Half Yearly Report

RNS Number : 5062R

Schroder Real Estate Inv Trst Ld

20 November 2012

 



20 November 2012

Schroder Real Estate Investment Trust Limited 

("SREIT"/ the "Company"/ "Group")

Half Yearly Report for six months ended 30 September 2012

CONTINUED PROGRESS REDUCING DEBT WITH SUSTAINED RELATIVE OUTPERFORMANCE AGAINST IPD PEER GROUP BENCHMARK

Schroder Real Estate Investment Trust today announces its results for the six month period to 30 September 2012.

Financial Highlights

·     Net Asset Value ('NAV') of £172.1m or 48.4 pence per share ('pps') (31 March 2012: £180.0m or 50.6pps) a decline of 4.3% primarily driven by a 1.5% decline in the capital value of the portfolio, comparing favourably to the IPD Benchmark capital value decline of 2.4% over the same period

·     £22m of debt repaid during the period with an additional £17m repaid subsequent to the period end, resulting in a reduction of LTV ratio, net of all cash, as at 15 October 2012, of 36% (31 March 2012; 40.6%)

·     Debt repayment generates interest cost saving of £2.2m per annum

·     Pre-tax dividend cover over the period of approximately 60%

·     Loss per share of 1.0p.  Recurring earnings per share of 1.0p when the impact of interest swaps are removed

·     Dividend declared and paid of 1.76pps (31 March 2012: 1.76pps)

·     Total cash of £27.9m following debt repayment on 15 October and related swap break costs.  £16.2m of the cash balance is outside the security pool charged to the Group's lenders

Operational Highlights

Good on-going progress in reducing risk, strengthening the balance sheet through debt reduction and driving income through active management of the portfolio.  Operational highlights include:

·     Disposal of Plantation Place, London EC3 for £11.7m, in line with March 2012 book value

·     Disposal of a further five low yielding or non-income producing assets for £25m reflecting a 7.5% premium to book value as 31 March 2012 and an average net initial yield of 4.4%

·     Continued progress with asset management activities including a 6.3% uplift secured from rent review negotiations with Ipsos Mori UK Ltd at Minerva House, London SE1, contributing to a 4% uplift in the value of the property over the period

Commenting, Andrew Sykes, Chairman of the Board, said:

"Progress on asset management and a reduction in gearing over the period has increased the resilience of the Company in the face of declining property values and the resultant negative impact on NAV.  It is the intention of both the Board and the Manager to build on this progress by pursuing refinancing options in the coming period."

Duncan Owen, of Schroder Property Investment Management, added:

"Further progress has been made towards meeting the Company's key objectives and the success of our asset management plans has been demonstrated by sales of assets at premiums to carrying values achieved over the period. Gearing has been reduced as a result, despite falling UK commercial property values, and this will enable the Company to pursue a refinancing strategy from a position of greater strength. 

"Challenging investment and occupier markets mean that successful asset management will be key to continuing to protect income and value as well as delivering on key initiatives.  Following recent debt repayments the Company continues to have cash for operational flexibility and to fund asset management activity. The quality of the Company's portfolio and strong tenant profile compared to its IPD peer group should also underpin portfolio income. Further progress in completing asset management initiatives and a successful refinancing should enable the Company to consider future opportunities for growth."

-Ends-

For further information:

Schroder Property Investment Management Duncan Owen / Nick Montgomery	020 7658 6000
Northern Trust David Sauvarin	01481 745529
FTI Consulting Dido Laurimore / Daniel O'Donnell	020 7831 3113

Schroder Real Estate Investment Trust Limited

Interim Report as at

 30 September 2012

Financial Summary	2
Chairman's Statement	3
Investment Manager's Report	5
Responsibility Statement	11
Condensed Statement of Comprehensive Income	12
Condensed Balance Sheet	13
Condensed Statement of Changes in Equity	14
Condensed Statement of Cash Flows	15
Notes to the Interim Report	16
Independent Auditor's Review Report	20
Corporate Information	21

Schroder Real Estate Investment Trust Limited aims to provide Shareholders with an attractive level of income together with the potential for income and capital growth from investing in UK commercial property.

Schroder Real Estate Investment Trust Limited (the "Company") together with its subsidiaries (the "Group") hold a diversified portfolio of UK commercial properties, which is mainly invested in three commercial property sectors: office, retail and industrial. The Group may also invest in other sectors from time to time. The Group will not invest in other listed investment companies. In pursuing the investment objective, the Investment Manager concentrates on assets with good fundamental characteristics, a diverse spread of occupational tenants and with opportunities to enhance value through active management.

Financial Summary

	30/09/2012	31/03/2012	% change
Net Asset Value ('NAV')1	£172.1m	£180.0m	(4.3)
NAV per ordinary share1 (pence)	48.4	50.6	(4.3)
Share price (pence)	39.0	35.5	9.9
Share price discount  to NAV	(19.4%)	(29.8%)
NAV total return2	(0.9%)	6.9%
FTSE All Share Index	2,998.9	3,002.8	(0.1)
FTSE EPRA/NAREIT UK Real Estate Index	916.86	1,103.15	(16.9)
Total Group assets less current liabilities	£356.9m	£389.6m	(8.4)
Borrowings as % of total assets less current liabilities	42.4%	44.5%	(2.1)3
Loan-to-value ratio, net of all cash4	34.2%5	40.6%	(6.4)3

Sources: Schroder Property Investment Management Limited and Datastream based on returns during the period from 1 April 2012 to 30 September 2012.

1  NAV is calculated using International Financial Reporting Standards.

2  NAV total return calculated by Schroder Property Investment Management Limited.

3  Percentage point change.

4  Loan-to-value ratio is total borrowings less total cash as a percentage of investment property.

5  Following debt repayment on 15 October 2012 and associated swap break costs, the Company's loan to value ratio, net of cash, is 36%.

