Schroder Real Estate Investment Trust (LSE:SREI) — Investor Presentation

0:01 Good afternoon, ladies and gentlemen. Welcome to the SCHRODER REAL ESTATE INVESTMENT TRUST LIMITED 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 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 publish responses where it's appropriate to do so. Before we begin, I would like to submit the following poll. And as usual, if you could give that your kind attention, I'm sure the company would be most grateful. I'd now like to hand you over to head of UK real estate, Nick Montgomery. Good afternoon, sir. Good afternoon, and thank you for the introduction, and thank you very much, everybody, for joining us today.

0:49 So those that have been with us before will know that Bradley and I are responsible for managing SREIDA REAL ESTATE INVESTMENT TRUST.

0:58 We've got a slightly shorter presentation than those that we have done recently because, obviously, we're focusing here on the quarter to December 2022. Clearly, a very interesting quarter for lots of different reasons after the the mini budget. But but we will hopefully have plenty of time for questions at the end. And in fact, we've already got a few that that that we can respond to. So so with that, just just moving on. Again, some of you may may well have seen these results. We announced earlier this or earlier last week our net asset value as at December 2022 of of just over 303,000,000. As a lot of you will know, the portfolio is independently valued every quarter that drives our announcements. Obviously, we we announced our interim to September, so this is an unaudited NAV.

1:52 But based on that independent valuation, which drove that net asset value of 303,000,000 or 62p per share. That resulted in a calendar net asset value total return of minus 8.1, and it and it really was a year of two halves. Healthy levels of growth in NAV driven by property valuations over the first half. But, obviously, what happened in the second half, we we were kind of expecting a correction, but but, obviously, the impact of the mini budget meant that the q four capital value decline across The UK market as a whole, the level of that and the speed of that was pretty unprecedented. Now we gave that guidance in our interim results. We we we advised that we were expecting to see values fall around 15% over the back end of last year. And and, actually, that's broadly speaking what the index did, albeit pleased to say with the activity across the portfolio, our portfolio held up better than that with the capital value movements of just under 12.

2:53 And we also benefited from having a consistently higher income return, and Bradley will talk about that a bit more later. Now now what that meant was a q four net asset value total return was minus 16.1%. But but it I guess, encouragingly, and as as those that have heard us speak before, ultimately, we own this company for income. Healthy levels of activity cost portfolio, continued strong levels of rental collections meant that we were able to, announce a fully covered dividend. So dividend covered by about a 105%, but also more importantly, and more later, announce a further 2% increase in the dividend that will be paid early this year. The other point to note is we remain in a position where we have a very secure balance sheet. Bradley will talk about the detail of that later on with a with a net loan to value of about 35%.

3:48 So at the upper end of our strategic range, but but, nonetheless, plenty of cover against loan covenants, and and we feel comfortable with be being in that position. Obviously, the the the the performance at property level continues to be strong as I as I noted briefly earlier on. And over the twelve month period, we had probably widest margin of outperformance I think we've ever had, and and more on that shortly. Over three years, a total return of 5.2% versus a benchmark of one and a half percent. And as I say, performance driven by a very healthy level of active management, But also, and we've signaled this in previous investment company presentations, we will, where we can, continue to realize active management upside where when realized, where we have smaller assets, where we see the future potential as being more limited.

4:38 And so that led us to sell a small asset, an office asset, down in fleets, realizing a 70% premium over the last reported value, and we have more small sales currently in process. Proceeds we use, obviously, to repay debt in the short term, but, obviously, looking forward, lots of projects we think that we can deliver very attractive returns investing in our portfolio. And with the market correction, we believe some way through, Looking forward, we think there'll be the opportunity also to make some accretive acquisitions in the not too distant future. Income in the middle column there. There's lots of stats here, which Bradley will give you a bit more color on, but but fundamentally, we have benefited from having a higher income producing portfolio. That's obviously allowed us to increase the dividend by that further 2%, where we're now 6% above the pre pandemic level, the only one in our peer group that is in a position where it's paying ahead of that.

5:33 The last couple of points here, again, I won't go into great detail, but but huge focus on ensuring that we are maximizing the quality of our assets through active management, through capital investments, but with an increasing emphasis on improving building ESG performance. We we genuinely think that that will enable us to deliver, more sustainable income in in both senses of the word, and and there will be increasing emphasis on that as part of our strategy in order to maximize income and total returns for shareholders. So just moving on, again, for those perhaps that haven't heard us speak before, we thought we'd just give a very brief snapshot of the types of assets that we own. Moving from the left hand side, almost half of our assets are within the multilet industrial sector, good quality quality assets on the edge or or or in densely populated urban areas. And Bradley will give you a flavor of of of those in a bit more detail later on.

6:34 Obviously, we we about a quarter of the portfolio is invested in offices. We've been very careful in selecting offices that have good fundamentals in what we call winning cities. So cities where you've got knowledge based economies, a a clustering of, for example, you know, life science, tech, media in in cities such as Manchester, parts of London, and Edinburgh, just to give three examples. And finally, although interestingly, we are seeing a turn generally in the retail market, and in fact, more liquidity in shopping center, example, than we've seen for many years, our focus has and will continue to be on what we call value and convenience retail. So that's, as you can see in the top right hand corner there, our biggest retail asset is a is a really good quality retail warehouse park in Bedford where we've got anchor tenants like Liddell, but also assets like Headingley Central where we've got catchment dominant local retail, in this case, anchored by Sainsbury's, but where we've also got alternative uses. For example, a Premier Inn, you can see in the image on that bottom right hand corner.

