Schroder Real Estate Investment Trust (LSE:SREI) — Results for the quarter ended 30 June 2024

0:01 Good morning, ladies and gentlemen, and welcome to the SCHRODER REAL ESTATE INVESTMENT TRUST LIMITED investor presentation, and apologies for rescheduling today's presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged. They can be submitted at any time via the Q and A tab that's just situated on the right hand corner of your screen. Please simply type in your questions at any time and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today, and we'll publish those responses on

0:32 the INVESTMENT company platform. Before we begin, we would just 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. And I would now like to hand you over to the team from SCHRODER REAL ESTATE INVESTMENT TRUST, Nick Bradley. Good morning. Good morning. Thank you very much, Jake, for that introduction, and thank you, everybody, for bearing with and and dialing in, for the second time this week. That that is very much appreciated. This is, an update, on SCHRODER REAL ESTATE INVESTMENT TRUST. So as usual presenters, myself, Nick Montgomery, and and Bradley, who who and we jointly manage the company. For those for those that don't know us, but I expect most of you hopefully do, what it says here on the first slide in terms of our overarching strategy, we have a thematic focus on sustainability with active management to enhance returns. And I'm I'm delighted to say that that that we're we're, you know, we have conviction that that what we're doing really is having a positive impact on the underlying portfolio and will allow us to continue driving high levels of net income growth.

1:37 So we'll we'll do our usual tag team. As I as I move to the next slide, it's worth noting, we're announcing, obviously, we're providing you with information on our June net asset value that we've we've obviously just announced. This is the NAV that sits between, obviously, having announced our finals to March and the forthcoming interim to September. It is nonetheless, although in order to do this based on an independent portfolio evaluation. And so as we go through, we'll give you obviously more color on what's driven the performance in absolute terms, but also relative to our to our to our benchmark. So I guess just to reinforce some of the key messages, and and I guess this will also be helpful for people that don't know us quite so well. So so as it says on the tin, the thematic focus, but really very focused on active management.

2:31 This is not about this is not a strategy that's driving social value. Specifically, it's about how by focusing on decarbonization, active management, extracting the green premium, we should be able to drive higher income and total returns and obviously continue growing the dividend. We're listed on main market in the LSE. For those that don't know us, our ticker is SREI. From when we last presented, the portfolio in terms of properties and tenants has remained broadly unchanged. We reported positively. And I think when I come on to talk about the market, we do think we have reached, as we've been guiding, an inflection point in The UK real estate market as we saw the portfolio value tick up for the second quarter.

3:18 Interestingly, when we look at the benchmark data, which includes all of the commercial real estate that sits within our benchmark and its many billions, very good representation of The UK real estate market. Capital values on the wider benchmark have actually ticked up on a quarterly basis for the first time since the middle of twenty twenty two. So what we've been saying in terms of expectations of a market recovery, Obviously, we've already been benefiting, but it does appear that the wider market is also moving in that direction, and I'll cover that in a bit more detail later. So we've announced the net asset value there of $289,000,000. That represented a 05% uplift over the quarter. And once you also take account of dividends that we paid over that period, we delivered a net asset value total return of 2%. So you know, relatively low numbers, but importantly, positive numbers, but actually also when you compare us to the wider peer group because of the activity, because of a high covered growing dividend, we're scrubbing it better than all or most.

4:28 The positive valuation movement also had the impact of taking our net LTV down slightly. So our net LTV moved from just over 37% to just under 37%. And Bradley will provide more color on on that in due course. Continued improvements in in in our GRESB score. We've submitted the most recent annual GRESB. This is the most well regarded global benchmark looking at sustainability performance of principally commercial real estate portfolios, but actually increasingly a much wider part of the real estate market and we remain top in our peer group there. Why have we had this outperformance? Well, there are some particular asset examples we'll come on to, but really it's still about asset allocation. We continue to benefit and actually with our forecast, I'll come on to. We think this will continue to help our relative performance.

5:17 The fact that we have 90 just over 50%, I should say, of our portfolio allocated to industrial, and importantly, almost all of our industrial allocation is in multi let industrial estates. And for those of you that have heard us before, that's our preferred part of the industrial sector. Very granular tenants when you've got lots of tenants on these multi let industrial estates. And our estates are typically located on the edge of densely populated urban areas, Milton Keynes, Leeds, etcetera, South Manchester, and and really, you know, that allows us to drive higher occupational demand and therefore that translating to higher rents and and performance. And performance, again, more a little bit more on this later, but but we're showing you here for reference really how our underlying portfolio has performed against our institutional peers.

