley has noted, there was an 8% decline or seven or 8% decline in values, would have fed through to NAVs in those vehicles. And we understand that there is secondary market activity in some of those funds where we've got investors who are looking to buy those shares in those unlisted vehicles, you know, discounts between 1520%.

47:53 So not at the same levels that we are, but nonetheless, illustrations there of of demand. We have seen deals in the market that have repriced quite significantly. Interestingly, even today, one of the major pension funds has withdrawn, two portfolios totaling about 600,000,000, which they were selling principally, we understand, for redemptions. But obviously, the sort of the stability that we're now seeing in markets means that they no longer have to sell. So we are seeing assets reprice, but at the moment at least, there are there are signs of stability. And I don't think we're gonna see a situation which was comparable with the GFC where, of course, around the GFC time, there are a lot of retail funds with which were daily priced and daily dealt. So a much smaller part of our market now.

48:47 Most of the funds that are experiencing redemptions are quarterly dealt. So if you redeem on the January 1, you get your money at the end of June the end of June value. So so I don't think we're gonna see such volatility coming out of those open ended funds. Of course, the caveat to that is, you know, that's based on where we are today with markets being more stable. It clearly if we see a shock in markets and we see a spike in guilt yields again, then then then clearly we may see a repeat of that. As to how we can capitalize on it, and and there's another question actually further down about about our ability to fund some of our projects. We have limited new firepower at the moment because, as Bradley has outlined, the capital that we do have is allocated to some really interesting CapEx projects.

49:33 And although there are some interesting and I think quite attractively priced deals out there and and the deal we did in Manchester earlier on in the period, think is a good illustration of that, I think we will still have more conviction that we will get a better return out of investing in our existing assets. So, you know, the standard green warehouse development, for example, that Bradley touched on, you know, we're we're you know, there's potentially another 7 or 8,000,000 of profit to have out of that. And so we'll generate, think, a better return putting our money into those initiatives just at the moment given the more limited capacity that we've had that that that we have at the moment. So that's the answer to that question. So just going through the next question. Please, can you color the the feel of demand that's out there for potential tenants on taking up space since the mini budget?

50:23 So I'll give an initial response, and, Bradley, you you add to it if if if if you want to. I think what I'd say is the the investment side of the market is moving at a very different pace from the occupational market. And actually, interestingly, if you look at the return from the industrial market over three months, for example, to to October, so the latest the latest data. So over three months to end of October, average industrial values fell 15%. Over that same period, rents went up by 2% according according to to the the index. So we're we're we're in this interesting situation where we're seeing values reprice because of the risk free rates, not at the moment because actually we're seeing a significant tail off in occupational demand. As I said earlier, the supply demand dynamic, particularly the multileptic industrial, remains favorable for landlords.

51:20 Now so so so and and actually, interestingly, I'm I'm sat here in the city and, you know, we've heard today, for example, that GP have done their biggest ever pre let to the to The US firm Clifford Charms who are moving from Clary Wharf to just down the road here. And I can give you other examples where, for example, whether it's Starbucks, Lidl, and Bargains, there are pockets of the retail market where we also are seeing retailers with quite significant new store requirements. So overall, the occupational market is actually better than I think you might fear. I guess the reason why we're making some slightly cautious statements and I think the reason why it's right to be prudent at the moment is obviously we're going into a more difficult economic period particularly for the consumer.

52:07 And so we might see that feed through particularly, for example, into the hospitality sector, some of the more highly levered retail tenants. And as Bradley has outlined, we don't have a significant overexposure to those occupiers. So we're expecting a slowdown. The rent collection rates don't tell us that at the moment, but it's something that we're monitoring very closely. Bradley, is there anything you want to just add to that? Know, I completely agree with what you say. The occupational market has been very strong up till today. You know, we see it in the rents coming through. I outlined some examples during the presentation where there's some significant uplifts. But, you know, we think that businesses may come under more pressure next year as costs increase both interest as they, you know, have the combined effect of higher interest, higher energy costs, and general inflation. It's it's going to become challenging, particularly as consumer spends less.