7:43 Now why is SREI an interesting investment today? We're sort of recapping some of the key messages that we've been giving to to you and and other shareholders over the course of the last eighteen months or so. I think the first thing is we we we have a good quality and, importantly, a diversified high yielding portfolio. You'll you'll see numbers in a moment that show the polarization that we've seen in the market, where, obviously, the industrial sector up until middle of last year generated absolutely unprecedented levels of return, we were expecting that to converge, and that is exactly what has happened. And so owning a more diversified, high yielding portfolio, we think, is the right place to be. And if we can apply our asset management, particularly focused on ESG, we believe that's the right way to deliver more sustainable returns over the over the long term.

8:33 We have an attractive dividend yield. So based on the higher dividend that we've just announced on today's share price of just under 50 p, that reflects a dividend yield of about 6.8% and and and also a discount to net asset value of still, somewhere over 20%. And really importantly, and I'll come onto some of these messages in a moment, we have a high yield, but we are also fully covered, by by our earnings, unlike others in the peer group. We have a very strong balance sheet. As I say, we have a a we have a net price in the markets today that we believe is compelling. And finally, again, I've touched on this already. You know, we do have a a thematic focus on sustainability that we're we're applying across our entire asset base using the the asset management teams that Bradley and I have access to within our offices down here in London, but also importantly, actually, up in Manchester, which means we're closer to to our our portfolio that stretches across The UK.

9:34 So if I just move forward a sec. So just to get give a bit more color on the peer group. Some of you will know a number of companies in our peer group. The these are all investment trusts. When you look at our MSCI benchmark, that also includes main market REITs, but the what we're focusing on here are the are the investment trusts, which most investors use being close to peer group. And what we're showing here are three measures that we believe demonstrate that that we do offer really interesting value at the moment and and and, obviously, SREIPSE in shown in orange. I think the first point to note on the top line is that we have the highest fully covered dividend, in the peer group. So you can see there the 6.8% on on today's share price with coverage last reported at a 105%.

10:22 Now as you move to the left, there's only one to the left. You can see there, AW. They do have a high yield. They are currently paying a yield on share price of 8%, but they are substantially uncovered. But and and and so when we're looking at the sustainability of dividends, I think investors can take comfort from the fact that, a, we are already fully covered, But also, as Bradley will outline later in the presentation, we've got activity that we're working on, which hopefully will allow us to maintain that level of coverage and hopefully improve it with with further dividend growth into the future. In terms of the share price discount to NAV, you can see there again, there are companies that have have wider discounts, but at 23%, they're slightly wider today. You know, investors are able to access a really good quality portfolio at a meaningful discount to market. As I said earlier on, you know, it does feel, as we've started this year, and particularly as some of the inflation numbers, arguably somewhat surprisingly, are looking more favorable, I think the market is expecting interest rates to stay below perhaps where people feared at the back end of last year, and that ought to support real estate values and lead to a quicker floor than perhaps we were expecting when we last spoke to you at the back end of last year.

11:38 Final point is, and this is probably the most significant at the moment, we have the lowest cost of debt in the peer group on a blended rate of 2.8. But as you can see within the box here and and probably more importantly at the moment, we have the longest duration. So our weighted duration and our debt across the portfolio is eleven years. The biggest part of that debt, which is our fixed rate term loan at two and a half percent, actually has a duration of over thirteen years. So gives us a fantastic bedrock, if you like, from which we can really plan and give investors confidence that, you know, we we it's very likely we'll get blown off course by by rising interest rates, diluting earnings. Moving on to the next slide. Obviously, key for all of us is a level of dividend.

12:26 We did pause the dividend during the pandemic. You can see there in q three twenty twenty. But since then, we have continued to rebuild it. Every quarter we meet the board, we look very closely at our cash forecasts based on activity in the portfolio. And when we feel that we can make a recommendation to Accretive, we will do. We we will continue where we can to to continue delivering a progressive dividend policy. You know, ultimately, that's why we own a good quality portfolio that does generate a high level of income that we can grow through our active management.

13:05 Moving on to the next slide. So this is showing you the portfolio performance. So rather than NAV level, this is looking at the performance of the underlying portfolio like for like with other owners of of UK direct real estate. And you can see and I'm not gonna talk to all the numbers, but on the bottom right hand corner, you can see the relative performance versus the MSCI peer group over three months I'd say most recent three months period to December, but also one and three years. You can see that the one year outperformance of 6.9%, I think that is actually tempting fate, highest margin outperformance that we we've ever had. And and that and that's for for for different reasons. Actually, I think it's partly due to the fact that the correction at the back end of last year was largely driven by yields rerating.

13:56 And therefore, by definition, low yielding assets benefited or rather were suffered disproportionately as as that risk free rate increased, property yields increased, and therefore, the low yielding assets, in particular, very low yielding industrial, bore the most significant capital value declines, and I'll illustrate that in a bit more detail shortly. But but also importantly, and and this is illustrated by the bars on the top there, and you can see over over the one year, It's also about having that higher income return over the long term, and that's what those orange bars are representing. You can see there with the higher income return versus the benchmark shown on the right hand side over over all time periods.