Chairman's Statement

The period to 30 September 2012 saw continued progress towards the Company's strategic objectives of improving dividend cover and reducing debt levels, with the aim of optimising underlying net income and reducing balance sheet risk.  This progress has been achieved despite challenging conditions in the UK commercial property market and wider economy, and has been reflected in the narrowing of the discount at which the Company's share price trades relative to Net Asset Value ('NAV') has narrowed over the period. 

Results

The Company's NAV as at 30 September 2012 was £172.1 million, or 48.4 pence per share ('pps'), which compares with £180 million or 50.6 pps as at 31 March 2012.  This represented a decline of 2.2 pps or -4.3% over the period.  Shareholders received total dividends of £6.25 million or 1.76 pps over the period resulting in a NAV total return of -0.9%. 

A substantial part of the reduction in NAV over the period was due to a 1.5% decline in the capital value of the property portfolio.  This compared to the Investment Property Databank ('IPD') Benchmark capital value decline of 2.4%. The Company's relative outperformance has been driven by disposals at a premium to valuation, high levels of asset management activity, a low exposure to the retail sector and higher weighting to assets in the South and South East.

Marking the Company's interest rate swaps to market over the period had a small positive impact on the NAV. As at 30 September 2012 the swaps were valued at -£23.3 million, representing 13.5% of the NAV.  

Strategy

The net impact of property disposals and debt repayment resulted in an increase in pre-tax dividend cover over the period to approximately 60% and reduced the Company's loan to value ratio, net of cash of £27.9 million, from 41% to 36% at 15 October 2012.  The Company is now well placed to consider refinancing options ahead of the maturity of its securitised loan facility in July 2014. 

Bank lenders have pulled back from real estate lending since the financial crisis and the securitisation market is moribund.  However, other providers of commercial real estate debt, such as insurance companies, have entered the market over the last 12 to 18 months, and recent transactions have provided evidence that financing for real estate investment companies is potentially available on attractive terms. 

Any early refinancing of this kind would require the termination of the Company's existing interest rate swaps, which hedge the floating rate borrowings in the securitised debt facility.  The potential cost of this termination is already provided for in the Company's NAV and, if this option was progressed, the cost and funding requirement of swap termination would be considered alongside the potentially positive impact of securing long term debt to provide stability and greater certainty about the future.

Further property disposals will also be considered as part of the strategy to reduce the Company's loan to value ratio, in order to secure a refinancing on favourable terms.

Property performance

The Board continues to monitor the performance of the Company's underlying property portfolio compared to its IPD peer group Benchmark.  The latest available data showed that over the six months to September 2012 period the portfolio produced a total return of 2.0% compared to the Benchmark of 0.5%.  Longer term relative performance also remains positive, with a three year total return of 11.8% per annum compared to the Benchmark of 10.2% per annum, and a total return since inception in 2004 of 5.1% per annum compared to the Benchmark of 3.8% per annum.

Financing

Following the repayment of £22 million of debt during the period and a further £17 million on 15 October 2012, the Company now has a loan facility of £134.5 million maturing in July 2014.  As a condition of these repayments, a pro-rata amount of the interest rate swaps were broken at a total cost of £5.5 million.  These repayments result in a loan to value ratio, net of cash totalling £27.9 million, of 36% as at 15 October 2012 against a net loan to value ratio covenant of 60%.  The Company continues to have significant headroom on its Interest Cover Ratio of 280% compared with the covenant of 150%, calculated on a simplified basis of rental income as a proportion of interest cost. 

Outlook

Progress on asset management and a reduction in gearing over the period has increased the resilience of  the Company in the face of declining property values and the resultant negative impact on NAV.  It is the intention of both the Board and the Manager to build on this progress by pursuing refinancing options in the coming period

Looking ahead, whilst occupational markets remain challenging and further valuation declines are expected, we believe improved performance will follow delivery of the Company's strategic objectives and a recovery in the wider economy.

Andrew Sykes

Chairman

Schroder Real Estate Investment Trust Limited

19 November 2012

Investment Manager's Report

Performance and strategy

There were high levels of activity during the period to 30 September 2012 implementing the Company's strategy to improve dividend cover and reduce debt.  Progress has been achieved despite the continued market uncertainty and falling UK commercial property values which led to a decline in the Company's Net Asset Value ('NAV') over the period of 2.2 pence per share ('pps'), or 4.3%, to 48.4 pence per share ('pps').  The table below provides a detailed breakdown of the movement in NAV over the period:

	Pence per share
NAV as at 31 March 2012	50.6
Unrealised change in valuation of direct property portfolio	-2.0
Realised gain on disposal of direct property portfolio	0.4
Unrealised change in valuation of joint ventures	0.1
Movement in interest rate swaps	0.9
Swap break costs incurred	-0.8
Net earnings	1.0
Dividends paid	-1.8
NAV as at 30 September 2012	48.4

The unrealised value of the underlying direct property portfolio fell by 1.9% over the period.  This was mitigated by the positive impact of disposals on completion of asset management initiatives to crystallise profits which contained the overall capital value movement over the period to -1.5%.  This compared favourably to the IPD Benchmark, which experienced weaker performance on a like-for-like basis, with value falls of -2.4%. 

During the period the Company incurred swap break costs of £2.9 million associated with repaying debt totalling £22 million.  Taking this into account, the impact of marking the Company's interest rate swaps to market was marginally positive over the period.  This debt repayment reduced annual loan interest by £1.3 million per annum and made a positive contribution to net earnings which, after paying a dividend of £6.25 million over the period, resulted in pre-tax dividend cover of approximately 60%.  The movement in NAV combined with dividends paid resulted in a NAV total return of -0.9% over the period.

Since the period end the Company repaid a further £17 million of debt, incurring additional swap break costs of £2.6 million, and reducing annual loan interest by a further £1 million per annum.  Following this repayment on 15 October, the Company holds cash balances of £27.9 million, of which £16.2 million is outside the security pool charged to the Group's lenders.

