Schroder Real Estate Investment Trust (LSE:SREI) — Results for the Quarter Ended 30 June 2023

0:01 Good morning, and welcome to the SCHRODER REAL ESTATE INVESTMENT TRUST LIMITED INVESTOR PRESENTATION. The team will be providing a short update presentation today followed by Q and A relating to the results for the quarter ended 06/30/2023. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and could be submitted at any time via the Q and A tab situated in the right hand corner of your screen. So click Q and A, type your question and press send. The company may not be in a position to answer every question received during the meeting itself. Have a review of all questions submitted today and publish responses where appropriate to do so. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Nick Montgomery, head of UK Investment. Good morning. Good morning, and welcome, everybody, and thank you very much for joining us today. So this, as Paul has just mentioned, will be a slightly shorter presentation because we're presenting today on our on our interim NAV update for the quarter ending 06/30/2023.

0:55 So as as as just mentioned, we will hopefully keep this presentation to twenty, twenty five minutes and then leave time for questions. And we will I can see we've already received some, which is great. So I'm Mick Montgomery. So I'm one of the managers working very closely with Bradley, who you'll see in a moment. And so we've got slightly shorter deck than normal, but hopefully this gives you a good flavor of the activity over the quarter and our views on the market. So I guess just to start with and and this is also partly aimed at people who perhaps know us less well than than some of you. It's really just to illustrate how the portfolio is currently made up. And

1:33 with it being real estate, we love showing pictures. So so the six images here are six amongst our six amongst our 10 biggest assets, I should say. So of our 470,000,000 of portfolio value as at the end of June, these six assets here represent about 50% of that value. As it happens, the top 15 assets now, as we're investing in the portfolio and selling some of our smaller assets, our top 15 assets now represent almost 80% of portfolio value. What that means is for those who don't know us quite well, it's actually very straightforward to get a good feel for the quality of the underlying portfolio. And that really is a key driver at the moment given the, you know, the headwinds that we're facing in the market, but also the opportunities that we can see across the portfolio.

2:20 Moving from the left hand side, almost half of our portfolio now is comprised of multi net industrial estates. This is our preferred part of the industrial market. We are beginning to see a supply risk coming through to the logistics sector, which obviously has grown very strongly off the back of Internet related demand, but we are begin to see a slowdown there because of the more more development coming through and companies like Amazon taking their Conversely, for multi industrial estate, you've got a much more granular occupational base, and and and we're seeing very good levels of occupational demand. And, Bradley, we'll give you a really great example later in the in the presentation. Our office waiting now continues to fall. Our office waiting now is at around 25%. The majority of that value is is is in two key assets, but we also have other exposure, particularly focused on the big six regional centers like Leeds and Edinburgh, for example, and and and obviously Manchester here.

3:16 But our two biggest office assets, they are offices in most respect, but equally at the same time, we have lot of office uses. So we have a a university as a tenant in one of our biggest offices up in Bloomsbury in in London. And also, as it happens, a university as a tenant in a multilet asset. Apologies. There's issue with the sound there with our large multi net assets up in Manchester. The balance of the portfolio largely comprises convenience retail. We've got two really good examples here. And in the retail market, you know, it is polarized, and we but we are seeing continued healthy levels of demand, particularly for convenience and particularly grocery as part of that convenience market. And and there's a lot of our activity at the moment is focused on capturing those sorts of occupiers into our retail warehouse portfolio.

4:08 So, again, key messages here. Sorry. Skip that one. Key messages here. Why do we think SREIT is a is actually a really interesting investment opportunity today? Well, first of all, from the top down, and again, Bradley will build on some of these themes that we genuinely have a a good quality diversified, but importantly, towards parts of the market that we think will deliver more attractive returns going forward. Diverside also in terms of 40 assets, as I mentioned, but still with a heavy weighting towards our top 15, but also diversified by tenant base. And Brad will give you a good idea about the quality of that, particularly our larger tenants across the portfolio with almost 320 tenants now, which obviously diversify the income risk and gives us confidence about future earnings.

4:53 And finally, in relation to portfolio, we have a very high reversionary yield. So the the reversionary yield is a bit of property jargon, but that reflects the valuers view of our portfolio rent today where all the space available to let into the market, effectively today's market rents, as a percentage of our underlying portfolio value. And today, that reversion yield is about 8%. I actually can't remember everything higher. And equally, I can't remember having such a big spread compared with the average of the market, which today stands at about 5.8%. That higher income, but but also very robust balance sheet, again, I'll come back to that in a bit more detail, means that we robust earnings.

5:40 We we announced a further dividend increase for the most recent sorry. We announced a dividend increase over the financial year to March. We held the dividend over the course of June. But that dividend is fully covered, a 103% of earnings. And that dividend yield today or today's share price reflects a yield of about 7.7%. So a very attractive covered dividend yield of approaching 8%. Balance sheet, Bradley will talk to that in a moment. We've we've put in place some further hedging. So 91% of our drawn debt is is hedged. And we have a very long maturity, and we would argue most attractive debt structure from the peer group. But I'll try to illustrate that clearly in a moment. Discount of 30% is better than some of the peer group, and we have seen an improvement in that as as shareholders have begun to see the the the impact of our efforts coming through into earnings.