14:39 The next chart is showing the discrete yearly performance using all the different measures. So you can see there the the the negative 8.1% NAV total return I mentioned. The second line down on on in that first column of numbers, obviously driven very much by the performance over the final quarter. I I guess for those again that don't know us quite so well, we're continuing to highlight the the orange dotted box there, where that during that twelve month period to December 19, we completed that major refinancing that did incur those significant break costs, which diluted the NAV, but also at the same time locked in the very long term loan I've just mentioned. Bradley will walk you through in a bit more detail shortly. I think what what we will say, having had some comment over many years now, is we now have a clean three year NAV total return track record.

15:34 When investors and shareholders didn't know us quite as well was screening the company, up until last quarter, we were always having the negative impact of those break costs. So now we don't have that in our three year number, but we are, of course, benefiting from that lowest the lower cost of debt going forward. Now on the market, I've touched on this already. This is a a chart that that we we we use to illustrate, at least historically, just how polarized the market was. And you can see the dark blue bars there, you can see, are the monthly movements in average UK capital values. This is the whole market rather than just our portfolio in isolation. And you can see with those orange bars either side of that, we're showing you the spread between the best performing segments of the property market by sector, and obviously, at the other end, the worst performing segment of the property market.

16:30 And you can see that really since the EU referendum and driven by those incredibly strong tailwinds, the industrial sector clearly delivered very, very strong levels of performance that drove yields down to levels that we we did believe were getting to the unsustainable levels. You know, we weren't buying the very low yielding logistics assets. We actually began to sell some of our industrial assets to crystallize that performance. And what we are seeing now is obviously a correction where, as I have said, some of those yielding assets have actually borne the brunt of that capital value decline. High yielding sectors like parts of the retail market have actually, over more recent months, begin to deliver the highest returns across the market, which which, you know, has been a very, very different picture, obviously, over over over recent years.

17:20 Somewhere sitting in the middle is the office sector. Although, just reading this morning, in fact, there's the the the stats for people returning to work are particularly between Tuesday and Thursday, obviously, are are are getting back, to levels not that far off pre pandemic levels, at least in some cities and towns. But, of course, alongside that that that sort of structural issue that investors are trying to get their heads around, the office sector also is suffering from the highest levels of obsolescence risk, partly relating to, obviously, building specification, but largely relating to buildings ESG performance. And and the cost of refurbishing offices as a proportion of value is is somewhat higher than the other sectors, which is why we're we're seeing investors, guess, step back from that sector until it reprices to a level where where the cost of doing that is fully in the price.

18:10 And and and we think we've got the skills within our team, firstly, to assess that price, but, arguably, more importantly, actually deliver on that active management. I guess what has driven that repricing, I've already touched on this, but you can see the charts on the left hand side, the the bars you can see there represent the spread or the yield gap between the average property initial yield and the ten year bond yield. So you you can see the blue line there, the bond yield, clearly post mini budget. We saw that spike very sharply. Interestingly, that ten year bond yield is now trending back down towards the low threes. And as I mentioned earlier on, you know, if consensus and I and I think I think, actually, we do feel that, consensus perhaps is a bit too optimistic given that how persistent core inflation looks.

19:00 If the forecasts are right and we do see CPI trend down nearer to two or three percent twelve months out, obviously, particularly with the energy price not having such an impact, then I think it's plausible that those ten year gilt yields will remain at or around 3%. And I think with that, we're coming to a view that perhaps we have had the worst of the capital value declines in the market. So I think our view is probably, you know, over q one and into q two, average values may fall between another five or 10%. But, again, average will be very misleading. We are already seeing evidence in the industrial sector just really showing where the floor is, And we do believe our assets are are good quality in that sector. So so, again, we're not expecting to see a five to 10% decline in our portfolio in the same way that we haven't suffered as much up to December, but it does feel like we'll be beginning to get visibility on on on the floor in the market.

19:57 And, again, we may are very happy to take questions on that later. Last slide on the market. We again, Bradley will give you a bit more information on our portfolio in a moment, but I think there's been a huge focus on the industrial sector because it has been such sort of an in demand sector, and, obviously, lots of specialists have have been listed to to to invest. And I and I think the key message coming from this slide is whilst it has seen the most significant falls in capital value, it is finding a floor partly because we're beginning to see yields stabilize, but actually more importantly on fundamentals, particularly in the multilendustrial markets, the supply and demand characteristics remain very attractive. What you can see if we probably just start on the bottom right hand side of of this chart, you can see the building starts with a multilayer industrial market, which is what we own, but then comparing it with the supply of distribution warehouses. And anyone that spends any time driving up in our motorways across The UK will know that all the industrials that is being built comprises generally big or mid boxes that that that that, at least up till now, clearly have been dominated by the likes of Amazon and other retailers or third party logistic operators who who are who are effectively serving the huge growth in online retail in particular.

