Half-year Report
24 June 2020
SCHRODER EUROPEAN REAL ESTATE INVESTMENT TRUST PLC
("SEREIT"/ the "Company" / "Group")
HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 31 MARCH 2020
DIVERSIFIED PORTFOLIO AND ASSET MANAGEMENT ACTIVITY PROVIDES RESILIENCE AND OPPORTUNITY TO IMPROVE PORTFOLIO AND GROW INCOME AND NAV
Schroder European Real Estate Investment Trust plc, the company investing in European growth cities and regions, today announces its half year results for the six months ended 31 March 2020.
Well positioned with diversified portfolio and pipeline of value-enhancing asset management initiatives
‒ Actively managing the impact of Covid-19 on the portfolio, with rent collection in each of April, May and June above 80% of contracted rent
‒ Diversified portfolio of 13 investments with approximately 100 tenants
‒ 75% of the portfolio invested in business space assets (office/industrial/mixed-use data centre) in cities including Paris, Berlin, Stuttgart and Hamburg
‒ Good progress with key asset management initiatives at Paris Boulogne-Billancourt and Hamburg office assets
‒ Loan to value ('LTV') of 30% / 27% net of cash (30 September 2019: 28% / 25% net of cash) at a weighted average total interest rate of 1.4%
‒ Each loan has separate LTV and income covenants, with a range of headroom against covenants:
o LTV default covenant average headroom approximately 27% across the portfolio. This ranges between 17% (Seville) and 37% (Hamburg and Stuttgart)
o Income default covenant average headroom approximately 34% across the portfolio. This ranges between 15% (Hamburg and Stuttgart) and 73% (Rennes). For the Company's sole shopping centre in Seville, there is no default income covenant for the loan, however there is currently a cash trap of net income from the property due to reduced rental income
‒ Next quarterly dividend reduced to 0.925 euro cents per share, equating to 50% of the target dividend level, in light of market uncertainty
Key Financial highlights
‒ Portfolio valued at 31 March 2020 at €247.3 million1, reflecting a 1.9% uplift during the period and an uplift of 11.1% on purchase price
‒ Net Asset Value ('NAV') of €182.1 million or 136.2 cps, reflecting no change compared to 30 September 2019
‒ NAV total return of 2.7% (31 March 2019: 1.7%)
‒ Profit for the six months of €4.9 million (31 March 2019: €3.2 million) driven primarily by the portfolio valuation uplift
‒ Underlying EPRA earnings of €4.3 million (31 March 2019: €5.4 million), with the 2019 earnings having included receipt of a one-off surrender premium of €1.5 million
‒ Total dividends declared relating to the six months of 2.775 cps (31 March 2019: 3.7 cps)
‒ Dividend cover for the six months of 116% (31 March 2019: 108%)
Operational highlights
‒ Maintained high portfolio occupancy of 95% (30 September 2019: 94%), with a 6.0 years average lease term to expiry (30 September 2019: 6.4 years)
‒ Successful execution of asset management initiatives across the portfolio:
o converted heads of terms to a signed conditional lease with Alten for a ten year commitment at the Company's largest asset at Boulogne-Billancourt, Paris
o advanced planning, detailed design, construction tender and financing of the Alten refurbishment
o excluding Alten, concluded a further five new leases and re-gears, generating a 16% increase in annualised income relative to previous rent of those leases, at a weighted lease term of 4.4 years
‒ Reflecting its increasing focus on ESG considerations, the Company secured its first GRESB Benchmark Green Star in recognition of the portfolio's sustainability performance, whilst improving the sustainability rating at the Company's Hamburg office asset with the certification of BREEAM in use
‒ Underlying property portfolio total return of 4.0% over the six-month period
‒ The Group continues to give support to its tenants, service providers and consumers in understanding the impact Covid-19 is having on their respective positions. It is expected that the Seville shopping centre will face the most challenges as a result of Covid-19.
1 Includes the Group's share of the Seville property proportionally valued at €22.8 million.
Dividend Update
In light of the ongoing market uncertainty, the Board has reduced the next quarterly dividend to 0.925 euro cents per share, equating to 50% of the target dividend level.
In implementing the dividend strategy, the Board considered the rent collection and cash position of the Company, alongside market conditions, current asset management activity and the longer term sustainable rental income from the portfolio. By retaining additional cash at this time, the Company will be better positioned to withstand the impact of Covid-19 on the portfolio. The dividend will be kept under close review as clarity improves around the extent of the impacts of Covid-19, including on future rental receipts, property values and asset management initiatives.
Sir Julian Berney, Chairman of the Board, commented:
" During the first half of the year the Company has made good progress with key asset management initiatives, but we enter the second half of the year against an uncertain economic backdrop. We believe the diversification of the portfolio across different countries, sectors and tenants positions it well to withstand a period of market volatility. By reducing the dividend and retaining earnings, we have sought to strengthen the ability of the Company to mitigate the impact of Covid-19 and improve our flexibility to be able to capitalise on asset management opportunities going forward ."
Jeff O'Dwyer, Fund Manager for Schroder Real Estate Investment Management Limited, added:
"The impacts of Covid-19 have yet to fully play out and the depth and recovery of global GDP cannot be predicted with any confidence. Over the period, the SEREIT portfolio has stood up well, underpinned by our tenant and sector diversity that has led to favourable rent collection rates and valuation resilience. Whilst early indicators are that the easing of the lockdown in our key markets is having a positive impact on our tenants' operations, we remain alert to the near-term challenges facing all our stakeholders. Longer term, we continue to believe that the portfolio's weighting towards Continental European 'Winning Cities' like Paris, Berlin, Frankfurt and Hamburg will be beneficial to its future performance and liquidity."