6:34 But, you know, we would argue today at that discount given the outlook for the market, notwithstanding the remaining uncertainty in the wider market, we just think actually represents really good value. And the final point to note, more on this, I think, when we next present off the back of our interim results later in the year, we are continuing to evolve our strategy with increased focus on sustainability. And this is all about a conviction that there is now an increasing green premium that occupiers are prepared to pay. And we think we can use our specialist expertise to drive value, exploit this pricing, and deliver more sustainable income growth over the over the long term. Now I'm not gonna go through through all these numbers, but we've shown here the movements of NAV the over the course of the June. Then as you know, the portfolio is independently valued every quarter. We we changed our valuer in line with best practice guidance from the RSCS at the year end. So So this this is is the the second valuation that CBRE carried out across the portfolio.

7:38 The headlines of that were that partly because of the active management across portfolio, our values were basically flat like for like basis, minus 1.1%, which compared to the benchmark at minus 1.1%. So continued relative outperformance against benchmark together with the higher income return. Again, I'll illustrate in a bit more detail shortly. We've continued to invest capital expenditure into the portfolio. Key projects like Stanley Green, which we'll come on to later on, but also with a with a reagent pipeline of of future projects building through through the portfolio. I mentioned earlier on that we we paid a dividend of naught 0.836p per share, and that is the dividend that reflects a 7.7% yield yield on on today's today's share price.

8:28 And the numbers are there that are clear to see. Now all of that, in summary, represented a NAV increase of 0.2% and a NAV total return for the quarter of about 1.5%. Will compare favorably with others across peer group. Moving on to the income statement again briefly because there are lots of numbers here that we've shown, you what know, we think is a clear illustration of of successful implementation of our strategy focused on the asset management. And and the really the headline number here is that increase in April earnings, the 27% quarter on quarter increase. Just look at the table, I'll draw out a few key points. I think the first point to note is, positively, recurring income increased by 5% over the quarter.

9:20 We saw a a reduction reduction in in in property operating expenses. That that was for different reasons. That that number does move around a little bit because, of course, if we are carrying out positive leasing activity, then that clearly does have an impact in terms of fees, at the same same time, time, obviously, in terms of boosting income. So I so I would expect that probably to trend back up, particularly over the rest of the year given given the pipeline of activity that we've got. We did see, obviously, the finance costs increase and that's because of part of our debt, which is currently unhedged. And, again, Bradley will talk to that in a moment. But very, very positively, and and, again, I think in line with guidance that we gave you when we last presented, fully covered dividend with that attractive yield of 7.7%.

10:10 Just to illustrate the dividend profile in a little bit more detail, I think we remain the only company in a sort of recognized peer group. And, again, I'll I'll walk you through that in a bit more detail shortly, where where we are paying a dividend that is above the pre pandemic level. They're the only company that is in that position. We're very clear. Our board are very clear. When we meet on a quarterly basis, if we can see that there is visibility for us to continue increasing the dividend where it's sustainable, we will pass that on to shareholders. We are shareholders. We know people, own this principally for income. That is our objective to have a progressive policy over the long term. Obviously, the capital value side is is important as well.

10:58 And so what we're showing here are the latest performance numbers. So this shows you the performance of our underlying portfolio. So this is not NAV level. This is underlying property level. And this allows us and importantly, the board and shareholders to compare the performance of our underlying portfolio against our institutional and and REIT peers. And you can see I won't go through all of these numbers, but you can see on on the right hand side the relative performance over the different periods. And very positively, we have outperformance literally over all time periods now, and we would attribute that to both the higher income return really driven by the active management, but also the diversified strategy allowing us to tack and change between the sectors. We've been increasing our industrial weighting, particularly to multilet. We've been reducing office weighting.

11:48 And that those those allocations alongside the active management driven that return. I guess the the point to note here is that the total return outperformance of 6.2% over twelve months is is is obviously positive, but they clearly are negative numbers. I I think think what probably was more interesting, and I think a good indication of where future performance will come from, is if you look over twelve months, income return over the twelve months to the end of June was 6.1% compared with the benchmark of 4.3. And that's cash rent collected. And, again, having the head start on income, we think, will really support our returns as we go through the rest of the year and, obviously, into next. This this next slide, obviously, includes the details on risk considerations, but it also includes information on the the share price performance, NAV returns as well alongside the the MSCI data that I've just provided you.

12:48 Clearly, the last one was due with the correction in the market. Those are negative returns. But on a rolling three year basis now, we are running, you know, somewhat ahead of our peer group. As you as you some of you will know because we made the point previously, if you look at the twelve months to June 2020, you can see that the negative impact there, and and that was largely because of the refinancing that we did in relation to our long term debt, which has been, you know, with with hindsight, a really significantly positive thing to have done. But there was that one off hit, which we provide information on here, which dilutes our our return when you look at it over a longer period of three years. But but really importantly, the bed into that refinancing, and Bradley will talk a bit more about it in the moment, is now coming through positively in terms of our visibility on earnings and having the the the best and most, I guess, the the strongest pay the benchmark in the balance sheet in the pay group.

13:44 Just to bring that to life a little bit more, this is what most people, I think, and the analysts that write about us would consider to be our most directly comparable companies in our in our peer group. And we we wanted you to draw out three reasons why we think

14:02 our company is is very well positioned. And so if I just start from the top, I think the first point to note, and I've the yield of 7.7%. That is obviously amongst the highest in the peer group. But I think what's really important is if you look at the the number in the in the columns, our dividend at 7.7% is more than covered. The The companies companies that that are are currently paying a dividend yield slightly ahead of us, you can see there are not covered. And we would argue that with our reversionary yield, with the activity in the in the hopper, so to speak, across the asset management projects, more opportunity to drive that forward than than than our peers. Notwithstanding that, you can see our discount, we would argue, is compelling for for given our visibility on what's happening in the portfolio, but also because where we where we we see see the the outlook for The UK market. And you can see that compares with some some some wider discounts in the sector, but there are some different reasons for those.