6:06 We know for some people this is not such a relevant metric. Clearly, you're more interested as we are as shareholders in what the share price is doing or what the NAV is doing in obviously, this is looking at how our underlying assets are performing when we compare those with our institutional peers. And this is independently calculated. And what you can see very clearly is over all time periods, we are continuing to deliver that relative outperformance. Now as I said at the start, you know, these are relatively low numbers. But from a from a from a relative perspective, it hopefully gives investors reassurance that actually we are delivering against our institutional peers and the strategy on that basis is working. Now again, the five key points, why do we think SREI is particularly interesting today?

6:55 Well, as you've heard me say, over half the portfolio now is allocated to industrial sector. Another, give or take, 15% is allocated to value retail warehousing. So, you know, a lot of people are talking about boxes, big boxes. Well, you know, almost two thirds of our portfolio is allocated to boxes insofar as it's industrials and retail warehousing. Now, again, we have the benefit of being a diversified strategy. And so the offices that we own, we think are gonna deliver good returns. You know, the majority of our office exposure is actually university accommodation. But looking forward, and particularly looking forward through the lens of our brown screen strategy, you know, we think there is mispricing emerging in the office sector and having the ability to tack and change between all the sectors, traditional and increasingly alternative sectors, will allow us to continue driving the higher levels of income that we need in order to continue paying what is a very attractive dividend yield. And I guess that's the key point on the next line. Two, our dividend yield today, give or take, is trending between 7.27.5%.

7:57 Clearly, we've had a bit of volatility in the share price. Share price today at about forty five point six percent forty five point six p, I should say, which reflects a dividend yield of just over 7.2. Really importantly, and we're very disciplined about this, that is fully covered by earnings. We were 103% covered by recurring earnings over the most recent quarter. And as you'll hear later, a very positive pipeline of leasing activity coming through, which we hope and believe, assuming we execute, will allow us to continue with the support of the board moving that dividend on. The other thing, of course, as I've touched on briefly, that allows us to have that confidence about growing earnings and dividends is we have a very secure balance sheet.

8:44 Seventy five percent of our debt, as lots of you will know, is fixed for another ten years or so at 2.5%. So very low cost of debt. Yeah. Clearly, we are seeing interest rates come down, but they're they're not gonna get down to that level anytime soon in our opinion. So there's a real value there, and in fact, were we to fair value the loan in a way that you would an interest rate swap, that would be around 18,000,000. We we produce that number every every six months. As of March, that number was about 18,000,000, which is not reflected in the NAV. I mentioned the share price at 45.6 p or at least it was when I looked about an hour ago. That compares with the NAV, and I'll come on to the NAV breakdown of 59.1, and that's obviously a discount of 23%. So we have seen, and actually encouragingly, we've seen an improvement in our rating against peers partly because I think of presentations like this where we're we're getting more traction with the platforms.

9:45 But clearly, we think that that there is room for that discount to narrow as there's a broader acknowledgement of what's happening in the underlying real estate market with transaction volumes starting to pick up from a very low base, admittedly. But nonetheless, an expectation that we will see the market moving to a recovery phase. And the final point to note, you know, we are very focused on ensuring that our strategy is differentiated. You know, this is not, a social value driven strategy. We are focused on sustainability because, frankly, we think it will help us make more money by manufacturing that green premium, you know, addressing the decarbonization challenge that The UK and wider real estate markets have, but in doing so, drive higher levels of earnings growth. Now I'm not gonna spend too long on this, but we include it because, hopefully, it gives people who are more interested in the detail a clear view about how the numbers are moving.

10:38 So this is obviously the math movement over the quarter that ended June. And you can see there the 58.8 p moving upwards to the 59.1 p. Clearly, the big driver, obviously, was the underlying positive movement in the capital value of the portfolio of 0.4%. As I mentioned earlier on, that compares to the benchmark, which is essentially flat. But that was the first time the benchmark had produced something other than a negative number for two years. So again, that's why we think that's a signal to that recovery. We've paid the dividend of 0.853 p. As you all know, those of you that were this last time, last quarter, we announced a 2% increase in the dividend. We haven't done so this quarter, but we're obviously looking forward with activity in the expectation that if we are successful delivering that activity, we will continue to move that forward.