The Half Year Report is also being published in hard copy format and an electronic copy of that document will shortly be available to download from the Company's webpage www.schroders.co.uk/sereit . Please click on the following link to view the document: http://www.rns-pdf.londonstockexchange.com/rns/8424Q_1-2020-6-23.pdf
The Company has submitted a pdf of the hard copy format of the Half Year Report to the National Storage Mechanism and it will shortly be available for inspection at www.morningstar.co.uk/uk/NSM .
A further announcement will be made shortly to confirm the full timetable of the second interim dividend.
For further information:
|
Schroder Real Estate Investment Management Duncan Owen / Jeff O'Dwyer |
020 7658 6000 |
|
Ria Vavakis Schroder Investment Management Limited |
020 7658 2371 |
|
FTI Consulting Dido Laurimore / Richard Gotla / Methuselah Tanyanyiwa |
020 3727 1000 |
A presentation for analysts and investors will be held at 09.00 BST / 10.00 SAST today. Registration for which can be accessed via:
If you would like to attend, please contact James Lowe at Schroders on james.lowe@schroders.com or +44 (0)20 7658 2083.
--------------------------------------------------------------
Half Year Report and Condensed Consolidated Interim Financial Statements for the six months ended 31 March 2020
Chairman's Statement
Overview
We expect 2020 to be a year of two halves. For the majority of the six month period to 31 March 2020, real estate markets and the economic backdrop were positive. We made progress with important asset management activity, such as advancing the planning for the Paris Boulogne-Billancourt refurbishment and reletting vacant space in Hamburg and Paris Saint-Cloud. During the interim period this has resulted in the valuation of the portfolio increasing and growth in contracted rental income.
However, the Covid-19 pandemic is likely to overshadow the remainder of the year. There is uncertainty over what the exact impact of this will be on economic activity. Real estate markets across Europe have suffered a significant decline in leasing and investment transactions. The key issue for real estate looking forward is the extent to which the lockdown and the subsequent mitigation period affects the real economy and consequently the security of the Company's underlying income streams and value of its assets. Since the outbreak, 84% of the portfolio's rent has been collected for the period April, May and June.
SEREIT is positioned to mitigate a near-term period of market volatility, with a diverse portfolio comprising of 13 assets across multiple countries, Winning Cities and sectors and around 100 tenants with exposure to a broad range of industries. Whilst a small number of assets, such as the Seville shopping centre, are likely to face stronger downward pressure on rents and value, we believe the majority of the portfolio is well positioned to generate long-term shareholder returns. The most immediate example of this is the Paris Boulogne-Billancourt office redevelopment, which has the potential to deliver NAV upside. The main focus for the remainder of the year will be to continue to position the Company to withstand the short-term uncertainty and generate long-term growth.
Strategy
The Company's strategy is built around three core pillars being: a focus on assets with strong fundamentals in Winning Cities and regions across Continental Europe; diversification across sectors and tenants; and execution of value-enhancing investment and asset management via on-the-ground European teams.
Winning Cities and regions such as Paris, Berlin and Frankfurt are characterised by themes such as broad-based economies and technological and infrastructure improvements. Whilst they will not be immune from the global economic slowdown, this should enable them to recover faster and thrive over the long term. The strategy to have a diverse portfolio not only improves the risk characteristics of the Company, but also provides opportunities to tactically allocate between different cities and sectors to potentially capitalise on changing investment fundamentals going forward.
Execution of the strategy is implemented by the real estate teams that the Investment Manager has located on the ground across eight key European markets, including Paris, Munich and Frankfurt. This local presence is key to being able to understand local dynamics and build relationships with tenants, which is increasingly important at times such as this. One of the main strategic focuses for the remainder of the year will be proactively working with our tenants to help manage their safety and wellbeing, alongside stabilising cash flows and protecting shareholders' long-term interests.
Financial results
The Company delivered stable financial results during the six month period. The NAV includes a provision of €1.1m relating to a percentage of the Group's internal loan for its 50% share of the Seville investment. IFRS 9 requires such a provision to be made, despite the value of the property as at 31 March 2020 being above the level of the cumulative external and internal loans made to the joint venture.
IFRS profit increased to €4.9 million compared to €3.2 million for the six months to March 2019, driven mainly by a €2.4 million increase in the portfolio valuation, net of capex. EPRA earnings were €4.3 million, compared to €5.4 million for the 2019 interim period which included a one-off €1.5 million surrender premium in 2019.
Balance sheet and debt
Total third party debt was €80.7 million as at 31 March 2020, representing a loan to value ('LTV') net of cash of approximately 27% against the overall gross asset value of the Company. The Company has seven loans secured by individual assets or groups of assets, with no cross-collateralisation between loans. The average weighted total interest rate of the loans is 1.4% per annum. The weighted average duration of the loans is 4.4 years, with the earliest loan maturity in 2023. All loans are in compliance with their default covenants, though there is a cash trap in operation for the Seville loan. More detail of the individual loans is provided in the Investment Manager's Report.
The Company is currently considering funding options for its Paris Boulogne-Billancourt office investment, where an agreement for a new lease with Alten has been concluded in return for a comprehensive refurbishment of the asset. This has the potential to deliver NAV upside for the Company. The main funding options include a forward funding/forward sale and taking additional debt.
Dividend
In April 2020 the Company paid a first interim dividend in respect of the year ended 30 September 2020 of 1.85 euro cents per share. In light of the ongoing market uncertainty, the Board has reduced the next quarterly dividend to 0.925 euro cents per share, equating to 50% of the target dividend level.
In implementing the dividend strategy, the Board considered the rent collection and cash position of the Company, alongside market conditions, current asset management activity and the longer term sustainable rental income from the portfolio. By retaining additional cash at this time, the Company will be better positioned to withstand the impact of Covid-19 on the portfolio. The dividend will be kept under close review as clarity improves around the extent of the impacts of Covid-19, including on future rental receipts, property values and asset management initiatives.