15:04 So, for example, moving to the far left hand side, a balanced commercial property. And then one of the key reasons for that discount is because all of their debt comes up for refinancing at the end of next year. So investors are being rightly beginning to be more discerning looking at that refinancing risk given given the outlook for interest rates, particularly over the course of the next twelve to twenty four months. And I guess related to that, we're showing here that the the cost of debt, but also the the duration. So how long is your debt locked in for as an average? Because different companies companies have slightly different structures, so we we try to come up with an average duration for each of the companies based on their most recent disclosure. And you can see that amongst the lowest cost of debt in the peer group, but really significantly, some distance along this duration.

15:54 So I gave you example there of some of the companies to the left, in particular, that is commercial property where, whereas I say, the the discount is reflective of the fact that all of that debt, is currently at 3.2, comes up for refinancing next next year. So moving on, I'm gonna talk briefly about the market because, again, it's not that long since we've last presented. But but but the big issue for all, of course, in assessing pricing pricing across all markets is the outlook for inflation. And and as you all know, CPI has been the highest forty years, but we are now beginning to see that fall back. Now whilst clearly that is positive, the worry has been that core inflation, so excluding the more volatile energy and food prices, has been more persistently stubborn.

16:44 And, you know, that is a risk, and we clearly see that reflected in market's expectations of of interest rates and any approach taken by the Bank of England. But there is an expectation here, but we will see that gradually trend downwards. So so although inflation remains a risk, there is an expectation that we are moving towards the top of the interest rate cycle. But nonetheless, we do expect interest rates to continue to drift up before they start coming down again. And you'll see huge volatility in the guild market and also in the in the in the in the swap market reflected in cap prices, for example, being being as volatile as we can remember. And, of course, yeah, real estate as as a hybrid asset, so it has qualities of equities in terms of growth, but obviously, it has a has a qualities that are working to a to a bond.

17:37 So that part of valuation is is susceptible to what's happening with with interest rates. And what we're showing on the left hand side of this chart is in the the the blue line, of course, being ten year bonds. And then also what that implies in terms of debt costs, you know, and a typical borrower today of an average office building, for example, you know, will be paying a total interest rate of, you know, 7% plus. So so above where our reviews are for the sector. So for that reason, our expectation is, and this this is is this is more than reflective, we think, in the share price discount, that we will see a further leg downwards in property values prices. Our view at the moment is average values from June might fall another five, possibly 10%.

18:29 But averages, as always, will be misleading. We expect the next phase of of the correction to be more focused on secondary assets, particularly secondary offices, secondary out of town offices where they are the most adversely affected by changing working pattern, but but also, you know, obsolescence risk largely because of, you know, the increased cost of delivering space for tenants that has a high sustainability standards. So we are expecting the the further move in the market to be to be more differentiated between the sectors. And we are expecting the industrial sector in particular, a multilayer states, to to actually deliver relatively attractive return from here driven by rental growth. And I'll illustrate those points in a bit more detail in in a moment.

19:20 The chart on the right, I guess, just gives a bit more of an illustration of of that long term relationship between the ten year guilt rate and property yields. And and so that's shown by the the green line you can see here as your property initial yield, and you can see there the ten year bond yield. And and long run, you can see illustrated by the bars. Over the last ten to fifteen years, the spread between the two has been about 200 basis points.

19:50 If you look back over a longer period, so if you go back pre GFC to a more normal real estate market of the late nineties, early two thousands before we had, you know, the impact of QE sort of artificially pushing guilt rates down, the longer term relationship is more like a 150 basis points. And that's why, again, we think going forward, particularly as we move into next year, as interest rates come down in line with consensus, property yields will start to look relatively good value or fairly priced versus our historic average. And the last point I'll note is that we haven't got too much information in this deck because we we we're trying to keep this shorter. But unlike car cycles, we don't have the suppliers coming through. There isn't a huge amount of development in the market as we have, for example, coming into and then after the the financial crash of of the GFC in the o seven to o nine period.

20:49 So that's what this means in terms of capital values. You can see here on the left hand side the correction that we have seen with average values down now about 22%. That's represented by the dotted line. But with the industrial sector having fallen more mainly because of the lower yields being more adversely impacted by that rerating that we've seen across all asset classes. As I say, going forward, we think that average line will continue to trend down a bit, but with the industrial sector, because of rental growth holding up better now

21:20 compared with those other sectors. Again, I've touched on this, but in contrast to previous cycles, you you know, know, this is a fairly significant correction that we've seen, you know, to put it in context. The average values do end up falling between sort of 2530%. That compares with 44% during during the the GFC. So this is a significant correction. But it is worth noting, and and this is partly about the the supply side point I've mentioned, rents are still rising. Now admittedly, these are nominal. The numbers would look very different if they're real, but rents in normal terms are still rising. And and I guess just to illustrate that point further, the data here shows the trajectory of rental growth from the point of the market, Nadir, effectively. So so we're looking at months after the market's bottoming out following corrections. On the left hand side, you can see the downturns follow or or the recovery, I should say, following the downturns of 1989, 07/2022.

22:27 And and you can see there the red line, the most recent period with average rental growth for all sectors, broadly speaking, tracking what happened post 2007. Now when we can present you in in six months' time, I would expect to see that red line moving ahead of that equivalent period post GFC because, as I say, we haven't had the same degree of speculative developments, particularly in the office sector that we saw in the run up to the GFC. What's much more striking and why we think having 50% allocation to industrial is it will will put us in in a good place is is comparing how the industrial sector has recovered in terms of rental growth compared with those past periods. And so you can see that period from from from 2007 where industrial rents were pretty much flat for twelve months after that market bottoming out. You can see in contrast normal rental growth in the industrial sector

23:27 way ahead of of those of that past most recent correction and all properties on average. So that reason, again, we think the tight losses that we own within the industrial sector put us in in a in a relatively good position. I think, finally, just to just to, I guess, wrap up on the market, you can see on the left hand side our forecasts.