53:08 We're monitoring it closely, and, we're also looking to improve the defensive qualities of the portfolio. So you'd have heard us saying a lot about our resilient talent base, giving examples like strong businesses such as University of Law where we're taking or providing them more space, executing re regears with companies like Buckinghamshire University who are performing very well, and Siemens and Balfour Beatty. They're the sorts of businesses we're trying to let space to. Absolutely. Absolutely. I guess carrying on that theme a little bit. So one quick the next question is what would you say makes you different to trusting your peer group? And I think that's a very fair question because it's certainly at face value. It might look quite a crowded space. I guess there are probably three things that really differentiate us. I think the quality and granular nature of our income, and in particular, as I said, the level of cover that we have, particularly given the attractive income return and the ability that we have to boost that income further from the active management.

54:12 The second key point is a specialist expertise that we have. That's important to deliver the active management. You know, we have boots on the ground. We are doing direct development. We're not paying a developer profit. We're doing it ourselves with our specialist teams. And I think increasingly, as the market becomes more operational and we talk about the hospitality approach, as the market becomes more operational, having their boots on the ground, in our case in Manchester as well as down here in London, is a real competitive advantage. And the last point to note, what differentiates us, I don't think we're necessarily shouting about it enough, but I think our approach to sustainability in ESG, we are hiring people into that business. We're investing in natural capital research. Have a big renewables platform. And I think we've got a real opportunity to capitalize on that more than perhaps we have done.

55:03 So moving on, strategy execution on track, what keeps you up at night? Well, apart from the foxes in the back garden, I think I think it's principally, as Bradley has said, I think just monitoring very carefully how the next few months is going to impact our occupiers, rising utility costs, rising interest costs, you know, recent refinancings. As I say, you know, we are cautious, but I think we are cautiously optimistic given the granularity of our portfolio. But I think it is just that income side, just making sure that we're on top of our tenants, you know, we're on top of getting the rents in, but also equally that that, you know, we we are there to communicate with them so we can understand where there are issues and we can help tenants deal with them.

55:49 Next question, Bradley. One for you. Is there scope to accrue additional income by installing PV on industrial sites? Tenants might also benefit sort of building on what I just mentioned. Tenants might also benefit from having less volatile energy pricing. So, yeah, that's a very good question, and it's one that we're looking into proactively right now. So we're currently undertaking a tender to to find a partner, so someone who can install PV across our portfolio. And, this isn't exclusive to SREI as a fund. This is for TRUST LIMITED, so hoping to get some economies of scale there. And as part of that, we'll be undertaking a feasibility study to kind of model the the cost benefit analysis at an asset by asset level to then make the decision as to whether it is worthwhile investing in PV.

56:43 And, you know, I'm I'm a big advocate of PV and that, you know, I hope to I hope that we can report over the next couple of years some some interesting projects where we have have done that. And I would also add that at Stanley Green, we're adding PV and our new part of Stacy Bush's, we're redeveloping an old unit into into a of brand new operation at zero carbon one that would also incorporate PV. You know, we think PV is a, a good way potentially to make high returns both financially, but also it helps the net zero carbon pathway enormously as well. Great, Bradley. That that that's really clear. So the the last I've got two remaining questions in given time.

57:32 They're linked. So Bradley, maybe the the I take the first, you take the second leg of this. So the first leg is given asset management and development opportunities, do you see a need to increase the RCF as well as extended duration? What is your estimate of the premium over Sonya that might be available to you? So that's linked into the second question, which is what is likely to the new interest rate for the RCF interest cap in 2023? So I'll give Bradley that one because that's difficult. The the first one, I think, is really about the RCF. I think at the moment, we have enough capacity to deal with the near term projects that Bradley has mentioned. So obviously, of Standard Green with Starbucks that we mentioned, you know, if another significant project, for example, the Ducksbridge comes along to do the refurbish room with the tenant there, then again, we may have capacity.