The second interim dividend in respect of the year ending 30 September 2020 of 0.925 euro cents per share is payable on 31 July 2020 to shareholders on the register at 17 July 2020.
Responsible and impact investment
Environmental, Social and Governance ('ESG') considerations are an increasingly important focus. During 2019, the Company secured its first GRESB Benchmark Green Star in recognition of the portfolio's sustainability performance. The annual GRESB Benchmark assesses governance as well as implementation of relevant initiatives and, encouragingly, the Company improved its rating on both measures. The Investment Manager is also focused on ensuring that its activities deliver a positive social impact, illustrated in the Investment Manager's Report by the collaborative working approach with the local community in Seville and recent Covid-19 assistance.
Outlook
We are in a period of unprecedented uncertainty, and our expectation is that we will continue to face economic headwinds for the foreseeable future. Our priorities are to seek to mitigate the impact of this on the portfolio as much as possible, whilst also advancing opportunities to grow long-term income and value. Having a diverse portfolio of properties and tenants, focused on Winning Cities and regions, and managed by local teams, positions us well to pursue this strategy.
Sir Julian Berney Bt.
Chairman
23 June 2020
1 Includes the Group's 50% share of external debt in the Seville joint venture of €11.7 million and excludes unamortised finance costs of €0.9 million.
Investment Manager's Report
Results
The NAV as at 31 March 2020 stood at €182.1 million (£161.8 million), or 136.2 euro cents (121.0 pence) per share, achieving a NAV total return of 2.7% over the six months to 31 March 2020.
The table below provides an analysis of the movement in NAV during the reporting period as well as a corresponding reconciliation in the movement in the NAV cents per share.
|
NAV movement |
€m 1 |
Cps 2 |
% change per cps 3 |
|
Brought forward as at 1 October 2019 |
182.1 |
136.2 |
- |
|
Capital expenditure |
(2.2) |
(1.6) |
(1.2) |
|
Unrealised gain in valuation of the real estate portfolio |
4.6 |
3.4 |
2.5 |
|
Provision of internal loan made to Seville Joint Venture |
(1.1) |
(0.8) |
(0.5) |
|
EPRA earnings 4 |
4.3 |
3.2 |
2.3 |
|
Non-cash/capital items |
(0.6) |
(0.5) |
(0.4) |
|
Dividends paid |
(5.0) |
(3.7) |
(2.7) |
|
Carried forward as at 31 March 2020 |
182.1 |
1 36.2 |
0.0 |
1 Management reviews the performance of the Group principally on a proportionally consolidated basis. As a result, figures quoted in this table include the Group's share of the Seville joint venture on a line-by-line basis.
2 Based on 133,734,686 shares.
3 Percentage change based on the starting NAV as at 1 October 2019.
4 EPRA earnings as reconciled on page 29 of the of the condensed consolidated interim financial statements.
Strategy
The strategy over the period remained focused on the following key objectives:
· Executing asset management initiatives to enhance both the long-term rental profile and individual asset values;
· Improving the Company's net income profile to support a sustainable dividend; and
· Managing portfolio risk in order to enhance the portfolio's defensive qualities.
Progress has been made in executing the strategy and activity over the period, which has delivered:
· Converting a heads of terms to a signed conditional lease with Alten for a ten year commitment in the Company's largest asset at Boulogne-Billancourt, Paris;
· Advanced planning, detail design, construction tender and financing of the Alten refurbishment;
· Concluded five new leases and re-gears (excluding Alten), generating a 16% increase in annualised income relative to previous rent at a weighted lease term of 4.4 years;
· Improved sustainability rating at the Company's Hamburg office asset with the certification of BREEAM in use;
· Portfolio real estate total return of 4.0% over six months with the majority from income; and
· A prudent loan to value ('LTV') of 27%, net of cash.
Covid-19 impact
The portfolio's diversification benefits have positioned the Company favourably in dealing with Covid-19. Comprising 13 assets, approximately 100 tenants across a range of industries and a strong bias towards office, industrial and a data centre uses has created a platform for positive rent collection and valuation resilience. The more immediate Covid-19 impact has been as follows:
· During April to June, 84% of the portfolio rent was collected.
· Metromar Shopping Centre, Seville (50% interest): this asset represents 9% of the portfolio value and 11% of income. The centre was forced to close (save for the supermarket) from 14 March 2020 and re-opened on a conditional basis on 25 May 2020. The strategy is focused on working with centre management and tenants to implement a re-opening plan that creates a safe environment for tenants and consumers. It is inevitable that consumers will be reticent to congregate in public spaces, particularly leisure-related businesses. As such, we anticipate vacancy rates increasing and rent recoverability remaining under pressure until the centre re-stabilises.
· Boulogne-Billancourt, Paris: this asset represents 17% of the portfolio value and 14% of income. It is the Company's largest investment, leased to engineering and technology consulting specialist Alten. As previously announced, the Company has been working on a value-enhancing asset management initiative to refurbish the building on the basis of a new ten year lease to Alten, who remain committed. Covid-19 has delayed the planning application and therefore the delivery of the initiative by approximately three months.
· Tenant rent relief: outside of the Seville investment, approximately ten tenants (representing 7% of income) have requested cash flow assistance. We continue to work with these tenants to agree payments plans/rent deferral and/or amendments to lease terms.
· Direct impact measures for the wider community, customers and management (including setting up a blood transfusion centre in Metromar, donating the shopping centre's PPE supplies to the local hospital and formulating a strategic management plan for the re-opening of the centre on 25 May 2020 to facilitate social distancing best practice).
