Interim Management Statement

RNS Number : 2022Y

Schroder Real Estate Inv Trst Ld

22 January 2014

 



FINAL for release 22 January 2014

Schroder Real Estate Investment Trust Limited

(the 'Company' / 'Group')

INTERIM MANAGEMENT STATEMENT

Net Asset Value

Schroder Real Estate Investment Trust Limited announces an unaudited net asset value ('NAV') of £168.5 million or 47.3 pence per share ('pps') as at 31 December 2013.  This reflects an increase of 4.2% compared with the NAV as at 30 September 2013 of £161.6 million.  A breakdown of the NAV movement over the quarter is set out below:

	£m	pps	Comments
NAV as at 30 September 2013	161.6	45.4	Announced 22 October 2013
Unrealised change in valuation of direct property portfolio	9.0	2.5	Like for like increase before capital expenditure of 3.4%.
Capital expenditure during period	(0.6)	(0.2)	Principally relating to the refurbishment of 95 The Promenade in Cheltenham and 24/25 High Street, Chelmsford, together with planning fees at Wembley and Hinckley.
Unrealised change in valuation of joint ventures	(0.4)	(0.1)	No change in Merchant Property Trust and a reduction in the Directors valuation of Crendon Industrial Partnership Limited to reflect the risk connected with the loan maturity.
Post-tax net revenue	1.6	0.4	Reflects quarterly dividend cover of 74%.
Dividends paid	(2.2)	(0.6)	Dividends paid during the quarter.
Others	(0.5)	(0.1)	Portsmouth acquisition fees of £400,000 and a rent free adjustment of £100,000.
NAV as at 31 December 2013	168.5	47.3

Dividend payment

The Company announces an interim dividend of 0.62 pps for the period 1 October 2013 to 31 December 2013.  The dividend payment will be made on 21 February 2014 to shareholders on the register as at 7 February 2014.  The ex-dividend date will be 5 February 2014.    

Placing of new ordinary shares

Completion of the re-financing in April 2013 and further progress with accretive asset management has provided the Company with a solid platform from which to potentially enhance returns to shareholders through a gradual increase in size. 

This decision also follows evidence of improving market conditions with the latest Investment Property Databank ('IPD') UK Monthly Index reporting a 1.5% increase in average capital values for December 2013, with the pace of growth increasing.  This contributed to a total return for the quarter to December 2013 of 4.7% and a total return for calendar 2013 of 10.9%.  The current stage of the recovery is notable for improving sentiment towards good secondary property outside of the core Central London markets.  This is partly to do with the yield premium available but also reflects an improving occupational market in some regions, as a result of economic growth and reducing levels of supply. 

These conditions are providing the Company with increasing deal flow offering total returns consistent with the Company's investment objective.

Against this backdrop, on 10 January 2014, the Company announced the successful placing of 35,592,128 new ordinary shares (the 'Placing Shares') at a price of 48.25 pps, raising gross proceeds of approximately £17.17 million.  The Placing shares represented 10% of the issued ordinary share capital of the Company prior to the Placing.  Following the successful conclusion of the Placing, the Company exchanged contracts to acquire The Arndale Centre in Headingley for £16.23 million, which subsequently completed on 15 January 2014.  Further transactions are under consideration and the Company hopes to make further announcements in this regard in due course.

Performance versus Investment Property Databank ('IPD') Index

The latest available IPD Index performance data for the quarter to 30 September 2013 confirmed that the Company's property portfolio produced a total return of 3.6% compared with 2.5% for the IPD peer group Quarterly Version of Balanced Monthly Index Funds (the 'IPD Index') on a like-for-like basis. 

Property Portfolio

As at 31 December 2013, and prior to the acquisition of The Arndale Centre in Headingley, the Company's direct property portfolio comprised 52 properties independently valued at £279.59 million.  At the same date the direct property portfolio produced a rent of £18.97 million per annum which, based on the Knight Frank independent valuation, reflected a net initial yield of 6.4%.  The portfolio's rental value is £21.56 million per annum, resulting in a reversionary yield of 7.3%.  Following letting and lease restructuring activity over the quarter the portfolio will benefit from additional fixed rental uplifts of £1.8 million per annum due by December 2015.

