Interim Management Statement, NAV and Dividend

RNS Number : 9807B

Schroder Real Estate Inv Trst Ld

25 April 2012

 





25 April 2012

Schroder Real Estate Investment Trust Limited

(the 'Company' / 'Group')

INTERIM MANAGEMENT STATEMENT, ANNOUNCEMENT OF NAV AND INTERIM DIVIDEND

The Schroder Real Estate Investment Trust, formerly the Invista Foundation Property Trust, today provides an update to shareholders for the quarter to 31 March 2012.

Net Asset Value

Schroder Real Estate Investment Trust Limited announces an unaudited net asset value ('NAV') of £167 million or 46.9 pence per share ('pps') as at 31 March 2012.  This reflects a decrease of 1.1% compared with the NAV as at 31 December 2011 of £168.9 million.

On a like for like basis and allowing for capital expenditure, the directly held property portfolio fell in value by 0.8% or £2.5 million.  This excludes the BT Building in West Bromwich which was sold on 30 March for £19.5 million which compared with a valuation of £18.9 million as at 31 December 2011. 

Over the quarter to 31 March 2012 the negative mark-to-market of the Group's interest rate swaps reduced by £1.8 million, or 6%, to -£28.0 million.  This represents 7.9 pps or 16.7% of the Company's NAV.  Pre-tax dividend cover over the quarter was 62%.

The Company is also today announcing an interim dividend of 0.88 pps for the period 1 January 2012 to 31 March 2012.  The dividend payment will be made on 18 May 2012 to shareholders on the register on 4 May 2012.  The ex-dividend date will be 2 May 2012.

	31/03/2012 (£m)	31/12/2011 (£m)	3 month change (£m)	3 month change (%)
Direct property independent valuation	328.8	349.8	(21.0)	(6.0)
Rent incentive adjustment	(8.0)	(7.6)	(0.4)	(5.3)
Valuation of disposal*		(18.9)
Capital expenditure during the quarter		0.4
Direct portfolio after capital expenditure	328.8	331.3	(2.5)	(0.8)
Joint venture investments	4.3	4.2	0.1	2.4
Market value of interest rate swap	(28.0)	(29.8)	1.8	6.0
Net current assets**	53.2	35.4	17.8	50.3
On-balance sheet loan**	(183.3)	(183.1)	(0.2)	(0.1)
Net Asset Value	167.0	168.9	(1.9)	(1.1)
Net Asset Value per share (pps)	46.9	47.5	(0.6)	(1.2)
Net Asset Value per share excluding swaps (pps)	54.8	55.8	(1.0)	(1.8)

* Previously announced disposal of the BT Building in West Bromwich that completed on 30 March 2012 for £19.5 million

^** Both net current assets and on-balance sheet loan include £11.2 million drawn down from the Liquidity Facility (see Finance below).  The Liquidity Facility cash is held in a blocked account and the loan is excluded from related securitised financial covenants

Name change

At the Company's Extraordinary General Meeting on 14 March 2012 shareholders passed a resolution to change the Company's name from Invista Foundation Property Trust Limited to Schroder Real Estate Investment Trust Limited.  The Company's TIDM ('ticker') on the LSE has been changed from IFD to SREI and the Company's ISIN is unchanged as GB00B01HM147. The Company's secondary listing on CISX has retained the Mnemonic ('ticker') IFP.

Debt repayment

Following completion of the West Bromwich disposal the Board and the Investment Manager reviewed how this cash could best be utilised to progress the Company's key strategic objectives of improving dividend cover and managing the balance sheet in anticipation of its loan re-financing in July 2014.  This review concluded that, currently, it was more desirable to reduce the Company's leverage than maximise dividend cover.  Consequently on 16 April £10 million of debt was repaid which immediately saves the Company loan interest of £0.53 million per annum.  

As a condition of the repayment, a pro-rata proportion of the interest rate swap was broken resulting in a cost of £0.9 million.  Based upon the independent property valuations as at 31 March 2012 the Company's net loan-to-value ratio following the debt repayment is 41%. 

Having repaid the debt the Company now has total cash of approximately £27.3 million, of which £10 million is outside the security pool, with the balance of £17.3 million inside the security pool. 

Property Portfolio and Performance

As at 31 March 2012, and following the West Bromwich disposal, the Company's direct property portfolio comprised 57 properties independently valued at £328.8 million.  At the same date the direct property portfolio produced a rent of £22.2 million per annum which, based on the Knight Frank independent valuation, reflected a net initial yield of 6.4%.  On 4 April 2012, BUPA's rent free period at Victory House in Brighton expired, increasing the portfolio rent by a further £0.96 million per annum.  The portfolio rental value is £25.5 million per annum, resulting in a reversionary yield of 7.3%. 