Strategy

Following the recent disposals and debt repayment we will continue to focus on the following:

·      Intensively managing and investing in the existing portfolio to improve net income and protect the defensive qualities of the assets;

·      Completing key potentially value enhancing initiatives, such as securing planning consent at Reynards Trading Estate in Brentford;

·      Selling low yielding or non-income producing property forecast to underperform;

·      Redeploying sale proceeds in line with Company's strategic objectives, including further debt repayment; and

·      Pursuing refinancing options in advance of the Company's loan maturity event in July 2014.

Market overview

The latest IPD Monthly Index to 30 September 2012 confirmed average UK commercial property values fell by 2.4% over the six month period.  This combined with an average income return of 3.4% resulted in a total return of 0.9% over the period.

Low UK GDP growth, limited availability of bank finance and the on-going European sovereign debt crisis mean that the UK commercial property market remains fragile and polarised.  Global capital flows seeking 'super prime' and 'safe haven' assets continue to support high Central London office prices generating capital growth of 1.7% over the period.  More generally, the gap between prime and secondary property has continued to widen, with research by CBRE showing that the initial yield gap between 'average' prime and 'average' secondary is now 5.6%, compared with an average since 2000 of 2.1%.  Secondary property values continue to be depressed by poor occupational demand leading to weak, or falling, rental value growth.  Average rental values are now approximately 11% below their cycle peak in April 2007, with growth prospects limited without improved GDP growth. 

Retail continues to be the worst performing sector, producing a nil total return over the period, compared with offices of 1.8% and industrial of 1.6%.  The retail sector is currently experiencing a cyclical and structural downturn caused by weak consumer demand and the growth of on-line retailing.  The Company continues to have a strategically very low weighting to the retail sector which has made a positive contribution to its out- performance compared with IPD.

Property portfolio

As at 30 September 2012, the Company's direct property portfolio comprised 54 properties independently valued at £299.7 million.  On the same basis the portfolio produced rental income of £21.4 million per annum, reflecting a net initial yield of 6.8%.  The independent valuer has estimated that the current market rental value of the portfolio is £23.4 million, reflecting a reversionary yield of 7.4%.

The Company continues to own a diversified portfolio of UK commercial property with the tables below highlighting the strategic under-weighting to the retail sector and an above average exposure to the South East of England:

Sector weightings by value

	Weighting %
Sector Weightings	SREIT	IPD Benchmark
Retail	23.3	46.4
Offices	47.3	29.4
Industrial	21.5	18.4
Other	7.9	5.8

Regional weightings by value

	Weighting %
Regional Weightings	SREIT	IPD Benchmark
Central London	9.8	17.4
South East excl. Central London	47.8	32.2
Rest of South	10.7	6.8
Midlands and Wales	14.4	27.7
North and Scotland	17.3	15.9

Top ten properties by value

The Company continues to own properties offering good fundamentals such as established locations with good re-letting prospects.  The top ten properties below comprise 51% of the direct property portfolio as at 30 September 2012 and have an average unexpired lease term, assuming all tenants vacate at the earliest opportunity, of 10.2 years.

Top ten properties		Value (£)	(%)
1	London SE1, Minerva House	29,250,000	9.8
2	Brighton, Victory House	25,250,000	8.4
3	Uxbridge, 106 Oxford Road	14,800,000	4.9
4	Brentford, Reynards Business Park	14,250,000	4.8
5	Salisbury, Churchill Way West	14,150,000	4.7
6	Luton, The Galaxy	13,900,000	4.6
7	Wembley, Olympic Office Centre	13,000,000	4.3
8	Basingstoke, Churchill Way	10,650,000	3.6
9	Alfreton, Recticel Unit	9,000,000	3.0
10	Norwich, Union Park	9,000,000	3.0
	Total as at 30 September 2012	153,250,000	51.1

Top ten tenants by rent per annum

Top ten tenants		Rent p.a. (£)	% of portfolio
1	Wickes Building Supplies Limited	1,092,250	4.9
2	Norwich Union Life and Pensions Ltd	1,039,191	4.7
3	Lloyds TSB Bank PLC	1,024,000	4.6
4	Ipsos Mori UK Limited1	1,012,500	4.6
5	BUPA Insurance Services Limited	960,755	4.4
6	The Buckinghamshire New University2	900,000	4.0
7	Mott MacDonald Ltd3	790,000	3.6
8	Recticel SA4	731,038	3.3
9	Winkworth Sherwood LLP	689,975	3.1
10	Irwin Mitchell LLP	555,000	2.5
	Total as at 30 September 2012	8,794,709	39.7

¹ Ipsos SA is guarantor.  Figures based on 50% ownership of Minerva House.  Was formerly let to Synovate Limited, further details under asset management below

² Fixed uplift to £1.02 million per annum in May 2014

³ Mott MacDonald Group Limited are Guarantor

⁴ The tenant is currently benefiting from a half rent period equating to £365,519 per annum which will increase to £731,038 per annum in January 2014

The average unexpired lease term for the whole portfolio, assuming all tenants vacate at the earliest opportunity is 7.4 years. This reflects a small improvement over the period.   The table below shows the lease expiry profile of the Company's portfolio as at 30 September 2012 in five year increments assuming all tenants leave at the earlier of lease expiry and tenant break.  This is compared against IPD peer group Benchmark using the most recent available data as at 30 June 2012.  This ignores the potential for rental uplifts at future open market rent reviews as well as lease fixed uplifts:

	% of rent passing
	Company earliest termination / IPD Benchmark earliest termination	Company assuming no breaks / IPD Benchmark assuming no breaks
Up to 5	42.0 / 40.2	34.9 /29.4
5 to 10	26.6 /27.2	26.8 /32.0
10 to 15	23.7 /18.7	23.3 / 22.8
15 to 20	3.3 / 7.9	8.7 / 8.7
Over 20	4.4 / 6.0	6.3 / 7.1

The current void rate is 11.2% of rental value which compares to 9.9% at 31 March 2012 and the latest IPD Benchmark average of 7.9%.  Approximately 2.2% of the overall void is currently under offer to let to new tenants.