As a result of the letting activity summarised below, the portfolio void rate reduced to 12.5% from 13% over the quarter, with the potential for a further reduction to approximately 11% based on lettings under offer or conditional exchange.  The average unexpired lease term, assuming all tenants vacate at the earliest opportunity, was unchanged over the quarter at 7.3 years.  The tables below summarise the key portfolio information as at 31 December 2013:

Sector weightings	Weighting %
	SREIT	IPD Index*
Retail	27.1	44.1
Offices	43.3	28.4
Industrial	25.4	17.9
Other	4.2	9.6

* Latest available IPD Index data as at 30 September 2013

Regional weightings	Weighting %
	SREIT	IPD Index*
Central London	0	18.7
South East excl. Central London	44.9	31.1
Rest of South	12.7	7.0
Midlands and Wales	28.3	24.9
North and Scotland	14.1	18.3

* Latest available IPD Index data as at 30 September 2013

Top ten properties		Value (£)	(%)
1	Brighton, Victory House	26,250,000	9.4
2	Wembley, Olympic Office Centre and site	21,750,000	7.8
3	Uxbridge, 106 Oxford Road	16,000,000	5.7
4	Brentford, Reynards Business Park	16,000,000	5.7
5	Salisbury, Churchill Way West	13,000,000	4.7
6	Luton, The Galaxy	11,750,000	4.2
7	Basingstoke, Churchill Way	11,000,000	3.9
8	Norwich, Union Park	9,500,000	3.4
9	Alfreton, Recticel Unit	9,200,000	3.3
10	London, Booker Unit	8,500,000	3.0
	Total as at 31 December 2013	142,950,000	51.1

Top ten tenants		Rent p.a. (£)	% of portfolio
1	Wickes Building Supplies Limited	1,092,250	5.3
2	Norwich Union Life and Pensions Ltd	1,039,191	5.1
3	Lloyds TSB Bank PLC	1,028,900	5.0
4	BUPA Insurance Services Limited	960,755	4.7
5	The Buckinghamshire New University1	900,000	4.4
6	Mott MacDonald Ltd2	790,000	3.9
7	Recticel SA3	731,038	3.6
8	Sportsdirect.com Retail Limited	657,177	3.2
9	Irwin Mitchell LLP	555,000	2.7
10	Booker Limited	550,000	2.7
	Total as at 31 December 2013	8,304,311	40.6

¹ Fixed uplift to £1.02 million per annum on 30 January 2014

² Mott MacDonald Group Limited are Guarantor

³ The tenant is currently benefiting from a half rent period equating to £365,519 per annum which will increase to £731,038 per annum on 17 April 2014

Transactions

On 10 December 2013 the Company acquired 244 to 248D Commercial Road in Portsmouth for price of £7.18 million, reflecting a net initial yield of 8.3%.  The property comprises a 27,359 sq ft modern, well configured retail parade located at the eastern end of Commercial Road, Portsmouth's main pedestrianised retail area.  The property produces rent of £626,750 per annum and is let to four tenants, Sportsdirect.com Retail Limited (50% of the passing rent), Mothercare UK Limited (37%), Tui UK Limited (7%) and a small jeweller, called the Gold Centre (6%).  The rents are in line with market rents and the property has an average unexpired lease term, assuming all tenants break at the earliest opportunity, of 6.6 years.  Immediately adjacent to the property is the site for the proposed Northern Quarter retail and leisure redevelopment.  Portsmouth City Council and the developer, Centros, are promoting a 600,000 sq ft retail and leisure development, with the proposed anchor store directly facing the property.  Whilst there remains uncertainty regarding the viability of the scheme, Centros are expected to submit a new outline planning application in 2014. 