23:51 We are expecting a correction, as I say, over the next few months with the market then recovering towards the back end of next year when when, you know, the market more generally has better visibility on on where rates are gonna top out. And and as I say, when we are hopefully through what we see as being a a recessionary period over the end of this year and into next. Across the main sectors,

24:19 again, this is why we've we've got conviction about how we're positioned. You can see on the right hand side, we are expecting the sectors to to to to be more converged than they have been. You know, the polarization we've seen over the last five years, we think, will converge. But we are expecting most of that industrials, retail warehousing, particularly the value of the retail housing market, and I mean, within the office sector, more more polarized within the office sector, but we do expect the big six locations like Bloomsbury in London to to deliver relative outperformance. So we may have more questions on the market. But but with that wrap up, I I will will hand hand over over to Bradley.

25:00 Thanks, Nick. So whilst we've all probably been watching inflation and interest rates, we've still been continuing our day job of delivering activity in the portfolio, there's been some really interesting activity through the quarter. But first, in terms of strategy, it hasn't changed through the quarter. We've been investing in our industrial portfolio, which is mainly multi industrial estates. And Nick has articulated why we favor that sector. As as Nick said, we've got the strongest balance sheet in the peer group. Our our our net loan to value is 35.7%. And in order to ensure we're gonna keep that strong, we're looking at some smaller sales of assets where we completed the business plan, where we think that the sector is sort of more more challenged than than multi industrials, for example.

25:54 And finally, we are looking to evolve our strategy to focus on sustainability where we see a real green premium emerging and where we think we can add value and differentiate based on the huge resource we have in that area. So moving on. Here we show some important stats on the portfolio. On the left hand side, we have a table of some key map metrics at the portfolio level. The top two rows represent the granular nature of the portfolio. So you can see we've got 40 properties and more than 300 tenants. We think that makes the portfolio more resilient, particularly in this sort of recessionary environment where there's a cost of living crisis and, you know, consumers and businesses have less to spend. We we think risk is is lower in our granular portfolio.

26:45 And we've also highlighted two further rows that speak to the higher yielding nature of our portfolio. As Nick says, our reversion yield is 8%, which is eye wateringly high, and that compares to our current net initial yield of 5.7%. And that difference is around £8,000,000. So the difference between our current passing rent and our estimated rental value is about £8,000,000, which is half of our current dividend, which is around £16,000,000. So it just shows the size of the opportunity we have to go after within the portfolio to grow our rent. And on the right hand side, we set out the structure of the portfolio in terms of sector allocations. You know, as we said, around 50% allocation to industrial, and that's almost entirely multi industrial estates.

27:35 And then you will also see we're very overweight in retail warehouses, another area where we see sort of stronger occupational demand and and more resilient values.

27:47 With regard to our offices, we split these into three sort of sections for you. So we've got offices in London. We've got offices in the big six cities, and we've got offices elsewhere. So our our London offices, which includes Greater London, so, you know, all all 36 or so bars, these are led to two universities, University of Law and Buckinghamshire University, who are both growing. And we're and we're, you know, we're delighted to have them as tenants. And and in the big six, our offices are in, you know, city center locations such as Edinburgh, Leeds, and Manchester, where despite the structural challenges the offices are currently facing with more working from home post pandemic, you know, these areas have strong fundamentals, and there will always be demand for these sort of higher quality, well located offices.

28:44 Moving on. So here in this slide, we set out our 15 largest assets by valuation. This is really just to provide some granularity to you on the portfolio. You'll see, you know, the majority of our larger assets are in industrial or elected universities. And we've got a large retail warehouse at St John's Retail Park in Bedford. And on the right hand side, we're showing a couple of photos. So on the top, you can see Stanley Green Trading Estate, which we'll speak to a bit shortly, and this has been a key project for the fund over the last eighteen months or so. And then underneath that, you can see a photo of 19 Holly Lane, which is an element of Stacey Bush's industrial estate, which is our largest asset by value.

29:31 And you can see that this is under construction. And when it's finished, it will look like the photo above. So you'll see PV on the roof. It'll be shiny. We've used recycled materials. There'll be EV charging. We're targeting BREIAM excellent and EPCA plus. So this kind of speaks to that sustainability theme where we think if you can deliver the most sustainable space, you'll be able to demand higher rents, and the valuation will be as a keen yield. So, you know, justifies the extra CapEx spend. On this slide, on the left hand side, we list out 15 largest tenants as at the June 30. Some positive points to note, there's only two tenants that represent more than two and a half percent of the portfolio rent, and they are Siemens Mobility, who are a subsidiary of Siemens, the global conglomerate, and the University of Law, who I mentioned before, they occupy our London office space. They use it for for teaching, for lectures, that sort of thing.

30:32 And they are a growing business. And in fact, they're taking more space with us in Manchester, which is fantastic. The other tenants, you look down the list, you know, we see household names, strong names. We're really happy with the exposure here.