As at 31 March 2012 the portfolio void rate was 9.9% of rental value, compared with 12% as at 31 December 2012.  This reduction was due to the independent valuer reclassifying part of Reynards Trading Estate in Brentford as a development site with nil rental value.  On a like for like basis the void rate increased by 1% over the quarter, largely due to the failure of the retailer Game who were a tenant at a retail property in Harrow paying £0.2 million per annum.  The property is now being marketed and there is some interest from replacement tenants.

In addition to the BUPA rental increase referred to above there are additional contracted fixed rental uplifts of £1.5 million per annum due by the end of 2014.  The most significant of these during 2012 is the Buckinghamshire New University in Uxbridge, where the rent increases by £0.45 million per annum in May 2012 to £0.9 million per annum.

The tables below reflect the position based on the 31 March 2012 valuation:

Sector weightings

Sector	Weighting %
Retail	23.0
Offices	46.6
Industrial	26.0
Other	4.4

Regional weightings

Region	Weighting %
Central London	8.6
South East excl. Central London	38.9
Rest of South	23.7
Midlands and Wales	15.3
North and Scotland	13.5

Top ten properties

		Value (£m)	%
1	London SE1, Minerva House	28.2	8.6
2	Brighton, Victory House	25.3	7.7
3	Salisbury, Churchill Way West	15.2	4.6
4	Uxbridge, 106 Oxford Road	14.8	4.5
5	Luton, The Galaxy	14.3	4.4
6	Wembley, Olympic Office Centre	13.2	4.0
7	Brentford, Reynards Business Park	12.3	3.7
8	Brentford, The Gate Centre	11.9	3.6
9	Basingstoke, Churchill Way	10.7	3.2
10	Sheffield, The Portergate	9.3	2.8
	Total as at 31 March 2012	155.0	47.1

Top ten tenants

		Rent per annum (£)	%
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 PLC1	1,024,000	4.6
4	BUPA Insurance Services Limited2	960,555	4.3
5	Synovate Limited3	950,000	4.3
6	The Buckinghamshire New University4	900,000	4.1
7	Mott MacDonald Ltd5	790,000	3.6
8	Recticel SA6	731,038	3.3
9	Winkworth Sherwood LLP7	689,975	3.1
10	Irwin Mitchell LLP	555,000	2.5
	Total as at 31 March 2012	8,732,209	39.4

¹ Lloyds Bank on Church Street Liverpool and Bank of Scotland PLC at Keith House, Edinburgh

² Currently subject to rent free period that expired on 4 April 2012

³ Aegis Group plc is guarantor. Figures based on 50% ownership of Minerva House.  The lease is in the process of being assigned to MORI UK Limited

⁴ The Buckinghamshire New University is currently benefiting from a half rent period equating to £450,000 per annum from March 2009 which will increase to £900,000 per annum in June 2012.  The lease benefits from a further fixed uplift to £1.02 million per annum in May 2014

⁵ Mott MacDonald Group Limited are Guarantor

⁶ 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

⁷ On assignment from Reed Smith Ramboud Charot LLP. Figures based on 50% ownership of Minerva House

The performance of the Company's underlying direct property portfolio has been assessed by Investment Property Databank ('IPD') against its peer group Benchmark.  During 2012 the portfolio produced a total return of 7.3% which matched the Benchmark return.  Since inception of the Company in July 2004 the underlying portfolio has produced a total return of 4.5% per annum versus the Benchmark of 3.2% per annum, relative outperformance of 1.3% per annum over the period.

Transactions and Asset Management

As referred to above, on 30 March 2012 the Company completed the disposal of the BT Building in West Bromwich for £19.5 million,reflecting a net initial yield of 5.8%.  The property comprised a 75,000 sq ft office located on the edge of West Bromwich town centre and was let to BT PLC for 14.6 years at a rent of £1.2 million per annum with fixed uplifts of 3% per annum.  The Company committed to buy the property in February 2010 and subsequently acquired it in October 2011 for £14.86 million, reflecting a net initial yield of 7.7%.  The sale price reflected a 31% uplift compared to its acquisition price and an uplift of 3.2% compared with the independent valuation as at 31 December 2011 of £18.9 million.

At Reynards Trading Park in Brentford, the planning application for a residential scheme of 275 units totalling 224,000 sq ft has been refused, with the main reason being attributed to the density of the proposed development and the resultant traffic impact.  This is disappointing as the density is comfortably within formal planning guidance and was supported by Council Officers at the London Borough of Hounslow.  Notwithstanding the refusal, the principle of residential use at the site continues to be supported by Council Officers who wrote "The semi-landlocked nature of the site would make it an excellent location for family housing".  The Company's planning advisors believe there are strong grounds to appeal against the refusal and this, together with the possibility of making a revised application, is being considered.    