11:33 So really, those were the two key movers with the with the point there, of course, with EPRA earnings, we were a 103% covered when others in our peer group are uncovered. On the income statement, again, I won't spend too long on here,

11:48 but but obviously, the the key driver you can see there was a 3% increase in the rental income. That's the that's that's rental income received rather than rental value growth, and I'll come back to that in a moment. But all the numbers moving in the right direction. I think since we started on this platform, which has been a really great way for us to get to a different group of shareholders, hopefully, of you that have been in from the start will see that, you know, we are continuing to deliver what we have said we will do, and we hope and expect that will continue. I guess just to bring that out really clearly in terms of a dividend, you can see here the progression. And we have and with the support of the board, when we meet quarterly, when we have conviction that we will be able to continue paying at a certain level, clearly with the expectation that we will not have to go backwards, We will pass that on. And our intention is over time that we will continue delivering a sustainable and progressive dividend policy.

12:50 Versus peers, I I I we there's been a lot of movement in the in the peer group. Those of you that follow it closely would have known I guess, know what's been happening, for example, with some of our peers like API going for a failed merger process with custodian, with the API board then being in a situation where they've had to announce a wind up, and it will be interesting to see how that plays out. We've seen other companies obviously announce strategic reviews. I think in our case, you know, we obviously issued the circular at the back end of last year where we have real conviction that this is the right strategy. And and, you know, we are, you know business as usual for us is to continue driving its income growth, but also spend a lot of time in in meetings like this where we are pushing the company to new groups of shareholders, smaller wealth managers, really just to drive that marginal demand to move the share price on.

13:57 This really summarizes why we think we're well placed. Just starting from the top, we have the highest fully covered dividend yield in the peer group. You know, there are high yields available, the likes of of AW, for example, but they are not covered. I guess the share price discount to NAV that there this is probably where there has been most movement because, obviously, ratings have moved depending upon investors' views, for example, whether there might be nearer term realization. But the last point to note, which again, in an environment where rates we think will remain elevated, certainly compared with the most recent sort of five or ten year period, that long term fixed rate cost of debt just gives us a fantastic platform on which to continue growing top line rental and therefore earnings growth.

14:46 Performance, again, I've touched on this and I won't go into more detail because this again is comparing us to the institutional peer groups. What I would just note in the bottom right hand corner is now if you look at us over any period of time at an underlying portfolio level, we have delivered relative outperformance against our peers. And that's down, we would say, to obviously, that we're having the right sector allocations, the industrial sector clearly having driven returns over the last ten years versus other sectors. But also, you know, it's Bradley and I having access to a very large team of specialist asset managers, specialist sustainability subject matter experts, whether it's climate, net zero, decarbonization, and a and a combination of all of those things, meaning that we can drive more value through the active managements as as you as you will hear examples of shortly.

15:43 Now just on the market, no surprises here, I guess, insofar as clearly we've all seen the first rate cuts, which we're showing on the left hand side there. We we were obviously, and I think we commented last time, we were beginning to see, obviously, market expectations change in a in a in a more dovish direction. I've mentioned before on these calls that the real estate market, when it's thinking about interest rates, the most relevant metric is either the ten year gilt yield or or the five year interest rate swap because a lot of leveraged property buyers would typically look to fix their cost of debt for five years. And that five year number has moved down quite significantly now. So the five year swap rate is down at about 3.8%.

16:28 So once you overlay sort of a typical margin, you know, the average cost of debt therefore might be somewhere in the region of five and a half percent. So still relatively high compared to the recent past, but but I think it is moving in a more positive direction and that is beginning to stimulate more activity in the transaction market. You can see a bit more information here on that relationship between interest rates and real estate yields. We've mentioned before that long run spread that you would expect between that ten year gilt yield and average real estate yields, cash yield that is, so the initial yield as we would call it, is somewhere between one hundred and fifty and two hundred basis points. And if you think about the fact that the ten year gilt yield is now at about 3.8, and then you look at the fact that average real estate yields, depending upon the index, are somewhere around 5.5, we're moving towards that long run spread, which would indicate the the sectors approaching fair value.