30:46 A point to note, Buckinghamshire, New University, are currently on half rent because we regeared with them. So we agreed a new lease ahead of the expiry of their existing lease. We regeared them in October. And this was because, you know, there's clearly these structural sort of trends that are adversely impacting offices. So what we wanted to do was lock the university into our office building for a longer period of time. So we locked them in now until 2028, and we increased their rent by 13% in return for some rent free, which is currently on half rent. So when that half rent's over, they'll be paying us about 1,300,000 per annum, and they'll be our second largest tenant. On this slide, this analysis, so, you know, where we have vacant space in the portfolio.

31:41 It's 11.5%, which is slightly higher than it has been over the last prior quarters. And the reason for that is the Stanley Green asset I mentioned, so the new development that recently completed. And whilst we've let around 40% or or have let around or off of 40%, you know, it's still gonna take some time just to fully lease that asset because being a mostly industrial state, often you let to smaller businesses, and they like to see the space and walk around it and understand what it'd be like for them occupying. But if we adjust for that, then the void is 9.2%, which is, you know, bang in the middle of our five to 13% range over ten years. And then what you can see in the table on the right hand side is an analysis where we've shown you what we have let or under offer.

32:30 And of that 11.5%, 2% is that our under offer. So we're already trending down to 9.5% even before we adjust for standing green. We thought it'd be interesting to show you an example of how we work, you know, how we look to add value to assets, particularly with a particular focus on sustainability as well. And standing green, as I said, this is where we've spent the most money over the last eighteen months. You know, we spent more than £8,000,000. We developed 80,000 square feet of warehouse and trade units on an existing site. But just to put some context on this, we we bought this asset in December 2020, and it had a free acre empty sort of site next to it.

33:18 There was planning for around 40,000 square feet of, new accommodation. We immediately increased that planning to 80,000 square feet, and we also decided to make it, you know, leading from a sustainability perspective. That development completed in the quarter. As I said, around 40% is either let or in legals. And when it's fully let, we'll bring in £1,300,000 of rent. Now bear in mind, we paid around 17,000,000 for this asset. We spent 7,000,000. It's now valued at £39,000,000. So really, really accretive for the fund. And you can see in the bottom table the performance stats. So over one year, we've returned 17% compared to the all industrial benchmark of minus 22%. So it shows what we can do with our strategy focus on sustainability.

34:09 Now that was a backwards looking project, you know, one that's essentially complete. We've got a couple of kind of live projects that we'd like to speak to. Well, one live project and one that we're trying to make live. So on the left hand side, we have you can see in the photo an image of St. John's Retail Park in Bedford, which is our largest retail exposure. It's a really sort of vibrant retail warehouse. It's the predominant screen scheme in the area, and we have, you know, anchor tenant there being Lidl. So what we're we're doing here is and also it's a second retail park in Wattenon Street in Bletchley, is we've agreed with Starbucks that they'll build two pods. So one at each site on on the car park. That will cost around 8 point 1,800,000 for both.

34:55 We're paying for that, but Starbucks are building it because they have, you know, plenty of experience doing that. And if the cost goes above 1,800,000, then that'll be for their accounts. So we're protected on the cost front. And when complete, the rent for both schemes will be around 250 k. Really high return on our investment. So that is now on-site at Bedford. At Bletchley, we're gonna be on-site shortly. We've got the full 1,800,000 left to spend, and we think the value will end at 4,200,000, and it's currently 1,800,000. So that's an uptick of 2,400,000. So, you know, accretive CapEx there. And again, there's a focus on sustainability.

35:44 Starbucks required to meet certain standards in EPC and preamp and also have EV charging there for customers. On the right hand side, we have another scheme we're trying to develop. But, again, maybe just briefly step back on this asset. So this was another asset we acquired in December 2020. We paid £19,000,000 for this asset, and it's now generating £2,200,000 per annum of rent. That's a yield of around 11%, a yield and cost of around 11%. And we were able to achieve that by identifying during DD that there were kind of under rented units there, mainly with the largest tenant Siemens. So we increased their rent through a rent review by around 30% and also with a second tenant called ICSIS or Littlefuse who manufacture semiconductors.

36:37 So we increased their rent also by around 30% as part of a ten year regear. So they're there for ten years straight with inflation linked rent reviews. So that was the first stage of the business plan at Chippenham was to increase that income and, you know, really increase that yield and cost. But in addition to Chippenham, the site Langley Park is right in the center of the town. It's right by the train station. There's loads of residential around it, and Siemens employ, you know, hundreds of people there. The site is 28 acres, and there's plenty of unused space. So what we're trying to do is work with Siemens to develop a new headquarters for them for their mobility business. And you can see a CGI in the top right hand corner of what that might look like.

37:28 We're in negotiations at the moment. The plan would be to use the empty land on this 28 acre site to develop the new HQ whilst they're still occupied the existing units, which you can see the yellow units in the photo. So it'd be a really efficient sort of scheme for them. And then once that new accommodation is developed, we would then refurb the existing. So in terms of cost to build, we think that would cost around £69,000,000, including the value of the land that the units will go on. And at the end, we conservatively estimate that would be valued at around £75,000,000. So, again, another accretive scheme. On slide 24, you know, we spoke about rental growth, and we wanted to provide some color on where that will come from.

38:24 So the first bar the first blue bar on the left hand side shows our current rent. So that's 28,500,000. It's what's passing at the moment. And then the final bar on the right hand side shows our ERV, which as Nick described is what the valuers think we could rent our portfolio units at at today's rent. And then we're showing some steps on how we can get there. So first off, in the next twenty four months, we've got fixed uplifts worth £2,300,000. And a huge amount of that £2,300,000 relates to just two leases, one being Little Fuse and the other being Buckinghamshire New University. So around 600 k from the university and around 400 k from Little Fuse. So that's a million pounds coming through on just those two leases in the next few months.