The Company receives independent quarterly reports from the IPD Rental Information Service ('IRIS'), which compares the overall quality of the tenants and portfolio's income with its IPD Benchmark funds within the peer group.  This results in a weighted risk score that takes into account tenant credit ratings, lease length, tenant concentration, reversionary potential and vacancy.  As at 30 June 2012, the latest available data, the Company's weighted risk score puts it on the 14^th percentile of its peer group funds which is a strong rating.  The table below shows the percentage of rental income generated by the portfolio graded by risk band, using credit ratings provided by Experian. 

Tenant risk band	Maximum (%)	High (%)	Medium-high (%)	Low-medium (%)	Low (%)	Negligible (%)	Unscored (%)	Ineligible (%)
Company's portfolio	4.66	5.70	0.73	9.22	15.15	62.61	1.80	0.13
IPD Benchmark	8.59	4.49	2.74	7.18	20.38	51.52	4.95	0.15

Property portfolio performance

The performance of the Company's underlying property portfolio compared with its Investment Property Databank ('IPD') peer group Benchmark for the period up to 30 September 2012 is shown below.

IPD Sector	SREIT total return pa (%)				IPD total return pa (%)				Relative pa (%)
Period	Six Months	One year	Three years	Since inception	Six Months	One year	Three years	Since inception	Six Months	One year	Three years	Since inception
All Retail (inc. Leisure)	-1.5	-1.9	8.2	4.6	-0.3	1.2	10.4	3.3	-1.2	-3.1	-1.9	1.3
All Offices	1.3	7.1	12.7	4.8	1.2	3.6	10.4	4.2	0.2	3.4	2.0	0.6
All Industrials	6.2	9.8	12.8	4.6	1.4	4.0	9.1	4.0	4.7	5.6	3.4	0.6
Other commercial	1.3	6.7	12.5	0.3	1.9	7.5	12.5	3.8	-0.6	-0.7	0.0	-3.3
All Sectors	2.0	5.9	11.8	5.1	0.5	2.8	10.2	3.8	1.5	3.0	1.4	1.2

Transactions and asset management

As detailed in the year end report and accounts, the Company sold its joint venture investment in Plantation Place in the City of London for £11.7 million in May 2012.  The proceeds were used to repay debt.  Since then the Company has also completed a further five disposals totalling £25 million reflecting an average net initial yield of 4.4% and a premium of £1.8 million or 7.5%, above the March 2012 independent valuation.  Further details are set out in the table below:

Address	Date of sale	31/03/12 value (£m)	Price (£m)	Rent p.a. (£m)	Net initial yield (%)	Comments
Fleet, Cedar House	26/06/12	0.82	1.00	Nil	Nil	Vacant secondary office sold to owner occupier
Bromley, High Street	22/08/12	2.10	2.57	Nil	Nil	Retail unit recently let to Office Shoes at £0.18m p.a. with 12 months rent free
Havant, Solent Road	28/09/12	4.50	4.60	0.22	4.5	3 acre site producing short-term income  with a trade counter producing £0.16m p.a.
Bristol, Kingsland Trading Estate	28/09/12	3.90	4.10	0.28	6.5	Industrial estate north of Bristol that had been recently fully let.  Rent £0.38m on expiry of rent free
Brentford, Gate Centre	28/09/12	11.90	12.70	0.67	4.9	Industrial estate in West London that was 92% by area.  Rent £0.81m on expiry of rent free
Totals / average		23.22	24.97	1.17	4.4

In most cases the disposals followed recent asset management that enabled a strong price to be achieved. 

Asset management

Progress has been made with key asset management initiatives over the period, specific details of which are provided below.  More generally, a high level of management activity is on-going across the whole portfolio to increase income, reduce vacancy and reduce the costs associated with holding vacant property.

London SE1, Minerva House

The value of Minerva House increased by 4% over the period to £29.25 million as at 30 September 2012.  The performance was due to the strength of the local market and asset management arising from the acquisition of Synovate Limited, the Company's tenant, by the French media group, Ipsos SA.  Synovate were paying £0.95 million per annum on a lease expiring in 2022, and the consents required from the Company to permit the change of tenant, enabled a rent review to be agreed early at an increased level of £1.01 million.  The situation also enabled the Company to secure an improved tenant covenant profile, with Synovate Limited's lease being assigned to Ipsos Mori UK Limited, with the lease guaranteed by Ipsos SA. 

Brentford, Reynards Trading Estate

Reynards Trading Estate comprises a largely vacant industrial estate across six acres of land, valued at £14.3 million as at 30 September 2012.  The strategy is to secure a higher value residential planning consent and then sell the site on for development which, if successful, could enhance both NAV and dividend cover.  An outline planning application for a residential scheme of 275 units totalling 224,000 sq ft was submitted in 2011 but refused in April 2012.   This is now subject to a planning appeal, and a decision should be received during 2013.  In parallel with the appeal an outline planning application for a smaller residential scheme of 229 units totalling 189,000 sq ft has been submitted on which a decision is also expected in 2013. 

Finance

Following debt repayments during the period and since the period end, the Company has a loan facility of £134.5 million that matures in July 2014, with no other on-balance sheet financing maturing prior to this date.  Based upon independent property valuation as at 30 September 2012, the Company's net loan to value ('LTV') following debt repayment is 36% as at 15 October 2012, compared with a net LTV covenant of 60%.