17:25 You know, as we've said before, but I apologize repeating this again because I think it is a really important point. You know, what we have seen a very significant correction really compared to the most recent ten years, clearly, you know, the GFC period of 44% decline, the early nineties much more similar to the 25% peak to trough we've seen over the most recent cycle, which we're illustrating on the left hand side. You know, as as I said, we are beginning to see, and you can see this coming through in everything except the orange line, we are beginning to see values bottom out and show some recovery. You know, for example, we're beginning to see

18:06 more transactions within the industrial sector, investment transactions, I I should say. We're beginning to see more investment transactions in the retail warehouse sector. The office sector from the investment perspective remains very challenging. There's just a lack of capital there even though occupational markets actually are better than that would imply. Now and we're also interestingly seeing some bigger portfolio transactions. And notably, for those portfolio deals, are beginning to see more private equity stepping into the market and including US private equity, the big boys, the likes of Blackstone, and others making more positive statements about how they now view The UK real estate market and that and that's positive. You know, we do need to see the transaction market pick up, not least because on the other side of that, we do have continued selling out of open ended real estate funds.

19:02 And so although it's nothing like as significant as the flows that we're seeing out of those funds immediately after the mini budget and the guilt crisis, that we do still see those those drip drip drip coming out of those open ended funds. And therefore, you know, we we now feel a bit more confident that there is the buy side demand coming through from those from those private equity buyers.

19:25 What I think, again, I've said this before, but what what what differentiates this cycle from previous cycles is what's happening in the occupational markets. And a combination of factors, you know, relatively low levels of new build, and that's really legacy of the GFC, with banks and institutions putting far less capital into into particularly speculative developments. But also, you know, frankly, inflation and The UK economy showing some signs of resilience or certainly compared to to how some forecasters were viewing it maybe twelve months ago, means that we are seeing companies, you know, growing, taking space, particularly in in those high growth locations, knowledge based economies, as I mentioned also, parts of the multilayer industrial sector, retail warehouse market, and and these this is showing you the the impact of that. So you can see there on on on the left hand side of the chart, this is showing rental growth from the most recent market correction. So obviously, '22.

20:26 And you can see there the average rents for all UK property or principally commercial property are up about 7% over that two year period or roughly 3.5% per annum. Interestingly, just to give you some comparison, our portfolio did about twice that in terms of rental value growth, and that's the growth that we were hoping now crystallized in terms of in terms of rents actual rents paid as we as we go forward. Clearly, the biggest driver in the market was the industrial sector, and you can see here average industrial rents going up by about 14% or 7% per annum over the last couple of years at a time when obviously values were falling.

21:12 And just again, to give you that context, our industrial portfolio did almost double that. So, yeah, that's reflecting or reflected, I should say, in the higher version we yield that we have, which, frankly, will give you a more of a breakdown of very very shortly. So what does that mean in terms of our forecast? Well, the only certainty here is that these are wrong, but hopefully, less wrong with others. But what you can see as you look out over the next five years is we are expecting average rental growth of about 3%, give or take, combined with that higher income return of around five and a half percent, and this is an average for the market, deliver total returns at property level of between 89%. Now there will be clearly polarization between the sectors, parts of the office market, particularly the secondary

22:01 out of town market, we think it presents still a significant risk. We don't own that. So sectors equally, we think parts of the multi industrial sector, parts of the retail warehouse market, parts of the Central London office market even will will will perform better than than than the average. So, yeah, this is the key reason why I think we're now beginning to see more capital, at least looking at the sector because of the correction, because we finally got the decision on interest rates, and therefore we do expect more capital to be allocated, not just by domestic investors, but actually, as I mentioned, private equity, private institutional capital that we'll see a buying opportunity that we've really not seen in The UK market for the last ten years.

22:46 So I will pause there. We'll be pleased to hear it. And I will pass over to Bradley.

22:53 Thanks, Nick. Thanks very much. So whilst there's clearly been volatility across many empty markets over the past week or so, We've got some positive points and updates we'd like to make with regard to SREI, both the portfolio and the company itself. So with that, I'll get started. So on the slide on the screen at the moment, you can see images of six of our assets. These are six of our largest assets, and they represent £215,000,000 of portfolio value, which is 47% of the portfolio value. So just these six assets alone will give you a really good insight into the portfolio. So if we look at the first column briefly, we show our two largest multi let industrial assets. And as Nick said, multi let industrial represents around 50% of our portfolio, and we see really favorable supply demand dynamics in that sector.