39:12 Second, we've got Stanley Green. As I mentioned, that completed during the quarter, and the rent that we expect to get from the units once left will be £1,300,000. Third, you've got Starbucks ERV to come through. So Starbucks are currently on-site at Bedford, and we're gonna start on-site at Bletchley soon. And as I said, when complete, that's 250 k of rent, and that's shown in the in in the chart here. And then the final two bars show where our ERV is currently ahead of the rent that we're currently getting in the units. So as rent reviews come around and as leases expire, we would expect to kind of achieve that ERV. And then finally, there's vacant space at the moment, which we're working very hard to let.

39:59 So that describes where the 8,000,000 will will come from. On our balance sheet, so we set out here we tried to set out clearly, you know, the structure of our debt. We've got two facilities, a term loan with Canada Life of a £129,600,000. That's fully drawn. It's at a fixed interest cost on average of 2.5%, and the average maturity is twelve point eight years. So really strong, facility there. And as of June 30, that has a valuation that's not reflected in the NAV of around £20,000,000. Then we have our revolving credit facility with RBS. So the facility size is £75,000,000. We currently have £46,000,000 drawn. Of that £46,000,000 drawn, 30,500,000 is is hedged.

40:49 So there's a cap of 4.25%, and 15,500,000 is unhedged. So that is subject to the floating sonarine. Now the result of that debt is an average interest cost on drawn debt of 3.4% and an average maturity of ten point five years, which is a really strong position to be in. Finally, you know, sustainability is central to our strategy. We think there's really compelling structural trends supporting enhanced returns if we follow this strategy. This slide just sets out some of the work we've been doing over over a number of years to get us to the position where we are today that allows us to execute this strategy. And I hope that as we've been speaking through the deck, really comes through that this is a focus on everything that we do to the portfolio.

41:42 With that, I'll pause and hand back to Nick for some closing comments before we move on to questions. Great. Thanks, Bradley. I also gathered from Paul my camera went down partway through, so that that must have been a welcome relief for you. So I'm back on from what I understand now. So apologies for that. Look. Just just to wrap up, again, this is an interim update. I think the headlines are that we're pleased with the progress that we're making across the portfolio, delivering the continued growth in net income as shown by that early statistic. I think going forward, whilst there is clearly continued uncertainty in relation to the outlook, particularly driven by inflation and interest rates, that I'm sure we'll have some questions on that.

42:28 You know, we are very encouraged by having, firstly, you know, significant significant lettings under offer, but also a really quite exciting portfolio of future activity that we hope will deliver further growth in earnings go going into the future. I guess the final couple of points to note is, you know, we are differentiated by the strength of our balance sheet on on any measure. If you look at our balance sheet, duration, interest rate, hedging, We we you know, we're in a very good position. And finally, I think we have a really clear strategy for where we want to take the company with this increased emphasis on sustainability, real conviction that that will drive high levels of net income growth using the specialist expertise that that Bradley and I have alongside our teams based both here in London but also at Manchester.

43:19 So thank you for your time. And with that, I'll hand back briefly to Paul. Fantastic. Thank Thank you you very much indeed for your presentation, both to Nick and Bradley. Ladies and gentlemen, do please continue to submit your questions just using the q and a tab situated on the top right hand corner of your screen. But just while the team take a few moments to review those questions submitted today, I'd like to remind you that recording the presentation along with a copy of the slides and the Q and A can be accessed via your investor dashboard. Nick, just to say you are back on screen now, so thank you for that. As you can see, we've had a number of questions that have come through during the presentation. We had several pre submitted as well. If I may just ask to hand over to you just to click on that q and a tab, Nick, just just go through those as we're and read them out where appropriate, and I'll pick up from you at the end. Thank you. Look. Fantastic. Thanks thanks, Paul. And, again, it's great actually looking. We have some great questions, so so thank you. Really good engagement.

44:09 So so we'll we'll go through them. I I I and I'll we'll do a tag team on these as we go through. So first of all, question, what is the sustainability distributions going forward? Key key question, clearly, you know, we all know this for income. I hope what we give you today is obviously clarity in relation to the most recent period our dividends were a 103% covered by earnings. Again, we we are the only company in our peer group, as I say, to be paying a dividend level that's above pre pandemic level. Going forward, we believe they are sustainable. I think it's the most important point to note, and that and that's partly because of the visibility we have on activity across the portfolio, but also really critically because of the visibility we have on our future interest payments. So in that respect, you know, we're we're comfortable that they should be sustainable. Clearly, there's always a risk. You know, we we we we could lose a tenant.

45:07 But I think, again, hopefully, what's come across is the granularity of the portfolio means that that income exposure is mitigated by both the quality of, but also the the number of occupiers that we have across the portfolio. So I hope that answers that question. The next question is is where where and when do do we think interest rates will peak and what level? I think we need the answers to that. We would probably be interest rate traders and and he ought more money. But but I look. I think I'll I'll express it to you and then hand over to Bradley Baps on this one. I mean, we look. Can see what the markets are implying, and it has been increasing but but but also quite volatile.

45:55 And our expectation is that rates might peak at or around 6%. Probably more significantly, we and consensus expects that, obviously, will trend down as we go into 2024 and into 2025. So so so that's, I think, consensus. That's also why we obviously flag that long term relationship between property yields and interest rates. And in particular, flagging how we have a head start on that insofar as our portfolio is much higher yielding. So so so we would argue that, arguably, we're less susceptible to to the impact the rising rates could have on on on values. But also, again, while we illustrate that every cycle is different, although rates clearly are impacting values on the rental side, we think we are in a better position compared with previous corrections largely because we don't have that same oversupply risk that we had, example, for example, coming out of the the GFC. So I don't know, Bradley, if you if you want to add to that.