Good progress has been made with asset management at the Company's other industrial estates.   At Kingsland Trading Estate in Bristol, a 44,000 sq ft warehouse unit in the process of being refurbished has let.   Jongor Limited, an events company, has taken a new ten year lease without tenant break options at £0.19 million per annum.  Jongor receive 18 months rent free structured as 36 months at half rent.  This initiative contributed to an 18% increase in the value of the property over the quarter, from £3.3 million to £3.9 million.  At the Gate Centre in Brentford, where the Company recently completed a refurbishment, a vacant unit has been let to The Garden Centre Group at £66,720 per annum. 

Market Background

The latest IPD Monthly Index confirmed an all property total return of 0.2% in March, with capital values falling by 0.3%.  The IPD all property initial yield is now 6.19% and the equivalent yield is 7.24%.  March was the lowest monthly total return since June 2009, contributing to a quarterly capital decline of 0.7%.  This was the fifth successive month of value falls, with values a cumulative 0.8% lower than November 2011.  The only sectors to record positive capital growth in March were the City and West End Office markets, led by continued strong demand and positive rental growth.   The Central London office market continues to be driven by international investors with cross border flows accounting for 62% of all transactions in 2011 (source: Real Capital Analytics).  The worst performing sector in March was retail where capital value falls of 0.5% offset the income return, leaving total returns flat.  There was significant divergence within the retail sector, illustrated Central London retail values continuing to increase whereas Shopping Centres (-0.9%) and regional retail markets (-0.8%) fell sharply. 

Joint Ventures

The Company has three joint ventures with separate non-recourse, off-balance sheet debt:

Merchant Property Unit Trust ('MPUT') - 19.5% share

The NAV of the Company's 19.5% share in MPUT as at 31 March 2012 increased by £0.1 million, or 3.4%, to £3 million.  The value of the underlying portfolio increased to £41.7 million over the quarter, an increase of £0.37 million or 0.9%.  Following the valuation increase MPUTs loan to value ('LTV') ratio is 59% compared to the LTV ratio covenant of 85%, with the Interest Cover Ratio unchanged at 168% compared with an ICR covenant ratio of 150%.   As at 31 March 2012 the total negative marked to market value of the interest rate swap is -£1.39 million, meaning that the Company's share of NAV is diluted by approximately -£0.27 million.  The swap is matched to the term of the loan and will therefore erode to nil by loan maturity in December 2013.

Crendon Industrial Partnership Limited ('CIPL') - 50% share

The NAV of the Company's 50% share in CIPL as at 31 March 2012 was unchanged over the quarter at £1.2 million.  The underlying property valuation declined slightly by £0.1 million over the quarter to £24.7 million.  Continued good progress is being made with asset management activities including new lettings and a planning application submitted which has been submitted for 60,000 sq ft of warehouse accommodation.   There is no loan to value covenant prior to loan maturity in May 2013 and the interest cover is well within compliance at 160% compared to the covenant of 135%.  Due to the current high LTV discussions are ongoing with the lender, Nationwide, concerning a possible loan extension beyond 2013.

One Plantation Place Unit Trust ('OPPUT') - 29% share

The valuation of OPPUT's underlying property, Plantation Place, London, EC3 was unchanged over the quarter at £496.5 million, reflecting a net initial yield of 5.50%.  The independent valuation continues to be prepared on the basis of a disposal of the unit trust in which the property sits rather than the property itself, and therefore does not include any deduction for SDLT.  As at 31 March 2012, OPPUT's net debt is £427.8 million, resulting in a net loan to value of 86.2% compared to the net loan to value covenant of 82.14%.  The negative marked to market value of the interest rate swap, which is matched to the loan maturity in July 2013, reduced by a further £3.4 million to -£24.9 million over the quarter. 

Due to the uncertainty associated with the continuing LTV breach and as there is no certainty that any disposal will be of the unit trust, the Company continues to hold its interest at £nil.  The Manager is implementing a strategy to realise value from the investment.

Finance

Details of the Company's debt and two swaps are set out in the table below as at 31 March 2012:

Rating	Loan amount (£m)	Swap Rate (%)	Margin (%)	Total interest rate (%)	Swap Maturity	M2M 31/03/2012	M2M 31/12/2011
AAA	62.5	5.099% Fixed	0.20	5.299	15/07/2014	(6.3)	(6.8)
AAA	111	5.713% Fixed	0.20	5.913	15/07/2016	(21.7)	(23.0)
Loan total	173.5	5.420% Fixed	0.20	5.692	N/A	(28.0)	(29.8)
Liquidity facility**	11.2	1.01 Libor***	0.662	1.672	N/A	N/A	N/A

*    M2M or marked to market

**    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 20 April 2012 

The Company has a single on-balance sheet loan facility that matures in July 2014, with no other on-balance sheet financing maturing prior to this date.  Following the debt repayment on 15^th April referred above, the Company's loan balance has reduced from £173.4 million to £163.5 million.  Because the Company broke the cheaper swap maturing in 2014, the blended total interest cost increased slightly from 5.69% to 5.72%.

-ENDS-

For further information:

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

 

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