21:20 Now that structural trend is absolutely with us to stay, albeit the rate we think of growth, obviously, will slow having had the acceleration during the pandemic, and and and we are beginning to see a recovery in physical retail. But as in all cycles, the market tends to develop a bit too much. And so I think our concern about the logistics market is there is a fairly significant supply pipeline coming through at a time when that demand, we think, will begin to slow. Consequently, if you look at the the charts on the top right hand side, you can see that, actually, ecommerce demand has already begun to slow, but other parts of the market, manufacturing, three p l's, trade counter uses, for example, have have slowed less. And so where you have multilateral industrial estates that can satisfy that more diverse occupier market, we think actually that will lead to higher levels of demand, lower void, but also high levels of rental growth. And that's really the message on the left hand side is that we going forward, we are expecting lower levels of growth from distribution warehousing versus the lower dense sorry. The, yeah, the the the multi tech industrial estates, more lowly rented industrial estates, which which we tend to own.

22:35 And, again, we'll give you a bit more color on that shortly. So with that, I will pause a breath and hand over to Bradley. K. Thanks, Nick. It's a pleasure to be talking to you all here about SREI today. The slide in front of you sets out the pillars of our strategy, which Nick has outlined quite nicely already. So we'll move on to to the the next next slide where on the left hand side is a table of some important data points on the portfolio. We've highlighted some rows there. Firstly, we've highlighted the number of assets and number of tenants we have, and this speaks to the diverse and granular nature of the portfolio, which we think makes it more resilient, particularly in a more challenging economic environment. And then the second set of rows we've highlighted there speak to the higher yielding nature of the portfolio, which, as Nick says, has kind of contributed to the outperformance strong outperformance last year. So we have a higher yield. We're therefore less impacted by, you know, parallel yield movements.

23:37 On the right hand side, we show our sector breakdown of the portfolio compared to the benchmark, and we've highlighted our overweight positions in industrial and retail warehouse. So, you know, for industrial, particularly mostly industrial, we see favorable supply demand dynamics, and we expect that to continue. And in fact, the last seven lease regears and rent reviews we have performed in the quarter, you you know, know, there were rents 33% of the previous value. And we expect our convenience led retail warehouses to be resilient as they were resilient through through COVID. So moving on to the next slide. So So we've got good quality assets with good fundamentals in higher growth locations.

24:25 And to provide you with transparency of the portfolio, on the left hand side, we list our 15 largest assets by value. As you can see, this represents almost 80% of the portfolio value. And on the right hand side, what we've shown are three sort of mini case studies to give you a flavor of the sorts of nonindustrial assets that we own and also some of the asset management that we've already undertaken and have underway. So at the top here at the top, we've got Heavenly Central, which is in Leeds, 120,000 square feet of space. This is prominently located in a densely populated area, very popular with students and young professionals.

25:05 In the photo, you can see the Premier Inn hotel. When we acquired the asset, this was actually an office block, but we converted it to a hotel. We secured a twenty five year lease, and that's linked to RPI as well, to CPI, actually. And we recently increased their rent by 13% to around £480,000. So that happened in December as a result of a five year rent review linked to inflation. So there's twenty years left on that lease, and it continues to be inflation linked. And it's an example of us kind of building these long term leases, this long term income linked to inflation without having to pay the premium for it. We, you know, we spot the opportunity and undertake the work to develop that.

25:46 There's a similar situation also ahead in me with the gym. So there was a former office block. We converted it into a very large modern gym. It's really, really nice. It's one of the best trading gyms that the that the chain owns. And that's a twenty year lease where the rents are uplifted by 10% every five years. So fixed uplifts there. So, again, long income with fixed uplifts. In the center, you can see a CGI of our office in Uxbridge. So it doesn't quite look like that yet, but we've got ambitions to make it look like that.

26:18 So this office is actually occupied by a university called Buckinghamshire New University, and they train nurses at the site. So they're actually one of the fastest growing universities in terms of student attendance, and you can probably understand why given they train nurses. And we recently agreed to remove a break from their lease, which is fantastic because it keeps us with them at the site until November 2028. And it also locked in a 13% increase in their rent. So their rent increased into 1,300,000 effective January 2024. And all else being equal, they'll become our second largest tenant. So the story doesn't end there with with the university because we're looking to execute a longer term regear with them. So maybe twenty, twenty five year lease potentially linked to inflation or fixed uplifts.

27:09 And in return for that long lease, we work with the university on improving the sustainability performance of the building because they too have their own ESG goals, and, you know, the built environment is a key component of that. So we're in discussions with them at the moment, and we hope to agree a deal in the future. Then the last asset you can see there is St John's retail part. As Nick said, this is our largest retail exposure. It's the catchment dominant scheme in the area. It's fully let at sustainable rents and is anchored by Liddell that you you can see in the photo there. So really good footfall coming through.

27:48 During the year, we well, during last year, we completed a pre let with Starbucks. So this is fifteen years. Again, our CPI linked. And so Starbucks gonna build a new drive through on the estate for us. Pay for that, but it's capped, so the cost risk is on them. And we expect this to drive further foot forward to the scheme. We did recently get planning for this just this month or last month. And so we're all good to go on this one. So we expect to kind of update you in the future with hopefully some some images of the completed site. But, this is an example of us generating this long term income with good good tenants that are often linked to inflation or fixed uplifts.