Market overview
Economic outlook
The lockdowns imposed by most European governments in mid-March to slow the spread of the coronavirus have pushed the Eurozone into recession. Several European countries have started to ease restrictions at the end of April and in early May, but much will depend on how quickly businesses and consumers resume activity. Coming out of the lockdowns is not easy and many restrictions to control and limit the renewed spreading of the virus (which have so far proved efficient) will remain in place. While high-frequency indicators show that activity is returning, it seems somewhat slower than anticipated. Consumers remain cautious and the ongoing uncertainty weighs on business investment. Latest data for China and the US is also suggesting a sharper decline in economic output than previously anticipated. As such, the Investment Manager's house view is turning from a V-shaped recovery scenario to a U-shaped forecast with activity to increase again in the second half of the year, but at a slower pace than originally anticipated. The full impact of the crisis will depend on whether the huge package of tax breaks, loan guarantees and compensation for short-time working announced by the EU and by national governments succeed in keeping businesses afloat. If they fail and there is a wave of insolvencies, then unemployment will be permanently higher and the recession will be deeper and longer.
Offices
Office take-up in Europe Q1'20 was c.30% lower compared to Q1'19, but the full impact of the crisis is likely to only be reflected in the Q2 and Q3 numbers. However, initial data suggests the office sector is relatively well positioned versus other traditional real estate. In many cities, vacancy was very low at the end of 2019, so office markets are well placed to cope with a demand shock. Furthermore, a lot of office occupiers have been able to maintain operations by asking staff to work from home. The weak spot is serviced/flexible offices, which saw significant drops in usage or had to close. As such, some providers will come under pressure, particularly those that are paying high rents, which will accelerate a consolidation of the market. On the supply side, Q1'20 vacancy rates were mostly flat. Should the number of bankruptcies go up or occupiers scale back their requirements, vacancy is likely to increase in the coming months, further exacerbated as schemes currently under construction will still complete this year and next. Yet, the current crisis is also reducing supply volumes after 2021, as developers will hold back on starting new schemes and banks will be reluctant to provide financing. Overall, rental growth will be much lower or flat.
Retail
Although the lockdown measures have affected all commercial real estate, the biggest impact has been on the retail sector (and leisure and hotels). With the exception of Sweden, all restaurants, bars and leisure venues were closed and the only stores which remained open were banks, post offices, food stores and pharmacies. The lockdowns have given a boost to internet sales and while part of the shift will reverse as stores re-open, not all of it will and the structural change to online shopping has most likely accelerated. Some non-food retailers have deferred paying rent and, despite government support and the flexibility of landlords, a number of non-food retailers will fail, particularly those mid-market brands which were already struggling financially before Covid-19. Supermarkets, convenience stores and big box units are likely to be more defensive than shopping centres and department stores.
Logistics/industrial
In the industrial/logistics sector, the boost from higher online sales is positive, but must be put in context. The vast majority of warehouses are occupied by manufacturers and non-food retailers and logistics operators and their businesses have been seriously disrupted by the virus. All big car manufacturers have suspended most of their production and container traffic at European ports has dropped by 20-30% compared with the first quarter of 2019. In addition, on the supply side, a significant amount of speculative space was under construction before the lockdowns and it is unlikely to let quickly, once completed. Consequently, warehouse rents in Continental Europe could come under pressure in 2020, before stabilising in 2021. The demand for industrial manufacturing use is likely to increase as manufacturers look at diversifying their supply chains from Asia and include a proportion of local manufacturing (on-shoring).
Real estate portfolio
The Group owns a portfolio of 13 institutional grade properties valued at €247.3 million 1 as at 31 March 2020. The properties are 95% let and located across those Winning Cities and regions in France, Germany, Spain and the Netherlands. All investments are 100% owned except for the Metromar shopping centre, Seville, where the Group holds a 50% interest.
The top ten properties comprise 92% of the portfolio value:
|
Rank |
Property |
Country |
Sector |
€m |
% of total |
|
1 |
Paris (B-B) 2 |
France |
Office |
41.6 |
17 |
|
2 |
Paris (S-C) 3 |
France |
Office |
40.0 |
16 |
|
3 |
Berlin |
Germany |
Retail |
27.6 |
11 |
|
4 |
Seville 1 |
Spain |
Retail |
22.8 |
9 |
|
5 |
Apeldoorn |
Netherlands |
Mixed |
20.0 |
8 |
|
6 |
Rennes |
France |
Industrial |
18.3 |
7 |
|
7 |
Stuttgart |
Germany |
Office |
17.8 |
7 |
|
8 |
Hamburg |
Germany |
Office |
17.6 |
7 |
|
9 |
Frankfurt |
Germany |
Retail |
11.5 |
5 |
|
10 |
Venray |
Netherlands |
Industrial |
10.3 |
4 |
|
Top ten properties |
|
227.5 |
92 |
||
|
11-13 |
Remaining three properties |
Netherlands/France |
Industrial |
19.8 |
8 |
|
Total |
|
|
|
247.3 |
100 |
1 Includes the Group's 50% share in the Seville property proportionally valued at €22.8 million as at 31 March 2020.
2 B-B refers to Boulogne-Billancourt.
3 S-C refers to Saint-Cloud.
The table below sets out the top ten tenants, which are from a diverse range of industry segments and represent 68% of the portfolio:
|
|
|
|
|
Contracted rent |
WAULT break (yrs) |
WAULT expiry (yrs) |
|
|
Rank |
Tenant |
Industry |
Property |
€m |
% of total |
||
|
1 |
KPN |
Telecom |
Apeldoorn |
2.5 |
15 |
6.8 |
6.8 |
|
2 |
Alten |
Engineering services |
Paris (B-B) |
2.4 |
14 |
1.0 |
1.0 |
|
3 |
Hornbach |
DIY |
Berlin |
1.6 |
9 |
5.8 |
5.8 |
|
4 |
C-Log |
Logistics |
Rennes |
1.1 |
6 |
10.9 |
10.9 |
|
5 |
Filassistance |
Insurance |
Paris (S-C) |
0.9 |
5 |
1.8 |
6.8 |
|
6 |
Cereal Partners France |
Consumer staples |
Rumilly |
0.7 |
4 |
5.1 |
6.1 |
|
7 |
DKL |
Logistics |
Venray |
0.7 |
4 |
8.5 |
8.5 |
|
8 |
Land BW |
Government |
Stuttgart |
0.7 |
4 |
6.3 |
6.3 |
|
9 |
Outscale |
IT |
Paris (S-C) |
0.6 |
4 |
6.0 |
9.0 |
|
10 |
Inventum Industrial |
Manufacturing |
Houten |
0.6 |
3 |
6.2 |
6.2 |
|
Total top ten tenants |
|
|
11.8 |
68 |
5.3 |
5.9 |
|
|
Remaining tenants |
|
|
5.4 |
32 |
3.5 |
6.2 |
|
|
Total |
|
|
17.2 |
100 |
4.8 |
6.0 |
|
The portfolio generates €17.2 million p.a. in contracted income. The average unexpired lease term is 4.8 years to first break and 6.0 years to expiry.