The other key banking covenant is the interest cover ratio ('ICR') covenant of 150%, calculated as a percentage of total annual net rent over total annual interest. Net rent is defined as the amount to be received during the 12 months following the test date, assuming all tenants vacate at the earliest opportunity. Deducted from this rent is the annualised rent for any tenancies where the tenant has rental arrears greater than 60 days and also any interest earned on cash in the security pool. Calculating the bank covenant in this way results in an ICR of 280%.

The table below sets out the Group's annual interest costs including details of the interest rate swaps that fully hedge its interest payments for the duration of the loan term that matures in July 2014.  The negative marked to market value of the interest rate swaps as at 30 September 2012 was £23.3 million representing 13.5% of the NAV.   Details of the Company's debt and two swaps are set out in the table below:

	Amount (£m)	Swap rate (%)	Margin (%)	Total interest rate (%)	Swap maturity	M2M* at 15 October 2012 (£m)	M2M* at 30 September 2012 (£m)
Loan	43.2	5.099 fixed	0.2	5.299	15/07/2014	(3.4)	(4.0)
Loan	91.3	5.713 fixed	0.2	5.913	15/07/2016	(17.1)	(19.3)
Loan total	134.5	5.52 fixed	0.2	5.72	N/A	(20.5)	(23.3)
Liquidity facility**	11.2	0.54 ***	0.662	1.202	N/A	N/A	N/A

*    M2M or marked to market value of interest rate swaps

** Securitised debt facility has a Liquidity Facility of £11.2 million provided by Lloyds Banking Group ('Lloyds'). Liquidity Facility Agreement requires the provider to have a minimum Standard & Poor's ('S&P') credit rating of A-1+, which Lloyds breached in March 2009 when they were downgraded by S&P to A-1.  The breach required the Liquidity Facility to be drawn down in full and placed in a blocked deposit account or alternatively a new provider put in place. Accordingly, on the 23 September 2009 the Liquidity Facility was drawn down.

*** Three month Libor as at 15 October 2012

As noted above, we will be pursuing refinancing options ahead of the loan maturing in July 2014.  Our criteria for an early refinancing are a long-term debt maturity, a reduction in interest expense in order to improve dividend cover and sufficient operational flexibility to permit continued active management of the portfolio.   

The Chairman's Statement highlights how new providers of real estate debt have entered the market over the past 12 to 18 months, potentially presenting the Company with alternatives to bank finance which meets our refinancing criteria. 

Conclusion

Further progress has been made towards the Company's key objectives and we have managed to sell assets on completion of asset management initiatives at prices above valuation. Gearing has been reduced as a result, despite falling UK commercial property values, and this will enable the Company to pursue a refinancing strategy from a position of greater strength.  

Challenging investment and occupier markets mean that successful asset management will be key to continuing to protect income and value as well as delivering on key initiatives.  Following recent debt repayments the Company continues to have cash for operational flexibility and to fund asset management activity. The quality of the Company's  portfolio and strong tenant profile compared to its IPD peer group should also underpin portfolio income. Further progress in completing asset management initiatives and a successful refinancing should enable the Company to consider future opportunities for growth.

Duncan Owen

Schroder Property Investment Management Limited

19 November 2012

Statement of the Directors' Responsibility in respect of the half-yearly financial report

We confirm that to the best of our knowledge:

• the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting; and

• the interim management report (comprising the Chairman's and the Investment Managers report) includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

By order of the Board

Director

19 November 2012

Condensed Statement of Comprehensive Income

for the period from 1 April 2012 to 30 September 2012

		Six months to	Six months to	Year to
		30/09/2012	30/09/2011	31/03/2012
	Note	£000	£000	£000
		(unaudited)	(unaudited) (Restated - see note 1)	(audited)
Rental income		11,781	11,865	24,955
Other income		235	1,323	1,684
Property operating expenses		(1,215)	(1,161)	(2,491)
Net rental and related income		10,801	12,027	24,148
Profit/(loss) on disposal of investment property		1,372	(333)	2,706
Net valuation loss on investment property	6	(6,973)	(1,564)	(5,885)
Expenses
Investment management fee	2	(1,007)	(1,761)	(3,041)
Valuers' and other professional fees		(642)	(624)	(1,113)
Administrators and accounting fee	2	(60)	(185)	(301)
Auditor's remuneration		(72)	(77)	(146)
Directors' fees		(85)	(100)	(230)
Transaction costs	3	-	(374)	(1,338)
Other expenses	3	(106)	(259)	(417)
Total expenses		(1,972)	(3,380)	(6,586)
Net operating profit before net finance costs		3,228	6,750	14,383
Interest receivable		16	95	104
Finance costs payable		(5,146)	(5,410)	(10,862)
Swap break costs: portion of swap previously recognised in profit and loss		(2,380)	-	-
Swap break costs: portion of swap previously recognised in equity		(512)	-	-
Finance costs: Ineffective  portion of changes in fair value of swap		1,278	(6,229)	(3,667)
Net finance costs		(6,744)	(11,544)	(14,425)
Share of profit in associates and joint ventures	7	256	181	12,125
(Loss)/profit before tax		(3,260)	(4,613)	12,083
Taxation		(164)	(546)	(1,050)
(Loss)/profit for the period/year attributable to the equity holders of the parent
		(3,424)	(5,159)	11,033
Other comprehensive income/(loss): Effective portion of changes in fair value of swap		1,341	(1,217)	449
Net change in fair value of swap reclassified to profit and loss		512	-	-
Total comprehensive (loss)/profit for the period/year attributable to the equity holders of the parent		(1,571)	(6,376)	11,482
Basic and diluted (loss)/earnings per share	4	(1.0p)	(1.4p)	3.1p

All items in the above statement are derived from continuing operations. 

The accompanying notes 1 to 11 form an integral part of the interim report.