28:37 So moving on, you know, Nick outlined the volatility in the industrial market over the last six to nine months. And And we thought it'd be helpful if we provided you some detail on our industrial portfolio. So there's lot of data on this slide. There's some very nice aerial photos of our largest mostly industrial estates as well.

29:00 For us, we would draw out the the value of our portfolio. So the average value per square foot for our portfolio is £88, which is great value, frankly. Around a £110 per square foot to build the high quality modular industrial estates, such as development we're doing at Stanley Green. And this is one of the reasons why, you know, our portfolio outperformed last year. It's because it already represents great value. And just to give some context to that £88, our most expensive industrial estate on a value per square foot basis is Stacy Bush's, which you can see in the top left hand corner. And that's worth around £150 per square foot.

29:45 It's close to London. And last year in the height of the sort of industrial craze, units were trading hands at, you know, £4,500 per square foot. So it just shows a pretty good value portfolio that we expect to be resilient going forwards. So moving on. So on this slide, again, to provide you with some transparency on the portfolio, we show our 15 largest tenants by annual rent as at the December 31. In our view, this is a list of, you know, well known quality household names. We'd point out that there's only three tenants that represent more than 3% of the rent, and we're really comfortable with these tenants. So we've got University of Law, our largest tenant. They are a provider well, the largest provider of legal education in The UK, and they're growing as a business. And, actually, they're taking up more space with us in Manchester at City Tower, which is really positive from our opinion.

30:42 Siemens, clearly a very strongly performing business, of a global conglomerate, very profitable. And then we spoke about Buckinghamshire University already, so they're our third largest tenant at the moment. Then as we look down the list, you know, we have no concerns whatsoever. We We point out the long leases that we have with Premier Inn and Liddell.

31:02 So we think we've got a really resilient portfolio, and we expect our rent collection to remain strong. It's been 98, 99% for the last few quarters. Moving on to next slide. So our void marginally decreased during the quarter to 8.6%. This remains in the middle of our long term range of five to 13%, and we've highlighted in the table that we do have some of this space under offer, some of it's already let off that column. And we also have refurbishment underway at some other units that we expect to let better rents once complete. On to the next slide. So with returns between the sectors converging, you know, it it couldn't last that industrial was gonna outperform strongly every month, and retail was gonna be the worst performer every month. So we've expected this convergence to come for quite some time. And as Nick pointed out on the slide, industrial has been you know, it's it's completely reversed with industrial being the worst performer over q four last year.

32:03 But if if returns across the sectors converge and and the allocation to sectors, you know, a simple allocation isn't gonna be sufficient, you know, we see outperformance to be asset led going forwards. So what we've shown here is a summary of some some of the initiatives we have underway in our portfolio. So first, in in in the first column, what we have is a a new unit we're constructing at Stacy Bush's. So this is called Holland Lane. So at the moment, we have a small unit in place there just under 5,000 square feet. We're gonna build a 18,000 square foot sort of state of the art, really strong performer from a sustainability perspective unit, and there's a CGI there. This will increase the rents up to almost 250 k.

32:48 We were previously getting the 100 k in the unit, but actually that was because we had a short term lease with a tenant who we knew was gonna vacate, so we wanted to do the refurb. So once that's complete, we estimate a value of £4,200,000, and it will cost us around 2,700,000 to build that. On the second column, we've got standing green trading state, which we spoke about a lot over the last year. This is almost complete. We expect it to complete this month, actually. We think that will be worth around 20,000,000, which is a conservative estimate. We've we've got a valuation at the moment of 13,000,000, so that's the as at December 31. So we expect, you know, a a material uplift once complete. We're quoting a rent of 1,300,000, and we're making good progress in securing

33:39 interest in the units there. Then in the third column, we've got the Starbucks, which I mentioned before. So Starbucks being developed at St. John's Retail Park and also have. Again, you know, expect we a value of around 4,200,000 of these two two sites, and it's gonna cost us around 1,700,000 to build them. So, again, generating that that valuation uplift through active asset management. Then on to the final column. So this is so while the other three initiatives I've just described are in progress, this fourth one is one that's very much more in the pipeline and is something we're trying to develop. But just to give some background on Langley Park. So we acquired this asset in December 2020. We paid £19,250,000.

34:26 It's a 28 acre site in the Chippenham Town Centre right next to the train station. And when we acquired this asset, there was kinda two phases to the business plan. The first phase was to to secure the income uplifts that we saw from tenants that were already in at the site. So we executed a rent review with Siemens and increased their rent by 26%, and we executed a lease renewal lease renewal with IXYS, which is a subsidiary of Littelfuse, and increased their rent by 31% as well well as as securing a ten year lease with no breaks that has an RPI linked rent review in it. So, again, generating a longer term income. So now we've crystallized that rental growth.

35:11 The next phase is to make use of some of the kind of excess space we have at the at the site. So this is to increase massing and, you know, increase the rents from the site overall. We've had really encouraging talks to the council to build a further 130,000 square feet on land that currently has no value attributed to it. And if we assume a £110 per square foot, which is what we did with Stanley Green, this would cost around £14,000,000, and it would conservatively generate rent of 1,000,000 and result in an end value of 18,000,000. But, actually, what we've outlined in in in in the column is a larger scheme that involves tenants already at the site. So what we would do is develop not a 130,000 square feet, but 230,000 square feet.