46:59 Yeah. I mean, I broadly agree with the 6%. Our economists last forecast 6.5%, but that was before some more favorable data data came through. And I think as more time passes, you know, more people have to remortgage. You know, it's it's it's well well known now that there are fewer mortgages that have been subject to rate rises than in past cycles. And, also, I think we're starting to see the impact of higher interest rates sort of indirectly on rented accommodation. So people who are renting are, you know, suffering higher rents. So I agree. I think maybe around percent if I have to call it today. Yeah. I I I think I think that's right. And and likewise, the next question asks what impact do we think rates will have on our on our profits? I guess, you know, hopefully, again, we've we've made the point clearly that whilst property values clearly are influenced by rates for the reasons we've given, but also the fact we have a higher yielding portfolio insulates us more than peers.

48:00 I guess the other point in relation to rates that, Bradley, you may wanna talk to again just draw to draw the the points points around, you know, the the hedging that we have in place. So, I mean, the best hedge we have is the fixed rate debt being the the term loan, which accounts for around 75% of our drawn debt. So that's fixed at two and a half percent. Whereas if you were paying the floating RCF at the moment, you're probably paying close to 7% with a margin on top of that, Sonia. So, you know, that just shows how attractive that long term loan is. And and, you know, the duration of that is around thirteen years. So, really, that's the best hedge we have. And in terms of the RCF, we have an interest rate cap of 4.25%. And Sonia now is yeah. It is is ahead of that. I mean, it's around 5% somewhere, so we are getting payoff from that cap.

48:50 But overall, 91% of our debt is either fixed or or capped. So that really protects our earnings going forwards by keeping our finance costs, you know, limited or keeping the increase in finance costs limited. Very clear. The the next question, again, is slight segue relating to this as to our opportunities to buy and sell or recycle. At the moment, the available capacity that we have is allocated to asset management. And actually, at the moment, you know, given given the uncertainty, I think we we see more value investing into our portfolio than necessarily going out and buying assets, given the limited capacity that we have. I think we are looking to do more sales.

49:37 We provided in the year end results presentation details of assets that we sold during the financial year and, in fact, also since the financial year end of selling an office in Rugby, for example, to to to to our tenants. Going forward, we do we do see an opportunity for further sales. We are we are working up sales for early September. We have a couple of quality situations where we think there might be particular reasons why we may have people who want to buy. But they would be around the edges, it's fair to say. I don't think we really see any significant sales. I think our priority at the moment is to crystallize value, particularly from asset management with some of our smaller assets. And it's more likely that rather than immediately recycling any proceeds we use to repay the young edge portion of the debt, we'd expect that to be accretive comparing the yield that we're giving up selling versus the yield that we're currently paying effectively on on that RCF.

50:38 With the flexibility then, and that's beauty the of revolving credit facility, where we have more visibility on where the market will stabilize is to use those proceeds again, even to go buy new assets or or to invest further into some of the key asset management projects that Bradley, I think, clearly clearly clearly articulated. It's a question about what what opportunity exists for office conversions, other uses, and should this be part of the strategy? It seems Blackstone is still buying industrial portfolios. What implications does this have for our portfolio? Good Good question. So I guess, you know, we are already, if you like, exploiting opportunities to to convert office use. As said again, clearly, two of our biggest offices, in fact, are let to universities.

51:27 And at City Tower, Manchester, we've we've led a couple of florals recently to to to universities. That's obviously huge. Education in The UK is one of our big tech sports. And so we see that as a as a huge opportunity, particularly in the stronger regional centers where where where we where we are invested. I wouldn't rule out selling offices for other uses. In the past, we we we've taken advantage of permitted development rights where local authorities were given the ability to expedite change of use from office to residential, and I think we may need more of that. So so hopefully that that gives the question of reassurance that that is part of the strategy. In In terms terms of of the the question about private equity buying industrial portfolios, I think that's really good for us. I think, you know, what we are seeing is more demand for bigger multi lets sustainably rented regional industrial assets.

52:22 And that's because those investors like us can see that there is a chronic oversupply and that there is therefore likely to be a rental growth coming through. That's in contrast to less appetite for the logistics sector where, as I said earlier, there are still tailwinds in your patient market, but there is equally more supply risk compared to the month yet. So, look, if if we see portfolios trade and and that that proves and and moves our valuation on, that that that's fantastic. You know, we're we're we're we're very positive about that. Question about valuation. How is how is property valued? Is it valued on the yield multiple, or do we use a DCF? So first of all, as to our formal valuation that that that is used calculating the the NAV, obviously, the the full year audited that March, interim September, but also the the interim NAV announcement such as what we've just been discussing.

53:23 The the whole portfolio is valued by CBRE as the independent valuer in line with Rick's guidance. Alongside the guidance from the Rick's Royal Institute of Chartered Affairs on valuer rotation, which which we've adopted best practice and hence the move from the bank to CBRE. The RCS are also consulting on a great use of of DCF discounted cash flow within regulated valuations. It It is is something something we do as a team. So when Bradley and I are analyzing capital expenditure projects across our portfolio, we're working we're using DCF to calculate forecast internal rates of return on on on the direct projects that we are looking at.