Condensed Balance Sheet

as at 30 September 2012

		30/09/2012	30/09/2011	31/03/2012
	Notes	£000	£000	£000
		(unaudited)	(unaudited)	(audited)
Investment in associates and joint ventures	7	3,275	2,892	14,787
Loans to associates and joint ventures	7	1,308	1,191	1,240
Total investment and loans in associates and joint ventures		4,583	4,083	16,027
Investment property	6	291,691	324,540	320,888
Non-current assets		296,274	328,623	336,915
Trade and other receivables		10,161	10,445	9,580
Cash and cash equivalents	8	61,172	52,314	52,462
Current assets		71,333	62,759	62,042
Total assets		367,607	391,382	398,957
Issued capital and reserves		172,144	168,385	179,979
Equity		172,144	168,385	179,979
Interest-bearing loans and borrowings	9	161,567	182,949	183,258
Interest rate swap		23,274	30,635	26,407
Non-current liabilities		184,841	213,584	209,665
Trade and other payables		9,714	8,846	8,570
Taxation payable		908	567	743
Current liabilities		10,622	9,413	9,313
Total liabilities		195,463	222,997	218,978
Total equity and liabilities		367,607	391,382	398,957
Net Asset Value per Ordinary Share	10	48.4p	47.3p	50.6p

The financial statements were approved at a meeting of the Board of Directors held on 19 November 2012 and signed on its behalf by:

Harry Dick-Cleland, Director                                                          

The accompanying notes 1 to 11 form an integral part of the interim report.

Condensed Statement of Changes in Equity

For the period from 1 April 2011 to 30 September 2011 (unaudited)	Notes		Share premium	Hedge reserve	Revenue reserve	Total
			£000	£000	£000	£000
Balance as at 31 March 2011 - as previously stated			110,305	(23,189)	93,909	181,025
Prior year adjustment	1		-	16,933	(16,933)	-
Balance as at 31 March 2011 as restated			110,305	(6,256)	76,976	181,025
Loss for the period			-	-	(5,159)	(5,159)
Change in fair value of swap taken to equity			-	(1,217)		(1,217)
Dividends paid	5		-	-	(6,264)	(6,264)
Balance as at 30 September 2011			110,305	(7,473)	65,553	168,385
Total comprehensive loss for the period was £6,376,000.
For the year ended 31 March 2012 (audited) and For the period from 1 April 2012 to 30 September 2012 (unaudited)
	Notes		Share premium	Hedge reserve	Revenue reserve	Total
			£000	£000	£000	£000
Balance as at 31 March 2011 as restated			110,305	(6,256)	76,976	181,025
Profit for the year			-	-	11,033	11,033
Change in fair value of swap taken to equity			-	449	-	449
Dividends paid	5		-	-	(12,528)	(12,528)
Balance as at 31 March 2012			110,305	(5,807)	75,481	179,979
Loss for the period			-		(3,424)	(3,424)
Change of fair value of swap taken to equity			-	1,341	-	1,341
Net change in fair value of swap reclassified to profit and loss			-	512	-	512
Dividends paid	5		-	-	(6,264)	(6,264)
Balance as at 30 September 2012			110,305	(3,954)	65,793	172,144

Total comprehensive loss for the period was £1,571,000 (year ended 31 March 2012: income of £11,482,000).

The accompanying notes 1 to 11 form an integral part of the interim report

Condensed Statement of Cash Flows

for the period from 1 April 2012 to 30 September 2012

		Six months to	Six months to	Year to
		30/09/2012	30/09/2011	31/03/2012
	Notes	£000	£000	£000
		(unaudited)	(unaudited - restated, see note 1)	(audited)
Operating activities
(Loss)/profit for the period/year		(3,424)	(5,159)	11,033
Adjustments for:
(Profit)/loss on disposal of investment property		(1,372)	333	(2,706)
Net valuation loss on investment property		6,973	1,564	5,885
Share of profit in associates and joint ventures		(256)	(181)	(12,125)
Net finance cost		8,023	5,315	10,759
Ineffective portion of changes in fair value of swap		(1,278)	6,229	3,667
Taxation		164	546	1,050
Cash flows before changes in working capital and provisions		8,830	8,647	17,563
(Increase)/decrease in trade and other receivables		(581)	495	926
Increase/(decrease) in trade and other payables		1,225	(769)	(625)
Cash generated from operations		9,474	8,373	17,864
Finance costs paid		(4,932)	(5,129)	(10,291)
Swap break costs		(2,892)	-	-
Interest received		16	95	104
Tax paid		-	(352)	(680)
Net cash from operating activities		1,666	2,987	6,997
Investing Activities
Proceeds from sale of investment property		24,493	5,303	24,443
Proceeds from sale of joint venture		11,700	-	-
Cash disposed on sale of subsidiary		-	-	(102)
Acquisition of investment property		-	(5,869)	(21,320)
Additions to investment property		(885)	(567)	(1,752)
Net cash from investing activities		35,308	(1,133)	1,269
Financing Activities
Repayment of loan		(22,000)	-	-
Dividends paid	5	(6,264)	(6,264)	(12,528)
Net cash from financing activities		(28,264)	(6,264)	(12,528)
Net increase/(decrease) in cash and cash equivalents for the period/year Opening cash and cash equivalents		8,710	(4,410)	(4,262)
		52,462	56,724	56,724
Closing cash and cash equivalents		61,172	52,314	52,462

The accompanying notes 1 to 11 form an integral part of the interim report

Notes to the Interim Report

1. Significant accounting policies

Schroder Real Estate Investment Trust Limited ("the Company") is a closed-ended investment company incorporated in Guernsey. The condensed financial statements of the Company for the period ended 30 September 2012 comprise the Company, its subsidiaries and its interests in associates and joint ventures (together referred to as the 'Group').

Statement of compliance  

The condensed interim financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the United Kingdom Financial Services Authority and International Financial Reporting Standards ('IFRS') IAS 34 Interim Financial Reporting. They do not include all of the information required for the full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group as at and for the year ended 31 March 2012. The financial statements have been prepared on the basis of the accounting policies set out in the Group's annual financial statements for the year ended 31 March 2012. The Group's annual financial statements refer to new Standards and Interpretations none of which had a material impact on the financial statements.