23:49 In the central column, we show our two largest office exposures. As Nick says, our offices are in higher growth locations, such as Greater London and the big six, big big six cities, including Manchester and Edinburgh. The image you can see at the top is our largest office exposure, and this is actually led to the University of Law, and it's used for education purposes. So 10% of our office allocation is actually used for education rather than sort of general corporate office use. And that office that I mentioned is in Bloomsbury near Tottenham Court Road Tube Station, so really well located in that knowledge quarter. And we've seen some really interesting deals in that location taking rents to in excess of a £100, almost £130 pounds per square foot.

24:37 So it's been a really positive location. In the final column on the right hand side, we show our two largest retail exposures. And first point to note is the majority of our of our retail exposure is retail warehouse where we again see, favorable supply demand dynamics. And in the top photo, you can see St. John's Retail Park, which is in Bedford. It's a catchment dominant scheme. It's our it's our largest retail exposure, and the remainder of our retail is mainly part of mixed use schemes. So in the

25:11 second image you can see there, you see an image of Headingley Central in Leeds. So we have some retail there, which is adjoining a Premier Inn hotel, a large gym, and lots of food and beverage outlets. Moving on to the next slide, we show some important portfolio level metrics and characteristics. We show this slide all the time. So do think it's quite important that you understand the overall portfolio. And as usual, we've highlighted a couple of rows. So first, we highlight the number of properties and tenants. As Nick says, this has been fairly static over the over the quarter and and does speak to the granularity of the portfolio, which we have may think has made the portfolio more resilient as it spreads the risk across more assets and tenants.

25:57 And the second set of rows we highlight speaks to the higher yielding nature of the portfolio. So our initial yield is 6.1%, and that's a 100 basis points in excess of the benchmark. And our reversary yield is 8.5%, which is more than 2% ahead of the benchmark. And to put those percentages into kind of real numbers and pound notes, so the necessary yield refers to our annual rent today or as at June 30 of just around £30,000,000. Our reversion yield makes reference to our estimated rental value of £39,000,000. So there's a £9,000,000 delta there. So that's £9,000,000 of reversion we are trying to capture. And then again, to put that £9,000,000 in the context, our annualized dividend is around £16,500,000. So clearly, if we're able to start capturing that reversion as as we have been doing, then there'll be the potential to push that dividend on even further than we already have done since the pandemic.

26:53 On the right hand side, we show the structure of our portfolio by sectors. The key points to take away here are our overweight weighting to industrial and our overweight weighting to retail warehouse. So around 63% roughly of our portfolio is warehouses of some shape or form. Moving on to the next slide. So as Nick says, we are a very active manager. It's how we have, you know, combined with good sector weightings, it's how we aim to outperform the benchmark, particularly with regard to income. And to give you a flavor of some of initiatives we've been doing, we set out three examples on the slide here, and I'll briefly talk to each one. We've shown a retail example, an office example, and an industrial example to be fairly representative of the portfolio.

27:41 And as in the first column, as I've touched on before, I've shown St John's Retail Park in Bedford. As I said, it's a catchment dominant scheme. And recently, we've completed a new drive through development on the scheme. We've got a new Starbucks now operational on the scheme. It costs us £850,000 to build that Starbucks. The rent is a £155,000. So a really, really attractive yield and cost there, double digit yield and cost. And interestingly, the rent that the Starbucks are paying is just over well, it's around £85 per square foot. The average across the other units on the on on the scheme is around £20 per square foot. So you can see just how how, you know, how lucrative these drive throughs can be. They're very popular around the country.

28:30 And we didn't stop there. So on the estate or on the on the scheme as well as the Starbucks drive through, we already had a cost of drive through in a different location, on on the scheme. So because we're able to agree that rent with Starbucks of £86 per square foot, we use that as evidence when we had the rent review with Costa to do two things. So first, we increased the rent that Costa were paying by 73%. And secondly, we increased their lease term from four years to nine years. So really derisked that, second drive through. And that's a really good example of how we drive an income in the portfolio and driving the longer lease terms as well. In the center, we show the ton in Edinburgh.