36:00 And assuming a £110 a square foot, again, that would cost around 25,000,000. And then if we add on the existing site value, you get to around £60,000,000 cost. But we think, think, again, conservatively, this could be worth in excess of 70,000,000 as well as generating really high performing accommodation. So, you know, this again draws on our sustainability expertise and performance. So moving on to the next slide, we set out our balance sheet. So what you can see on the left hand side is we have two facilities. Got a term life, a term loan with Canada Life of a hundred and twenty nine million and an RCF with RBS with a total facility size of 75,000,000.

36:49 So the term loan is fully drawn. This has got a fixed interest rate of 2.5% and an average maturity of more than thirteen years. And the RCF is partially drawn, so 46,300,000 is drawn. The majority of that is currently capped, so 30,500,000 is subject to an interest rate cap that has a strike rate of 1.5%, combined with the margin, means the highest interest we would pay on that slice of RCF is 3.15%. And then there's a small slice of the RCF that is subject to to as it floats. So overall, that results in an average interest cost of 2.8% and an average maturity of eleven years, which is the best in the peer group by quite a quite a margin in our opinion and gives us a competitive advantage.

37:37 It protects our earnings and enables us to to hopefully maintain that dividend and perhaps even grow if we can deliver some of the asset management that we have underway. Overall, the loan to value is around 35% as at December 31. Moving on to the to the last slide for me, which sets out our sustainability progression over a long period of time. So our research and the evidence of the portfolio demonstrates that there is a material rental and value premium for buildings with green certifications. We expect this premium to grow as extreme weather events become more common as additional regulation with respect to the leases of buildings with poor energy performance becomes effective, and as potential forms of carbon taxation are introduced.

38:25 So this, in our opinion, supports the direction of travel where we want to make sustainability the defining attribute of our strategy. And the focus for us today is on decarbonization, which has to be driven by energy demand and efficiency first. So that is using resources responsibly. So therefore, a deep understanding of individual asset performance and potential performance is important. And we're currently undertaking a comprehensive review of the portfolio. We are measuring a whole host of sustainability sort of attributes of of the portfolio covering the quality of building fabric, energy systems, water consumption, waste management, biodiversity, etcetera. So what that analysis will enable us to do is form a baseline sort of measurement of each asset that we can then understand what we need to do to improve that baseline score over time.

39:21 And it would also enable us to report to stakeholders how we are progressing against our our targets. So that's something we're going to expand on at our annual results and and we're excited about. But fundamentally, we think will enable us to deliver more sustainable income going forwards. So sustainable from the perspective of ESG and sustainable from the perspective of maintaining that dividend. So moving on, I'm handing back to Nick for a summary. Great. That thanks, Bradley. Very clear. So so just just to wrap up briefly because we will go to questions. We continue to believe we're well placed. Clearly, we have seen a correction in the market, and we do think there is still scope for further capital value declines.

40:13 But the outlook today, I think, is certainly better than it was for for 2023 than we perhaps thought back in last year. I guess most importantly, based on the activity across the portfolio, and obviously based on our very secure balance sheet, and then, genuinely, it is it is sort of sector leading in terms of, interest cost and and duration. And we've got a really great foundation, which when combined with the active management, should allow us to continue delivering that progressive dividend policy. So so with that, I'll I'll leave it there because I can see that we've got some questions. So I'll I'll hand back briefly before we go to them. Nick, Bradley, that's great. And thank you very much indeed for your presentation this afternoon.

40:58 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. Bradley, Nick, we did receive a number of pre submitted questions ahead of today's event. And as you can see there in the q and a tab, we've also received a number of questions throughout your presentation this afternoon as well. So firstly, thank you to all of those on the call for taking the time to submit their questions. 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. Fantastic. Thank you very much. So we'll we'll we'll go through. It'll be a bit of a tag team effort.

41:47 I guess just just on the first question, and this relates to the EPC building energy efficiency ratings. And as some of you will know, the government are introducing more stringent regulations. And the question here relates to essentially how our portfolio measures up with reference to those regulations, and in particular, our exposure to the weakest ratings, which are ratings f and g. So there is a little bit more detail here, but Bradley will answer the question, and it's something that we will definitely be coming back to with our results. Yeah. So in terms of f and g ratings, we only have two units that have an f four g, so one f one g.

42:33 And they represent of the ERV around £300,000, which is, you know, less than 1% of the portfolio ERV. In terms of CapEx risk in relation to those two units, we we've actually undertaken CapEx in one of the units already. So when we get the EPC re remeasured this quarter, we expect a better rating. And on the other one, the CapEx risk risk is minimal. And the question goes on to ask about how, you know, how our kind of company is affected by ratings that are lower, so, you know, not a or b, for example, and how can they see that in the p and l? Actually, what should happen is our valuers should take account of any CapEx required to bring assets up to the kind of required standards in their valuations.

43:23 So theoretically, where you should see the impact of low energy ratings is in a lower value of the portfolio. And then when we do so so the value kind of assumes we undertake a certain value of CapEx. And then when when we undertake that CapEx, you'll see it as a in our NAV reconciliation, we show a CapEx line so you can see how much we spend on CapEx. And as Nick says, with regards to the EPCs, we will disclose kind of full information in our annual report, which will be released around June time. Thanks, Bradley. So the next question asks or is a request, really, that when disposing of assets, can we detail the latest book value at initial acquisition cost plus CapEx? And it we've referenced actually to the most recent sale we did at Beach House. So so Beach House, we sold at a 17% premium to the September valuation.