Prior period adjustment

In previous years the Group has accounted for its swap instruments as effective hedges and had taken changes in fair value movements to other comprehensive income.  However, management consider that the swap attaching to the £111 million of borrowings should not have been treated as an effective hedge, in accordance with IAS 39,  due to the non-coterminous periods of the swap and the loan, and that  changes in fair value should have been dealt with in profit and loss.  Whilst this has no impact on Net Asset Value, Total Comprehensive Income or Operating profit before changes in working capital in the cash flow statement, it has resulted in a decrease in profit before tax in the period to September 2011 of £6.2 million, from a profit of £1,616,000 to a loss of £4,613,000, with an equal and opposite reduction in other comprehensive income, and a transfer between hedge reserve and revenue reserves at the beginning of that period of £16.9 million.  The prior period earnings per share figure decreases as a result from 0.3 pence to (1.4) pence.

Going concern

The Directors have examined significant areas of possible financial risk including cash and cash requirements and the debt covenants, in particular the loan to value covenant and interest cover ratio along with the loan repayment date of July 2014.  They have not identified any material uncertainties which would cast significant doubt on the Group's ability to continue as a going concern for a period of not less than twelve months from the date of the approval of the financial statements. The Directors have satisfied themselves that the Group has adequate resources to continue in operational existence for the foreseeable future. After due consideration, the Board believes it is appropriate to adopt the going concern basis in preparing the financial statements.

Use of estimates and judgements    

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.  There have been no changes in the judgements and estimates used by management as disclosed in the last annual report and financial statements for the year ended 31 March 2012.

2. Material agreements

Schroder Property Investment Management Limited is the Investment Manager to the Company.    

Schroder Property Investment Management Limited ("Schroders") was appointed on 13 January 2012 as the Company's Investment Manager, providing investment management and accounting services, replacing Invista Real Estate Investment Management Limited ("IREIM").

The Investment Manager is entitled to a fee together with reasonable expenses incurred in the performance of its duties. The fee is payable monthly in arrears and shall be an amount equal to one twelfth of the aggregate of 1.1% of the NAV of the Company. The Investment Management Agreement can be terminated by either party on not less than twelve months written notice or on immediate notice in the event of certain breaches of its terms or the insolvency of either party.              

The total charge to profit and loss during the period was £1,007,000 (March 2012: £3,041,000 of  which £2,641,000 was paid to Invista Real Estate Investment Management for the period from 1^st April 2011 to 13^th January 2012 and £400,000 to Schroders for the period from 14 January 2012 to 31 March 2012) (September 2011: £1,761,000).

The Board appointed Northern Trust International Fund Administration Services (Guernsey) Limited as the Administrator to the Company with effect from 25 July 2007. The Administrator is entitled to an annual fee equal to £120,000.  Up to 13 January 2012, IREIM was also paid £181,000 (2011: £250,000) for accounting services to the Company.

3. Statement of Comprehensive Income

One-off transaction costs of £1,338,000 were incurred in the prior year, due to the change of investment manager and the Picton merger proposal, comprising a £320,000 termination fee paid to Invista Real Estate Investment Management, a £200,000 transition fee paid to Schroders and £818,000 of other professional fees of which £374,000 were incurred in the first half of the prior year.

4. Basic and Diluted (Loss)/Earning per Share

The basic and diluted earnings per share for the Group is based on the net lossfor the period of £3,424,000, (March 2012: profit £11,033,000) (September 2011 restated loss: £5,159,000) and the weighted average number of Ordinary Shares in issue during the period/year of 355,921,281 (March 2012: 355,921,281 and September 2011: 355,921,281).

5. Dividends paid

	Number of		01/04/2012 to
In respect of	Ordinary	Rate	30/09/2012
	Shares	(pence)	£000
Quarter 31 March 2012 dividend paid 18 May 2012	355.92 million	0.8800	3,132
Quarter 30 June 2012 dividend paid 15 August 2012	355.92 million	0.8800	3,132
		1.7600	6,264

	Number of		01/04/2011 to
In respect of	Ordinary	Rate	30/09/2011
	Shares	(pence)	£000
Quarter 31 March 2011 dividend paid 13 May 2011	355.92 million	0.8800	3,132
Quarter 30 June 2011 dividend paid 19 August 2011	355.92 million	0.8800	3,132
		1.7600	6,264

	Number of		01/04/2011 to
In respect of	Ordinary	Rate	31/03/2012
	Shares	(pence)	£000
Quarter 31 March 2011 dividend paid 13 May 2011	355.92 million	0.8800	3,132
Quarter 30 June 2011 dividend paid 19 August 2011	355.92 million	0.8800	3,132
Quarter 30 September 2011 dividend paid 25 November 2011	355.92 million	0.8800	3,132
Quarter 31 December 2011 dividend paid 17 February 2012	355.92 million	0.8800	3,132
		3.5200	12,528

A dividend for the quarter ended 30 September 2012 of 0.88p (£3,132,107) was declared on 24 October 2012 and will be paid on 16 November 2012.