29:16 We recently refurb part of the Letterbury area plus many of the common areas. We've also been, working on adding end of journey facilities to, you know, improve the, attractiveness of the of the asset to tenants and to encourage sustainable forms of transport. Where we've refurbed lessable areas already, the EPC, we've been able to move on from a d to an a. So, you know, really we've really focused on improving that environmental performance to drive those higher rents that Nick was talking about as being key to our strategy. And then what we've just given an update on here is we've got planning permission to undertake the refurbishment required to bring SLR Consulting into this in into the asset. Now SLR are interestingly a sustainability consultant, and they're going to pay us a rent of £425,000 per annum for around 10,000 square feet.

30:09 Now that represents a rent per square foot of £41, which is, you know, significantly higher than what was previously passing. But it's worth noting that an element of that rent, so around the £13 of that rent relates to an enhanced refurbishment we're doing for the for for the company. But even taking account of that, it is a significant step up in passing rent and is sort of testament to the strategy of providing high quality performing space from a sustainability perspective to drive higher rents from better tenants. On the right hand side, we show our industrial example. We've recently completed a deal with the largest tenant at this multinet industrial estate, that tenant actually takes 49% of the floor area.

30:56 And with that tenant, we've increased the rent by 50%, and we've increased the term from one point five years to nine years. So a really, really good deal there. And it's really reflective of the fact that we're owning the right asset in the right sector in the right location, and we have the best or a a brilliant tenant. So it's about getting big decisions right as well as well as being an active manager afterwards. Moving on to the next slide. Here, we show a breakdown of that reversion I spoke to, which can be quite, abstract. So here we try to to put some numbers to it. So on the left hand side, we show our current passing rent as at June 30. That's at £30,000,000 I spoke to earlier. And on the right hand side, the final blue bar is our reversionary rent. So that's the rent that our independent valuer thinks is the market rate for every of our units in aggregate if we were to let them all to the market today.

31:50 And sometimes it takes some time to realize this reversion because of, you know, lease terms can be from for for many years or there might be a number of years before the next rent review. Now the steps that we are sort of breaking down that journey are firstly fixed uplifts that have already happened since June 30. So we've done £300,000 of those. There are further 1,800,000 of fixed uplifts to come in the next twenty four months from June 30. So, you know, technically, if we do nothing in the portfolio, we're gonna realize these increases. In the third column, we show you standing green. So we've got 600,000 pounds of space to let us stand in green in relation to the new development, and we have really good interest there. And we we hope to give you a really positive update with our interims with regards to Danny Green.

32:37 And then the next red bar represents units where the ERV, as determined by the valuer, remains ahead of the passing rent we're currently collecting. So as I said, as you get around to those rent reviews and those, lease expiries and new leases, we'll be aiming to push the rents on. And then finally, we've got another 3,800,000 of rent in relation to vacant space, which we're working hard to get let. Now the final slide for me is I wanted to touch on our balance sheet. As Nick said, we've got a really strong balance sheet. It's a competitive advantage. We've got two facilities. We have a term loan Canada Life, which you can see on the left hand side. That's a £129,600,000 in total of which is fully drawn. And we have an RCF facility, which is £75,000,000 in total of which we have £47,000,000 currently drawn.

33:31 Now the strength of the balance sheet is really underpinned by that Canada Life loan. It's got an average interest cost of two and a half percent and an average maturity of around twelve years. So that underpins the strength of our balance sheet, and it's very, very attractive. But overall, the average interest cost including the drawn element of the RCF is 3.5 percent. And we have a strategy in place to dispose of some of our smaller assets to pay down that on unhedged £16,500,000 where we're currently incurring a cost of around six and a half percent. So as we pay that down, our average interest cost will come down, you know, disproportionately. With that, I'll pause for any final comments from Nick, and then we'll be really happy to take any questions that you have.

34:20 That's great. Thanks very much, Bradley. Very clear. So I I won't spend too long on this slide, but but I think these are the four really key points. None of which, I guess, should come as a surprise to anyone that's been with us over the last twelve months because it's broadly consistent with what we've been saying. So the market is moving from stabilization now to, we believe, recovery supported by those characteristics I mentioned, very limited development, most importantly, rental value growth. And as we're noting here, likelihood of there being further interest rate cuts as we move through the back end of 'twenty four and into 'twenty five. Our portfolio really continues to benefit from the higher allocation to those high growth sectors, particularly mostly industrial states, but also partly because of this, you know, the the active management potential that comes through having lots of tenants being able to improve assets on a phased basis, clearly with a real focus now on how sustainability improvements form part of that.