44:18 This this actually is an asset that's been in the portfolio since IPO in o four, So we don't actually have readily available the the book cost, but we will get that and respond accordingly. What we do do, any disposal of any size, say, example, the the office we sold in Nottingham early last year, we we we do give a a realized IRR or total return at asset level over the whole period and compare that to the benchmark. And in the case of that asset, it was very strong, but we will we will provide that information even for some of the smaller assets. The next question talks to the recent announcement we made. So so it notes that our portfolio, as I noted earlier, fell by 11.8% over the quarter, which was less than the monthly property index of 15.6.

45:08 Interestingly, as you'll you'll have noted in the in the presentation, our benchmark, we still outperformed but by a slightly smaller margin because you do sometimes get differences in the way that these benchmarks are calculated. And the one to focus on very much is the one that's in our presentation because that's a bigger sample that allows for all transactions and capital expenditure. Nonetheless, we did outperform, and the question is asking the reason in particular why there was such significant outperformance of the industrial assets, so negative 13 versus negative 21 for the benchmark. The simple answer is that we have a high yield industrial portfolio, and therefore, we didn't suffer as much as those very low yielding assets, for example, logistics in London, where they have been more adversely impacted by that increase in the risk free rate.

45:59 Now I actually spent the next phase of correction that I've touched on will be more driven by, you know, fundamentals. So more secondary assets, assets where there are tenant delinquencies will probably be more adversely impacted. But, again, hopefully, what's come across is although we do have some shorter leases, the active management, the asset improvement should mean that we continue delivering that that that relative outperformance. I'll ask Bradley to answer the next question because it kinda relates to a comment we've already made about how did we manage to be in such a good position as it relates to debt cost and maturities. Yeah. So the answer is the company undertook a debt refinancing in October 2019 at a time when, it looked like interest rates couldn't really get any lower and in the long term could could could potentially only move one way was was the view taken.

46:57 So the company entered into a a new term loan with candle life at the interest low rate of 2.5%. It did pay a cost in order to do that. And as Nick mentioned in his presentation, he he showed the impact on NAV during during 2019. So whilst it is a that incurring the one off cost in order to get that attractive debt, it it it does detract from past performance. I I think think the more important point to understand is what what happens to future performance, and that is you have a lower finance cost, whereas many of our peers would be would be incurring much higher finance costs. So and that's, in our view, a competitive advantage because it enables us to maintain the dividend, to keep it fully covered, and to hopefully increase the dividend as we deliver the asset management activities, some of which we've outlined in the presentation.

47:57 So someone has asked if there's scope to accrue additional income by installed in PV on industrial sites. And, also, they note that this may help tenants benefit from less volatile energy pricing. So we do actually have a project underway for this. We've run a a competitive tender to select two partners to work with. You know, we we have hundreds of assets in the portfolio. And we're in the process now of collating our our asset asset data so feasibility studies can be undertaken. And that based on those feasibility studies, that will enable us to have the data at hand to understand which assets can take PVs, where they'll make the best financial return, and, importantly, where we'll make the best sort of carbon savings as well. So there's a kind of financial element and a carbon element. So that's underway, and we expect to hopefully get some PVs on on roofs over the next sort of twelve to twenty four months.

49:09 Thank you, Bradley. So the the next few questions are interesting as well. So so the next question is based on how the market unfolds, do you now see a higher risk of breaching covenants? I think the short answer to that is no because although, obviously, we have seen values fall, and we are at the upper end of our own internal guidance. So we we've been clear, I think, in explaining that our long term net LTV internal target is 25 to 35%. But our covenants that we have with our two lenders, Canada Life and RBS, are at significantly higher levels than that. So our view very clear view is that we will not be breaching those covenants. And when we come to report our finals on the back of the March valuations, we will, as we always do, provide sensitivity information showing, you know, how much coverage we've got against those covenants. So so so no. I I I guess what I would say is, obviously, if we are undertaking small sales, then the beauty of our revolving credit facility is that we can use those proceeds to repay that on a temporary basis before then as the market recovers and particularly as we move these capital expenditure forward, we can redraw that at no cost.

50:28 So so we, you know, we structured our balance sheet so so that we are very well placed, we we we believe. Now the next question talks to there are two assets where only part of the asset is owned by the trust. I believe the other part is owned by SCHRODER entities. Are these also closed ended? If they are not, what are the redemption allowances for investors? But, therefore, what is the agreement? So, correct, we have two assets. One being the office we own in Bloomsbury, Store Street, where we own a 50% interest alongside SCHRODER's Capital UK real estate fund. And we then own a 25¢ interest in an asset in Manchester called City Tower, where, again, it's alongside the same fund I've mentioned together with a a pan European fund that that are run by by by by Schroders.