Since the quarter end, the Company acquired The Arndale Centre in Headingley for £16.23 million from Joint Fixed Charge Receivers, reflecting a net initial yield of 9.14%.  The property comprises a 125,834 sq ft multi-let retail, leisure and office property located in a densely populated suburb of Leeds.  The property produces rent of £1.57 million per annum, increasing to £1.69 million on expiry of rent free periods.  The initial yield reduces to 8.73% allowing for non-recoverable expenses.  Approximately 75% of the income is generated by 20 convenience retail and leisure tenants including Sainsbury's, Morrisons, Wilkinsons and Pizza Express, with a weighted average lease term, assuming the earlier of lease expiry and break, of 12.4 years.  The remaining 25% of the income is generated by offices at an average rent of £11.20 per sq ft and with a weighted average lease term, assuming the earlier of lease expiry and break, of five years.  The property offers scope to add value through asset management with potential for change of use of the office accommodation.  Furthermore, the property could potentially benefit from local transport and infrastructure improvements, with the subject property being located adjacent to the proposed Leeds Trolley Bus station, a rapid transport system linking Leeds city centre with the suburban areas to the north and south

Asset management

As noted above, over the quarter the portfolio void rate reduced from 13% to 12.5%.  The main contributor to the reduction was the letting of the Company's 81,121 sq ft vacant warehouse at Orton Southgate in Peterborough.  The new tenant, Yours Clothing Limited, has entered into an agreement for lease for a new ten year lease, with a tenant break at year five, on a stepped rent that increases to £245,000 per annum by year five.  As a condition for lease completion the Company is undertaking a refurbishment of the property at a cost of approximately £330,000.       

Since the quarter end the Company has also entered into an agreement for lease to let the vacant unit at Churchill Way Retail Park in Salisbury, to TJX UK Limited ('TJX', the operating company for  TK Maxx and Homesense), on a subject to planning basis.  TJX has agreed to take a 15 year lease with a tenant break at year 10, at £255,000 per annum or £17 per sq ft.  The letting is conditional on the Company securing a widening of the current retail consent and completing works at a cost of approximately £200,000.  TJX will receive six months rent free on completion of the lease together with capital contribution towards their fit-out of £382,000.  The Company will make the planning application and, assuming permission is granted, the lease should complete in the second half of 2014.

Debt

Details of the £129.58 million loan with Canada Life and compliance with the principal covenants as at 31 December 2013 are set out below:

Canada Life loan	Maturity	Interest rate (%)	Loan to Value ('LTV') ratio* (%)	LTV ratio covenant (%)*	Interest cover ratio (%)**	ICR ratio covenant (%)**	Forward looking ICR ratio (%)***	Forward looking ICR ratio covenant (%)***
103.7	16/04/2028	4.77	47.5	65	271	185	266	185
25.9	16/04/2023

*        Loan balance divided by property value as at 31 December 2013.  Note that the recent acquired properties in Portsmouth and Headingley are held outside of Canada Life's security

**       For the quarter preceding the Interest Payment Date ('IPD'), ((rental income received - void rates, void service charge and void insurance) / interest paid)

***     For the quarter preceding the IPD, ((rental income received - void rates, void service charge and void insurance) / interest paid)

As at 31 December 2013 the Company held the Portsmouth property valued at £7.2 million together with cash totalling £15.7 million outside of Canada Life's security.   This resulted in a loan to value ratio, net of cash, of 40.7%.  Following completion of the placing on 9 January 2014 and the acquisition of Headingley outside of Canada Life's security, the Company has cash of £15.3 million and a loan to value ratio, net of cash, of 38.6%.  

-ENDS-

For further information:

Schroder Property Investment Management Limited: Duncan Owen / Nick Montgomery	020 7658 6000
Northern Trust: David Sauvarin	01481 745529
FTI Consulting: Dido Laurimore / Nina Legge	020 7831 3113

 

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