The lease expiry profile to earliest break is shown below. The near-term lease expiries provide asset management opportunities to: renegotiate leases; extend weighted average unexpired lease terms; improve income security and generate rental growth. In turn, this activity benefits NAV total return.
Portfolio performance
The current portfolio value of €247.3 million1 reflects an increase of 11% (€24.7 million) compared to the combined purchase price. Transaction costs have been fully recovered through valuation uplifts since acquisition.
Over the last 12 months, the underlying property portfolio generated a total property return of 8.3%. Hereof, the portfolio income return amounted to 6.6% and the portfolio capital return to 1.7% (net of capex).
Over the six months of the current financial year to 31 March 2020, the underlying property portfolio generated a total property return of 4.0%.
The strongest contributors to portfolio performance during the last six months were Paris Saint-Cloud (7.1%), Rennes (7.2%), Apeldoorn (6.0%) and Rumilly (7.5%). Paris Saint-Cloud is a high-yielding property which also delivered good valuation performance driven by favourable leasing activity. Rennes and Rumilly, both industrial properties, performed well led by rental value growth and positive yield re-rating. The Apeldoorn property is over-rented and as such a high-yielding property. Despite the over-rent and declining remaining lease term, property values held up well, assisted by improving land value and investment markets.
The Seville property was the main detractor from performance, delivering a -0.7% total return.
1 Includes the Group's 50% share in the Seville property proportionally valued at €22.8 million as at 31 March 2020.
Finance
As at 31 March 2020, the Group's total external debt was €80.7 million, across seven loan facilities. This represents a loan to value ('LTV') of 30% against the Group's gross asset value. Net of cash, the Group's LTV is 27%. There is a net of cash LTV cap of 35% that restricts concluding new external loans if the Group's net LTV is above 35%. An increase in leverage above 35% as a result of valuation decline is excluded from this cap.
During the period, the loan on the Saint-Cloud office building in Paris was increased by €4 million to €17 million and a new 3.5 year loan of €3.7 million was also taken against the Rumilly logistics asset in France. The additional loans were drawn mainly to fund capital expenditure across the portfolio.
The current blended all-in interest rate is 1.4%, significantly below the portfolio yield of 5.8% p.a., providing a favourable yield gap. The average unexpired loan term is 4.4 years.
The individual loans are detailed in the table below. Each loan is held at the property-owning level instead of the group level and is secured by the individual properties noted in the table. There is no cross-collateralisation between loans. Each loan has specific LTV and income default covenants. We detail the headroom against those covenants in the latter two columns of the table below.
|
Lender |
Property |
Maturity date |
Outstanding principal 1 |
Interest rate |
Headroom LTV default covenant (% decline) |
Headroom net income default covenant (% decline) |
|
BRED Banque Populaire |
Paris (S-C) |
15/12/2024 |
€17.00m |
3M Eur +1.33% |
-25% |
-28% |
|
Deutsche Pfandbriefbank |
Berlin/Frankfurt |
30/06/2026 |
€16.50m |
1.31% |
-33% |
-40% |
|
Deutsche Pfandbriefbank |
Stuttgart/Hamburg |
30/06/2023 |
€14.00m |
0.85% |
-37% |
-15% |
|
Münchener Hypothekenbank 1 |
Seville (50%) |
22/05/2024 |
€11.68m |
1.76% |
-17% |
No default covenant, but currently in cash trap |
|
HSBC |
Utrecht, Venray, Houten |
27/09/2023 |
€9.25m |
3M Eur +2.15% |
-36% |
-64% |
|
Saar LB |
Rennes |
28/03/2024 |
€8.60m |
3M Eur +1.40% |
-24% |
-73% |
|
Saar LB |
Rumilly |
30/04/2023 |
€3.70m |
3M Eur +1.30% |
-28% |
-72% |
|
Total |
|
|
€80.73m |
|
|
|
1 All statistics in the Investment Manager's Report reflect a 50% ownership share of Seville. As a result, debt allocations for those investments in the table above are similarly proportioned.
For the Seville shopping centre, a reduction in rental income has resulted in a requirement under the loan to retain all excess income generated by the Seville property in the property-owning special purpose vehicle. This position will continue until the rental income increases sufficiently to meet the level required under the loan. There is 17% valuation decline headroom before breaching the default LTV covenant.
The Berlin/Frankfurt and Hamburg/Stuttgart loans also have cash trap covenants (in addition to the above default covenants) relating to income. The headroom for net income decline in respect of these is 29% for Berlin/Frankfurt and 1.5% for Hamburg/Stuttgart, which will increase as the vacant space at the Hamburg property is relet.
The German and Spanish loans are fixed rate for the duration of the loan term. The French and Netherlands loans are based on a margin above three-month Euribor. The Group has acquired interest rate caps to limit future potential interest costs if Euribor were to increase. The strike rates on the interest rate caps are between 0.25% p.a. and 1.25% p.a.