58:22 Looking beyond that, so for example, the Chippenham project, we don't currently have that capacity, but that's a nice problem to have. You know, if we've got more opportunities and we have capital, that's the right way around. I think we may consider extending our RCF, but only if we have visibility that we can get back to that strategic range of 25% to 35% net LTV down the road. As I say, our forecast suggests that we are gonna bump up against the upper end, perhaps go a bit over the the upper end. And so we will look very carefully at any further borrowings before being absolutely comfortable with with with that range. So so so I think at the moment, no immediate plans. What I would say is we have a number of smaller sales that are in the pipeline.

59:10 We may, for example, consider selling a couple of further assets if we think we can redeploy those proceeds into projects like Chippenham where where, you know, certainly on our current underwriting, we think the potential there or the the opportunity there is really, really significant. So, Bradley, just just a final point from you before we wrap up. Just just a question in relation to the interest rates. Yeah. So currently, the five year Sonya swap rate is 3.8%. So if we if we if we swapped we'd we'd lock in that 3.8% plus our margin of 1.65. So it would be obviously higher than what we pay now because we have a cap. So the the cap is 1.5%.

59:58 So in effect, you go from 1.5% to 3.8%, and that's a reflection of where interest rates have moved. We're choosing not to swap right now because we we think that with the autumn statement coming out and with the kind of the panic around the mini budget hopefully passing, maybe the forward curve will come down slightly so that swap rate may decline. In addition, we have an option to buy a cap again. The reason we haven't yet is because the last few months have been at historically the highest sort of prices. So again, we felt that we could you know, we we have time to wait and see if that improves.

1:00:46 And if we buy a cap, you you know, we we we can cap or whatever, broadly speaking, with a reasonable interest rate. So it could be lower than 3.8, but you just pay more for it upfront. So this is something that we're monitoring closely, and we'll make a decision on it in the new year. Yeah. I think that's that's absolutely right, Brady. I think I'm very fortunate position in the as we've said, you know, 75% of our drawn debt is locked in for a further fourteen years at two and a half percent, which is why I think we can afford to be a bit more relaxed on the basis that we do feel that the curve probably will work in our favor. But but we are monitoring very closely. So firstly, before we wrap up and I hand back to Jay, I thank you very much for those questions. And and and there are a couple of unanswered that we will endeavor to we're given time. We'll endeavor to respond to those after the event.

1:01:39 Nick, that's great. And Bradley as well, thank you very much indeed for addressing all of those questions that came in from investors this afternoon. And, of course, as you kindly just said, we'll give you back all of the questions that were submitted today as well as any further ones that do come through for you to review and then add any additional responses, where it's appropriate to do so. Nick, perhaps before redirecting those on the call to provide you their feedback, which I know is particularly important to yourself and the company, If I could please just ask you for a few closing comments to wrap up with, that'd be great. Thank you, Joe. Well, first of all, I'd like to say we're really delighted with the engagement we're getting on this platform. I think it's great. I think the questions are really insightful and, you know, we we will continue doing this. I I think, hopefully, for those of you that heard us, you know, six, nine months ago, we're on track.

1:02:26 We're doing what we said we're gonna do and we're absolutely moving in the right direction. Clearly, we're in a cyclical market, and and and, you know, we are expecting to see a correction in values, but we think that's more than the price. And and really the focus is on that very attractive dividend yield that is fully covered and the pipeline of activity that we've got coming through, which you will hopefully hear about through future news flow, which will should allow us, we hope, over time, to continue to adopt that progressive dividend. So Jake, I'll leave it there. Nick, that's great. And Bradley as well, thank you once again for updating investors this afternoon. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team can better understand your views and expectations?

1:03:12 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 this presentation. That now concludes today's session. So good afternoon to you all. Thank you.