54:11 On our portfolio evaluations and evaluation that that we're using for the NAV, the key driver for that is comparable evidence that's available in in the market. So it is double day yield multiple basis, having reference to that comparable evidence. And the values will then use DCF as more of a check, particularly where there is less evidence in the market. So for example, shopping centers, which which obviously we don't we don't own. Right. So and there's a, like, well, similar valuation question about why low yielding assets sold off relatively more than high yielding assets. Well, that's simply the multiplier effect. So, for example, some of the estates, not any owned by us, I hasten to add, at the peak of the market last year, the value yields, you know, in the threes because the market was expecting to see high levels of rental growth. And therefore, buyers were willing to accept a much lower initial return expecting to have that come through rent reviews or lettings.

55:12 But, of course, if if you see a general rise in interest rates, then the multiplier effect when you're at such low yield is much more significant than it is if you're earning an asset yielding 6%. So it really is as as as as simple as as simple as that. Again, I'm just conscious of of time because some of these we can follow-up on after the meeting. Let me just go through to see if we've entered the road area that we haven't covered. So there's a question about void rates. So I think, again, I think this is important. So so, Bradley, I'll I'll pass this over to you. Yeah. So So it says the void rate is 11.5%, and they think that seems high.

56:02 And they're asking if we, you know, if the company, I. E, we as the manager, has enough resource to actively promote the space. And And and the answer is yes. You know, we you know, taking a step back. So SCHRODER is investment manager in real estate in The UK. We manage around, what, £15,000,000,000? Roughly £15,000,000,000. So, you know, we have an enormous team of and the way we we manage our team is we have sector specialism. So we have industrial team. We have a retail team, hotels team, office team. And each of those teams has really great contacts in the market. And, you know, given how much we manage, we have really good visibility on what's going on in the market.

56:48 So, yeah, with that large team of around a 130 odd people, you know, we do have resources to be marketing this space. And we do have the contacts with the the agents that are required to kind of get in touch with the right occupiers, you know, where where we don't have the direct relationships, you know, we do have that too. So, yeah, there's plenty of resource going into lessen the void, and it's not lost on us. You know, we don't have to sort of spend money to to get that rental income in. So we are pushing it hard. Then in terms of the 11.5%, yeah, it is a bit high, but, you know, as explained, it is a large part due to stay at Stony Green where the new development came online during the quarter. It'll just take a few months to be fully let because, you know, we wanna make sure we get the best tenants on really strong terms.

57:38 And the rents we have got so far at Standing Green have been really good, you know, more 20% ahead of the existing estate, which is just next door, and with really strong terms. So we don't wanna rush it. So, yeah, I think there is an opportunity we'll avoid, and we are pushing it hard. Thanks, Bradley. Was really clear. Just the the final question, and we will we will separately address the others meeting, is related to the Siemens development. You know, the obvious question is how we're fund it because we haven't got the money assuming we get to a point where we're able to to contract on that. It It is is early days. And as Buddy has said, we're running off a yield of 11% on cost. So the asset is doing everything we wanted it to do and more.

58:25 We didn't underwrite doing a deal with any of the tenants there to deliver new space, but so this is upside. We've done it before where we have been able to line up pre let agreements, subject to planning, and then sell sell them. And in doing so, crystallize the majority of the value that comes through through that activity. What we are not going to do is put us in a position where any of our activity moves our net loads of value anywhere above, ideally, that long term strategic range on a on a sustained basis. So our long term strategic net load to value range, and this is guidance agreed with the board, is 25 to 35%.

59:11 We're very slightly above the upper range at the moment. So we're so a lot more of the activity we're focused on has that has that in mind. So as I say, it's early days. You know, if if if we make progress over the course of the next few months, if there's an opportunity to sell another asset and recycle into something like a deal with Siemens where there's a higher return to generate, then we'll look at that. But, you know, we acknowledge the money's not there at the moment, and therefore, we need to look at alternative ways to extract value, all all of of which which we've done before. I guess the last point, you know, is it does illustrate that, you know, if we were twice the size, we would have no hesitation doing that transaction. And so all of the activity we've talked spoken about today is clearly driving it, maximizing shareholder returns, but also ideally addressing the discounts so that we do, at some point in the not too distant future, create opportunities to grow.

1:00:05 So given time, I we really appreciate all those questions. And apologies to people people who feel they've not been answered, but we will follow-up with responses in due course. That's fantastic. Look, thanks for addressing all those questions there, and thank you to all the investors for submitting them. As Nick said, we will get those reviewed, and we'll publish those questions where appropriate to do so on the platform. Perhaps a a final few comments just before redirecting investors to provide their feedback, which I know is particularly important to you and the team. Yeah. Look. Thank you. Again, Paul, I guess, first and foremost, thank you very much for everybody for your interest and where you are, Sheldon, for your support. I again, I I we we really enjoy engagement on this platform, the interaction we get through the questions. And and interestingly, we are seeing a change in our register with more platform investors, which I think also will be helpful to potentially for our rating going forward. We generally think we're in a really good place, notwithstanding the market headwinds.

1:01:00 We're delivering everything that we said we were gonna do. And and, hopefully, what's come across is, alongside, you know, the very strong balance sheet that we have is we do have great visibility on future activity, particularly with that increased emphasis on sustainability. So we will continue updating with activity. We hopefully will be releasing notes on on on activity before we announce our results our original results, which will be at some point in in late October and November. So so with that, Paul, I'll hand back to you to close. That's fantastic. Nick Bradley, thanks indeed for updating investors today. Can I please ask investors not to close the session? It should only take a few moments to complete, and then it's greatly valued by the company.

1:01:50 On behalf of the management team at SREIED REAL ESTATE INVESTMENT TRUST, we'd like to thank you for attending today's presentation, and good morning to you all.