The Company is currently considering funding options for the refurbishment of the Paris Boulogne-Billancourt property. One option may include drawing additional debt to fund the refurbishment, which would increase the Company's overall LTV level and potentially requires shareholder approval to temporarily increase the Company's LTV cap.
Responsible investing with impact
The Board and the Investment Manager believe corporate social responsibility is key to long-term future business success. A successful sustainable investment programme should deliver enhanced returns to investors, improved business performance to occupiers and deliver tangible positive impacts to local communities, the environment and wider society.
The Investment Manager's sustainability programme is continually evolving, reflecting progression with industry sustainability targets, available technologies and the regulatory environment. Our programme looks to continually improve the sustainability credentials of the Company's portfolio. In 2019, the Company's work was recognised with the achievement of a Green Star in the annual Global Real Estate Sustainability Benchmark survey. The Investment Manager is evolving its investment philosophy to incorporate impact investing at the heart of its investment management activities. Impact investing involves proactively taking action to improve social and environmental outcomes. The Investment Manager has identified four pillars of impact and mapped these to the UN Sustainable Development Goals.
We are working to understand the opportunities and deliver positive impact through our activities within the built environment to communities and the environment. In relation to the environment, positive action is needed as the built environment is generally accepted to be responsible for 40% of global carbon emissions. In recognition of the role and responsibilities of the real estate industry and property owners, The Investment Manager signed the Better Buildings Partnership Climate Commitment in September 2019. This initiative supports the drive to net zero carbon in buildings and the first stage of this is to set out our pathway to net zero in 2020. This commitment is a natural extension of the 's sustainability programme which includes targets to reduce energy consumption and greenhouse gas emissions. Please refer to the Company's Annual Sustainability Report for more information on the sustainability strategy. We will report on the Company's progress with this impact programme in the Annual Report.
Outlook
The outlook for real estate markets remains uncertain. The impacts of Covid-19 have yet to fully play out and the depth and recovery of global GDP cannot be predicted with any confidence. Over the period, the SEREIT portfolio has stood up well, underpinned by our tenant and sector diversity that has led to favourable rent collection rates and valuation resilience. We continue to believe that the portfolio's weighting towards Continental European 'Winning Cities' like Paris, Berlin, Frankfurt and Hamburg will be beneficial to its future performance and liquidity.
The activity during the interim period focused on asset management. In particular, the advancement of a value-enhancing initiative to refurbish the Company's largest investment in Boulogne-Billancourt, Paris wherein the sitting tenant, Alten, have signed a long-term conditional lease commitment. This is a good example of using local expertise to create value through things we can control. This will continue to be a key element of SEREIT's ability to deliver long-term capital and income growth to shareholders.
Schroder Real Estate Investment Management Limited
23 June 2020
Directors' Report
Principal risks and uncertainties
The principal risks and uncertainties with the Company's business fall into the following risk categories: investment policy and strategic; economic and property market; investment management; custody; gearing and leverage; accounting, legal and regulatory; valuation; and service provider. A detailed explanation of the risks and uncertainties in each of these categories can be found on pages 27 and 28 of the Company's published Annual Report and Consolidated Financial Statements for the year ended 30 September 2019.
The emergence of coronavirus (Covid-19) in Continental Europe has heightened some of these risks, in particular, economic and property market risk, valuation risk, gearing and leverage risk, and service provider risk.
Insofar as Covid-19 has impacted the economic and property market, the Investment Manager is in close contact with property managers and tenants with an immediate focus on rent collection, reducing risk and implementing new property management procedures to ensure tenants and consumers can return safely to properties.
The Covid-19 pandemic has also increased the risk profile of the refurbishment of Boulogne-Billancourt, in particular, the Company's ability to commit to a construction contract, to fulfil the conditions of the lease agreed with the sitting tenant, and to obtain funding (either through forward funding or debt). We have made good progress over the period in mitigating these key risks.
In respect of the impact on valuations, as is the case in the property sector as a whole, the Company's valuers have advised they "can attach less weight to previous market evidence for comparison purposes, to inform opinions of value" and have applied a material uncertainty clause to the Company's valuations, which remains in place as at the date of this Report. Having regard to its diverse portfolio of assets and asset management initiatives, the board considers that the valuation of its properties should be able to withstand downward pressure arising from Covid-19 in the long term. However, in line with the valuers' recommendation, valuations will continue to be kept under regular review.
In terms of gearing and leverage, the risk of increased vacancy as a result of Covid-19 and also the potential downward pressure on values could heighten the risk of breaching net rental income covenants and Loan to Value covenants in individual loan agreements. There is currently headroom on all default covenants, but the Seville Shopping Centre asset is currently in cash trap under the terms of the loan for that property. Gearing covenants are being monitored closely and an open dialogue with lenders is being maintained.
Covid-19 also affected the Company's service providers, including the Investment Manager, who have implemented business continuity plans and are working almost entirely remotely. The board continues to monitor the Company's major service providers and has not seen, and does not anticipate, a fall in the level of service it receives.
The principal risks and uncertainties have not materially changed during the six months ended 31 March 2020, except for the risks associated with Covid-19 as outlined above which are expected to continue for the foreseeable future.
Going concern
Following the emergence and spread of Covid-19, and government regulations presented in March 2020, businesses have restricted employee travel for work and some tenants have had to temporarily close operations. There are no comparable recent events which may provide guidance as to the effect of the spread of Covid-19 and a potential pandemic, and, as a result, the ultimate impact of the Covid-19 outbreak or a similar health epidemic is highly uncertain and subject to change. As a result of this, the independent property valuer, Knight Frank LLP, has issued a material uncertainty clause for the March 2020 valuation of the assets.
The Directors have examined significant areas of possible financial risk including: the non-collection of rent and service charges; potential falls in valuations; the refurbishment of Boulogne-Billancourt, the review of cash flow forecasts and have analysed forward-looking compliance with third party debt covenants, in particular the loan to value covenant and interest cover ratios.