51:16 So I I guess the first point to note is we we bought those assets because they were we bought those part interest because it was too big for us to buy on our own, and we felt they would deliver good levels of performance. They are very simple joint venture structures where any one of the investors can ultimately force the sale of the underlying asset. Now that's important because, ultimately, every investor wants liquidity. But equally importantly, we are completely aligned on strategy. So those assets are part of my team, my wider team. The strategies for those funds are very similar, and so it's extremely unlikely that one fund will need to sell over another. On the question of redemptions, neither of the two co investors are open ended funds that are daily priced and held by retail investors, which is where historically you've seen the much high levels of volatility in terms of fund flows.

52:13 They are open ended, but they are institutional open ended funds where where where where, again, the redemptions over the long term have been low. Just to put it in context, the bigger of those two funds has a total asset base of about 2,300,000,000. So so neither of those assets are material in in in you know, looking at it from a context of of of a whole. So next, there's about two or three questions remaining in the time. So the next I'll I'll hand over to to Bradley because he he spoke to this briefly in the in the presentation. Yeah. So the question is what what's the plan with regard to the RCF for the expiry of the cap? So the cap expires in July this year.

53:00 The plan that you know, the plan has basically been to monitor this because what we've seen is that the cost of caps have has been as high as they've ever been. And also the swap rate has been extremely high as a result of the elevated sort of interest rate curve following, you know, mini budget, for example. And what we've seen since kind of middle and back end of last year is is the curve has come down. The swap rate has come down. So we're gonna monitor that, and we may enter into a swap or buy a cap. And and we'll also wait and see as to what happens with regards to some portfolio sales. So if we pay down the RCF sufficiently, that would dictate, you know, the sort of hedging we would we would under we we would enter into.

53:49 So we're very much monitoring it. We're forecasting forward what it looks like, and we'll take the decision nearer the time. Thanks. Thanks, Bradley. I'm just conscious of of time. I think if I just skip throughout, there's a question in relation to rent collection stats, which, as I've noted, we're we're back up at in in many ways, ahead of pre pandemic levels. And the question is relating to the 1% unpaid. In in most cases, that 1%, if you like, goes through a cycle. So, you know, there'll be some stubborn arrears one quarter. We'll collect them, and then we we it's a different tenant that might be in arrears the following quarter, but it's such a small amount of money in the whole scheme of things.

54:41 I'll probably just leave it there. We don't have any persistent offenders, if you like, that are material that that are contributing to that 1%. The the next question talks about ad gearing being conservative, and are we are we seeing attractive deals? Look. I I I think and this is partly linked to one of the later questions about the size of the company. I I think at the moment, all our available capital effectively is allocated to what we see as being very accretive active management. And the benefits of it are that, of course, we're improving existing assets. It's within our control, and we don't have the frictional costs associated with buying the asset in the form of stamp duty related fees, which, you know, for real estate, takes about 6%. Would we like to have more capacity to be investing today?

55:29 Yes. Because there are some interesting deals out there. Fewer than the GFC period because there aren't many false sellers because there's far less leverage in the system compared with past cycles. But I think fundamentally, a lot of what we're doing here in terms of trying to improve performance, narrow the share price discounts, ultimately, is about giving the company opportunities to grow because most of our shareholders that we speak with would like us to be bigger. Clearly, there'll be a fixed cost element that will spread across a bigger asset base. But, also, you know, we've historically made most money out of that bigger assets, and therefore, being bigger ought to allow us to do that. So, yes, we'd like to have more money to do it. Do I think we're missing huge opportunities? Well, actually, when I compare the returns in the market versus what we can do in terms of our own portfolio, I think, you know, I think we will deliver a similar return having having said all of that.

56:20 Now we may just go to one final question, which is just talking to the average unexpired lease term at five point one years, and it's worth noting that is to the earliest break. So in many cases, tenants don't break, and therefore, we we we actually enjoy longer lease terms than than we're giving as a sort of a worst case. The question is, you like this to be higher, or is or is this in the area we'd be comfortable with? The short answer is we're comfortable with it, but I would say that a lot of our asset management is focused on, as Bradley has noted, is actually about buying shorter let assets and improving them and increasing the lease loans.

57:05 So examples like Newbucks University, the the the lease extension Bradley mentioned that we did in Chippenham. You know, we're not what what we tend not to do is buy more secure, long dated assets because, fundamentally, they're more expensive. So what we like to do is buy the grade b assets, use our asset management skills, and improve them, and obviously, a key part of that being increasing lease length. So I'd expect us to continue focusing on maintaining it above five years, but more by creating those assets with longer leases rather than going out and buying them. So given time and thank you. First of all, thank you very much for those questions. We will follow-up on the one or two that we haven't covered, and I will hand back for the wrap up.

57:50 Nick, that's great. And Bradley as well, thank you, very much indeed for being so generous of your time then 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 after the presentation has ended for you to review to then add any additional responses, of course, where it's appropriate to do so. Nick, perhaps before just redirecting those on the call to provide you with 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 just to wrap up with, that'd be great. Thank you. Again, I just thank everybody on the line for for showing interest, and and, hopefully, this is proving interesting. We genuinely think we're in a really interesting place in terms of the activity in the portfolio, our capital structure, looking forward to our recovery in the market, and our ability to continue delivering that progressive dividend. So, again, I given time, I'll leave it there, but Bradley and I are obviously more than happy to have any follow ups either through this platform or or separately.

58:56 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 the management team can better understand your views and expectations. This won't 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.