35:20 Ultimately, all of this is about driving higher earnings growth. And and as Bradley has said very clearly, you know, we we benefit from not having the risk that others do in terms of refinancing because, as I said earlier on, I think although rates are falling, they're gonna remain elevated compared with where they were. So it's a company that are looking at refinancing in the next couple of years, clearly, gonna end up paying more more interest. So so I I will I'll pause there, Jake, because I think I think we've covered all those points given time. And then back to you. Perfect. Nick, Bradley, that's great. And thank you very much indeed for your presentation this morning. 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 company take a few moments to review those questions that were submitted already, I would just like to remind you that a recording of this presentation along with a copy of the slides and the published Q and A can all be accessed via your investor dashboard.

36:18 Bradley, Nick, as you can see, we have received a number of questions throughout your presentation this morning. And thank you to all of those on the call for taking the time to submit their questions. But Nick, Bradley, this point, if I may just hand back to you just to read out those questions and give your responses where it's appropriate to do so, and then I'll pick up from you at the end. Thank you. Great. Thanks, Jake. So thank you for the questions, first of all, everybody. I think on the first there's a first question about what specific asset management has contributed to the the performance and resilience. I think Bradley's touched on three particular examples over the most recent quarter and in particular, the multi letter state in in Telford where where that fairly significant lease new lease drove returns there.

37:07 As a more general comment, we continue to benefit from having the high allocation to the industrials so that there is like a sector reason why we're outperforming. But actually, that's being enhanced to to the asset management point by activity within the industrial portfolio because the higher growth means that we have more tenant demand, which means that we can really work with that, improve units, drive drive that green premium. So that that's really what is driving it. I think it was a question about the outlook. I think this might have come in before before we gave the overview of of of where we see returns. You know, I think we've seen a 25% decline from June 22 to to today, and and this is this is obviously looking at it from the perspective of the benchmark rather than ourselves. We performed better on a relative basis.

38:03 That compares, as I said, with 44% during GFC, 25% there or thereabouts during the late eighties, early nineties recession. So so that correction, a more supportive interest rate environment, an expectation of elevation you know, interest inflation rather remaining slightly higher, that passing through to rents means, as I say, we are expecting returns in the region of eight to 9% per annum on property level, which which we think will need more capital to to to come back to the sector. In terms of the reasons for the discounts, and this is linked actually into a question someone's asked specifically in relation to one of our peers because there are, you know, if if if you look at our NAV returns, particularly over the last three years since we undertook that refinancing because the the previous high get cost really was an anchor dragging our total returns.

38:59 From a NAV perspective, we scrub up well. From an underlying property performance, we scrub up very well. But clearly, there are also companies in the peer group that are performing better or worse at different points. And there's one in particular that's been I I won't mention what it is, but but I'll give an answer. The the the they're always gonna be, as I say, moved differently, but there's one particular company in our peer group that is somewhat smaller, that has a very concentrated asset base, has a very high yield, and that high yield has led to, you know, very healthy levels of return. We would say that although we haven't performed quite as well, we are more diversified and we would have more confidence kinda looking through the cycle. The other point to note, and then with that company in particular, is because they have a very high proportion of retail investors coming through platforms such as a number of you will be coming through AJ Bill, Huggies Lansdowne Interactive.

39:58 And actually, what we've begun to see with our share price and rating is an improvement as we've done more engagement such as this through the platforms. And so, you know, that's one of the reasons I think why that particular company has seen, you know, somewhat stronger share price performance compared to the whole peer group because of because of those retail investors. Bradley, there's a question here just on on VOID. I wondered if you want to just give some color about where we perhaps see that going given activity looking forward twelve months. Yeah. Sure. So what we've some of the initiatives we've we've completed recently have have been major refurbishments or or major developments. So examples are standing green where we have £600,000 of rent to capture.

40:49 We also have a net zero carbon in operation unit at, Basic Bushes in Milton Keynes. We've recently, completed, and and we've got that out in the market at the moment, and there's good levels of interest there. We refurbs did a major refurb of two industrial units in Swindon. They represent around £500,000 of rent just alone between the two of them. So they're they're out in the market at the moment, and we, again, have interest there. So we've got some rents coming through with regard to those. We've completed some major refurbishments at some of our smaller offices that we are now looking to let, and they are now in the market. So I'd say that they are the the major moving parts that we have at the moment.