As at 31 March 2020, 97% of the March quarter rents were collected. At the time of reporting, 84% of rents had been collected post period end for the quarter April, May and June 2020. Further details are provided under 'Covid-19 impact' in the Investment Manager's Report on page 10 of the condensed consolidated interim financial statements. Rent collection is being closely monitored by the Investment Manager.
Cash flow forecasts based on plausible downside scenarios including the anticipated impact of Covid-19 and the risks associated with the Boulogne-Billancourt refurbishment has led the Board to conclude that the Group will have sufficient cash reserves to continue in operation for the foreseeable future.
The Company has seven loans secured by individual assets or groups of assets, with no cross-collateralisation. All loans are in compliance with their default covenants, though there is a cash trap in operation for the Seville loan. More detail of the individual loans and headroom on the loan to value and net income default covenants is provided in the Investment Manager's report on page 14 of the condensed consolidated interim financial statements.
Having assessed the principal risks and uncertainties, and the other matters discussed in connection with the viability statement as set out on page 29 of the published Annual Report and Consolidated Financial Statements for the year ended 30 September 2019, the Directors consider it appropriate to adopt the going concern basis in preparing the accounts.
Related party transactions
There have been no transactions with related parties that have materially affected the financial position or the performance of the Company during the six months ended 31 March 2020. Related party transactions are disclosed in note 14 of the condensed consolidated interim financial statements.
Statement of Directors' responsibilities
The Directors confirm that to the best of their knowledge:
· The half year report and condensed consolidated interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union; and
· The Interim Management Report includes a fair review of the information required by 4.2.7R and 4.2.8R of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.
Sir Julian Berney Bt.
Chairman
23 June 2020
Condensed Consolidated Interim Statement of Comprehensive Income
For the period ended 31 March 2020
|
|
Notes |
Six months to 31 March 2020 €000 (unaudited) |
Six months to 31 March 2019 €000 (unaudited) |
Year to 30 September 2019 €000 (audited) |
|
Rental and service charge income |
2 |
9,859 |
8,945 |
18,667 |
|
Other income |
3 |
- |
1,500 |
1,500 |
|
Property operating expenses |
|
(2,794) |
(2,423) |
(4,807) |
|
Net rental and related income |
|
7,065 |
8,022 |
15,360 |
|
Net gain/(loss) from fair value adjustment on investment property |
4 |
2,907 |
(1,566) |
3,530 |
|
Realised (loss)/gain on foreign exchange |
|
(6) |
4 |
6 |
|
Net change in fair value of financial instruments at fair value through profit or loss |
5 |
6 |
(200) |
(304) |
|
Provision of internal loan made to Seville joint venture |
6 |
(1,097) |
- |
- |
|
Dividends received from joint venture |
7 |
- |
- |
93 |
|
Expenses |
|
|
|
|
|
Investment management fee |
14 |
(969) |
(947) |
(1,904) |
|
Valuers' and other professional fees |
|
(481) |
(494) |
(953) |
|
Administrator's and accounting fees |
|
(178) |
(165) |
(342) |
|
Auditors' remuneration |
|
(205) |
(191) |
(356) |
|
Directors' fees |
14 |
(73) |
(72) |
(142) |
|
Other expenses |
|
(197) |
(129) |
(183) |
|
Total expenses |
|
(2,103) |
(1,998) |
(3,880) |
|
Operating profit |
|
6,772 |
4,262 |
14,805 |
|
Finance income |
|
227 |
226 |
452 |
|
Finance costs |
|
(570) |
(402) |
(906) |
|
Net finance costs |
|
(343) |
(176) |
(454) |
|
Share of loss of joint venture |
7 |
(684) |
(71) |
(3,369) |
|
Profit before taxation |
|
5,745 |
4,015 |
10,982 |
|
Taxation |
8 |
(785) |
(818) |
(3,527) |
|
Profit after taxation |
|
4,960 |
3,197 |
7,455 |
|
Basic and diluted earnings per share attributable to owners of the parent |
9 |
3.7c |
2.4c |
5.6c |
|
Profit for the period/year |
|
4,960 |
3,197 |
7,455 |
|
Other comprehensive income: |
|
|
|
|
|
Other comprehensive loss items that may be reclassified to profit or loss: |
|
|
|
|
|
Currency translation differences |
|
(21) |
(6) |
(15) |
|
Total other comprehensive loss |
|
(21) |
(6) |
(15) |
|
Total comprehensive income for the period/year |
|
4,939 |
3,191 |
7,440 |
All items in the above statement are derived from continuing operations. The accompanying notes 1 to 16 form an integral part of the condensed consolidated interim financial statements.