6. Investment property

For the period 1 April 2011 to 30 September 2011 (unaudited)

	Leasehold	Freehold	Total
	£000	£000	£000
Amounts recognised as investment property at  1 April 2011	47,980	277,315	325,295
Additions	-	6,444	6,444
Disposals	-	(5,635)	(5,635)
Net valuation gains/(loss) on investment property	3	(1,567)	(1,564)
Amounts recognised as investment property at 30 September 2011	47,983	276,557	324,540

For the year 1 April 2011 to 31 March 2012 (audited)

	Leasehold	Freehold	Total
	£000	£000	£000
Amounts recognised as investment property at  1 April 2011	47,980	277,315	325,295
Additions	15,774	7,298	23,072
Disposals	(15,774)	(5,820)	(21,594)
Net valuation  loss on investment property	(526)	(5,359)	(5,885)
Amounts recognised as investment property at 31 March 2012	47,454	273,434	320,888

For the period 1 April 2012 to 30 September 2012 (unaudited)

	Leasehold	Freehold	Total
	£000	£000	£000
Amounts recognised as investment property at  1 April 2012	47,454	273,434	320,888
Additions	122	763	885
Disposals	-	(23,109)	(23,109)
Net valuation loss on investment property	(888)	(6,085)	(6,973)
Amounts recognised as investment property at 30 September 2012	46,688	245,003	291,691

Fair value of investment property as determined by the valuers excluding lease incentives totals £299,665,000 (31 March 2012: £328,765,000).

7. Investment in associates and joint ventures

For the year 1 April 2011 to 31 March 2012 (audited)

	£000
Opening balance as at 1 April 2011	3,902
Share of  profits in year	12,125
Amounts recognised as associates and joint ventures at 31 March 2012	16,027

For the period 1 April 2012 to 30 September 2012 (unaudited)

		£000
Opening balance as at 1 April 2012		16,027
Share of profits in period	188
Write back of loans  to associates and joint ventures previously impaired *	68
Total share of profits from associates and joint ventures		256
Disposal in period		(11,700)
Amounts recognised as associates and joint ventures at 30 September 2012		4,583

* Total loans to associates and joint ventures as at 30 September 2012 was £1,308,000 (31 March 2012 £1,240,000)

8. Cash and cash equivalents

Included in cash of £61.2 million (March 2012: £52.5 million, September 2011: £52.3 million) is £11.2 million (March 2012 and September 2011: £11.2 million) of restricted cash held under the liquidity facility with Lloyds TSB bank.  This is held in trust and under the terms of the loan agreement and can only be drawn down by the Trustee in the event of a liquidity shortfall within the Group for the sole purpose of paying the principal loan interest.

9. Interest-bearing loans and borrowings

In March 2005 the Group entered into a £152.5 million loan repayable in July 2014 with a securitisation vehicle, along with a facility of £150 million of reserve notes.  The Group has as at 30 September 2012 £151.5 million drawn under these two facilities and £1.1 million in unamortised arrangement fees.

At the same time as entering into these two facilities, the Group entered into a liquidity facility with Lloyds TSB Bank plc (Lloyds) as the Liquidity Facility Provider for £11.2 million, the intention of the facility was to provide funding for liquidity shortfalls. One of the criteria of the liquidity facility was that the Liquidity Facility Provider should have a credit rating of at least AA- (long term) by Fitch or A-1 (short term) by S&P. Recently Lloyds has been downgraded to A-1 (short term) by S&P. A consequence of this downgrade is the Group being required to drawdown the £11.2 million and place it in a blocked bank account. The drawdown can be repaid when Lloyds rating returns to at least the level set out in the agreement or the terms of the liquidity facility agreement are altered.

10. NAV per Ordinary Share

The NAV per Ordinary Share is based on the net assets of £172,144,000 (31 March 2012: £179,979,000) (30 September 2011: £168,385,000) and 355,921,281 (31 March 2012 and 30 September 2011: 355,921,281) Ordinary Shares in issue at the Balance Sheet date.

11. Post balance sheet events

Post period end the Group repaid a total of £17 million of debt incurring a total of £2.6 million in swap break costs.

Independent Review Report to Schroder Real Estate Investment Trust Limited ('the Company')

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2012 which comprises the Condensed Statement of Comprehensive Income, Condensed Balance Sheet, Condensed Statement of Changes in Equity, Condensed Statement of Cash Flows and the related explanatory notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with the terms of our engagement to assist the company in meeting the requirements of the Disclosure and Transparency Rules ("the DTR") of the UK's Financial Services Authority ("the UK FSA"). Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FSA.

As disclosed in note 1, the annual financial statements of the Company are prepared in accordance with IFRS. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2012 is not prepared, in all material respects, in accordance with IAS 34 and the DTR of the UK FSA.

Deborah J Smith

For and on behalf of KPMG Channel Islands Limited

Chartered Accountants and Registered Auditors

Guernsey

19 November 2012

Corporate information

Registered Address Trafalgar Court Les Banques St Peter Port Guernsey GY1 3QL Directors Andrew Sykes (Chairman) Keith Goulborn John Frederiksen Harry Dick-Cleland David Warr Peter Atkinson  (All Non-Executive Directors) Investment Manager and Accounting Agent Schroder Property Investment Management Limited 31 Gresham Street London EC2V 7QA The Manager's Investment Committee William Hill Mark Callender Duncan Owen Secretary, Administrator and Channel Islands Sponsor Northern Trust International Fund Administration Services (Guernsey) Limited Trafalgar Court Les Banques St Peter Port Guernsey GY1 3QL	Auditor KPMG Channel Islands Limited 20 New Street St Peter Port Guernsey GY1 4AN Property Valuers Knight Frank LLP 20 Hanover Square London W1S 1HZ UK Sponsor and Broker JPMorgan Cazenove Limited 25 Bank Street London E14 5JP Numis Securities Limited 10 Paternoster Square London EC4M 7LT Tax Advisers Deloitte & Touche LLP 180 Strand London WC2R 1BL Receiving Agent and UK Transfer/Paying Agent Computershare Investor Services PLC The Pavilions Bridgewater Road Bristol BS99 1XZ
Solicitors to the Company as to English Law: Herbert Smith Freehills Exchange House Primrose Street London EC2A 2HS as to Guernsey Law: Mourant Ozannes 1 Le Marchant Street St Peter Port Guernsey GY1 4HP
ISA/PEP status The Company's shares are eligible for Individual Savings Accounts (ISAs) and PEP transfers and can continue to be held in existing PEPs

 

END

 

 

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