41:37 And, you know, because these units have been developed and have now been refurbished, we would expect to let them, you know, sooner rather than later. We you know, we're not having to wait for for for that refurbished time. Yeah. Very clear. Thank you. The the related question actually, Bradley, which I'll I'll I'll touch on initially, where what are our strategies for managing lease expires and renewals in the current environment? Yeah. And that's a really good question. I think one point to note, I guess, is we provide average unexpired lease term information for the portfolio, and we and we assume the worst case in terms of all tenants break it at the earliest opportunity. And our our average and it's by lease term on that basis actually has has increased slightly because of the activity in the portfolio.

42:24 So it's now around five and a half years. So I guess in theory, percent of our portfolio comes up a year. As it happens, it's less evenly spread than that. Know, from an industrial sector perspective, you know, the average lease term on our industrial space is three to five years. And the market momentum and the rental growth means actually, you know, that's a good thing. The leases come up and we continue to crystallize higher rents as as we get that space back. We refurbish, we let, and and that's what you can see coming through in the rental growth. I guess where we've got bigger lease expiries, so for example, one of our university leases had a break, which they could otherwise have exercised last year. By having the big asset management teams, we can get ahead of that. And so what we try to do is engage well ahead of time.

43:16 So for example, in the situation I mentioned, which was one of our university tenants, we ended up agreeing a deal ahead of our break, gave them an incentive to knock the breakout, move the rent on with a fixed uplift, which although we had to take a short period of no income actually was was was very much value accretive. Another really good example actually of how we address that sort of risk is something Bradley touched on actually last quarter, where at our retail park in Salisbury, we had a couple of leases expiring. One to TK Max at home, another one to Smith Toys, but we knew through our specialist retail warehouse team here that Lidl had a requirement alongside others like Aldi and and and some other retailers.

44:01 And and and so what we're able to do, again, ahead of those leases expiring is line up one of those retailers on a long lease subject to planning at a materially higher rent. So, yeah, our foot in some cases, we want that space back and we're happy to let it run, but we judge it based on the circumstances. And so if there's a bigger risk there, we will generally wanna get ahead of it. And actually, you know, you can see in the numbers, albeit not a huge increase over the last quarter, we have seen that average unit spot lease term tick up because of that activity. So I think we've covered all the questions actually, Jake. And also I'm just conscious of time for an interim update. I'm I'm happy now to hand back to you.

44:46 Absolutely. Nick, Bradley, that's great. Thank you very much indeed for addressing all of those questions that came in from investors this morning. 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 just for you to review and to then add any additional responses, of course, where it's appropriate to do so. And we'll publish all those responses out on the platform. But, Nick, perhaps before really just looking to redirect 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 to wrap up with, that'd be great. No. Lovely. Thanks, Jake. And again, just to reiterate, thank you everyone again for for dialing in or back in. We appreciate your time. Look, I I think I'll just be very brief. Hopefully, those of you that have heard us over the course for the last twelve months or so will know that we've, you know, we've been pretty clear about the strategy, about our views on the market and I think most importantly, we are delivering what we set out to deliver.

45:44 We are delivering on the active management, we're delivering on the rental growth, we've got a huge amount of work going on in relation to our strategic evolution. We will give a much more thorough update on that when we come to announce our interims in September. But I guess most importantly, when you're looking at the share price today, the discount that's there, you know, we have conviction that we are gonna see a recovery in The UK real estate market that will go to sentiments, and we think it will drive more demand for the shares. So therefore buying today at a 23 discount at a covered dividend yield of between seven and seven and a half percent, you know, we we think remains a really compelling investment proposition. So again, really appreciate everyone's time. We will hopefully be back here probably in November when we will be announcing our interim results to the, excuse me, to the end of September.

46:37 That's great. Nick Bradley, thank you once again for updating investors this morning. Could I please ask investors not to close this session as you will now be automatically redirected for the opportunity to provide your feedback in order the management team can really better understand your views and expectations. This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of SCHRODER REAL ESTATE INVESTMENT TRUST LIMITED, we would like to thank you for attending today's presentation. That now concludes today's session. So good morning to you all.