Condensed Consolidated Interim Statement of Financial Position
As at 31 March 2020
|
|
Notes |
Six months to 31 March 2020 €000 (unaudited) |
Year to 30 September 2019 €000 (audited) |
Six months to 31 March 2019 €000 (unaudited) |
|
Assets |
|
|
|
|
|
Non-current assets |
|
|
|
|
|
Investment property |
4 |
224,143 |
218,896 |
213,174 |
|
Investment in joint venture |
7 |
1,694 |
2,378 |
6,626 |
|
Loan to joint venture |
6 |
8,980 |
10,035 |
10,035 |
|
Non-current assets |
|
234,817 |
231,309 |
229,835 |
|
Current assets |
|
|
|
|
|
Trade and other receivables |
|
8,172 |
6,341 |
5,773 |
|
Interest rate derivative contracts |
5 |
48 |
17 |
121 |
|
Cash and cash equivalents |
|
18,535 |
16,053 |
15,166 |
|
Current assets |
|
26,755 |
22,411 |
21,060 |
|
Total assets |
|
261,572 |
253,720 |
250,895 |
|
Equity |
|
|
|
|
|
Share capital |
|
15,050 |
15,080 |
15,540 |
|
Share premium |
|
29,984 |
30,043 |
30,959 |
|
Retained earnings |
|
4,442 |
4,430 |
5,120 |
|
Other reserves |
|
132,602 |
132,534 |
131,167 |
|
Total equity |
|
182,078 |
182,087 |
182,786 |
|
Liabilities |
|
|
|
|
|
Non-current liabilities |
|
|
|
|
|
Interest-bearing loans and borrowings |
10 |
68,293 |
60,692 |
60,506 |
|
Deferred tax liability |
8 |
1,900 |
1,521 |
1,061 |
|
Non-current liabilities |
|
70,193 |
62,213 |
61,567 |
|
Current liabilities |
|
|
|
|
|
Trade and other payables |
|
8,994 |
8,967 |
5,619 |
|
Current tax liabilities |
8 |
307 |
453 |
923 |
|
Current liabilities |
|
9,301 |
9,420 |
6,542 |
|
Total liabilities |
|
79,494 |
71,633 |
68,109 |
|
Total equity and liabilities |
|
261,572 |
253,720 |
250,895 |
|
Net asset value per ordinary share |
12 |
136.2c |
136.2c |
136.7c |
The accompanying notes 1 to 16 form an integral part of the condensed consolidated interim financial statements.
Condensed Consolidated Interim Statement of Changes in Equity
For the period ended 31 March 2020
|
|
Notes |
Share capital €000 |
Share premium €000 |
Retained earnings €000 |
Other reserves €000 |
Total equity €000 |
|
Balance as at 1 October 2019 |
|
15,080 |
30,043 |
4,430 |
132,534 |
182,087 |
|
Profit for the period |
|
- |
- |
4,960 |
- |
4,960 |
|
Other comprehensive loss for the period |
|
- |
- |
- |
(21) |
(21) |
|
Dividends paid |
13 |
- |
- |
(4,948) |
- |
(4,948) |
|
Unrealised foreign exchange |
|
(30) |
(59) |
- |
89 |
- |
|
Balance as at 31 March 2020 (unaudited) |
|
15,050 |
29,984 |
4,442 |
132,602 |
182,078 |
|
|
Notes |
Share capital €000 |
Share premium €000 |
Retained earnings €000 |
Other reserves €000 |
Total equity €000 |
|
Balance as at 1 October 2018 |
|
15,015 |
29,912 |
4,397 |
132,745 |
182,069 |
|
Profit for the year |
|
- |
- |
7,455 |
- |
7,455 |
|
Other comprehensive loss for the year |
|
- |
- |
- |
(15) |
(15) |
|
Dividends paid |
13 |
- |
- |
(7,422) |
- |
(7,422) |
|
Unrealised foreign exchange |
|
65 |
131 |
- |
(196) |
- |
|
Balance as at 30 September 2019 (audited) |
|
15,080 |
30,043 |
4,430 |
132,534 |
182,087 |
|
|
Notes |
Share capital €000 |
Share premium €000 |
Retained earnings €000 |
Other reserves €000 |
Total equity €000 |
|
Balance as at 1 October 2018 |
|
15,015 |
29,912 |
4,397 |
132,745 |
182,069 |
|
Profit for the period |
|
- |
- |
3,197 |
- |
3,197 |
|
Other comprehensive loss for the period |
|
- |
- |
- |
(6) |
(6) |
|
Dividends paid |
13 |
- |
- |
(2,474) |
- |
(2,474) |
|
Unrealised foreign exchange |
|
525 |
1,047 |
- |
(1,572) |
- |
|
Balance as at 31 March 2019 (unaudited) |
|
15,540 |
30,959 |
5,120 |
131,167 |
182,786 |
The accompanying notes 1 to 16 form an integral part of the condensed consolidated interim financial statements.
Condensed Consolidated Interim Statement of Cash Flows
For the period ended 31 March 2020
|
|
Notes |
Six months to 31 March 2020 €000 (unaudited) |
Six months to 31 March 2019 €000 (unaudited) |
Year to 30 September 2019 €000 (audited) |
|
Operating activities |
|
|
|
|
|
Profit before tax for the period/year |
|
5,745 |
4,015 |
10,982 |
|
Adjustments for: |
|
|
|
|
|
Net (gain)/loss from fair value adjustment on investment property |
4 |
(2,907) |
1,566 |
(3,530) |
|
Share of loss of joint venture |
7 |
684 |
71 |
3,369 |
|
Realised foreign exchange loss/(gain) |
|
6 |
(4) |
(6) |
|
Finance income |
|
(227) |
(226) |
(452) |
|
Finance costs |
|
570 |
402 |
906 |
|
Net change in fair value of financial instruments at fair value through profit or loss |
5 |
(6) |
200 |
304 |
|
Intercompany loan provision to Seville joint venture |
6 |
1,097 |
- |
- |
|
Dividends received from joint venture |
7 |
- |
- |
(93) |
|
Operating cash generated before changes in working capital |
|
4,962 |
6,024 |
11,480 |
|
(Increase)/decrease in trade and other receivables |
|
(1,648) |
6,761 |
6,308 |
|
(Decrease)/increase in trade and other payables |
|
(494) |
259 |
3,909 |
|
Cash generated from operations |
|
2,820 |
13,044 |
21,697 |
|
Finance costs paid |
|
(813) |
(569) |
(1,027) |
|
Finance income received |
|
226 |
226 |
452 |
|
Tax paid |
8 |
(552) |
(373) |
(3,092) |
|
Net cash generated from operating activities |
|
1,681 |
12,328 |
18,030 |
|
Investing activities |
|
|
|
|
|
Acquisition of investment property |
|
- |
(18,013) |
(18,281) |
|
Additions to investment property |
|
(1,900) |
(878) |
(1,513) |
|
Investment in joint venture |
|
- |
- |
950 |
|
Dividends received from joint venture 
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