Interim Management Statement

RNS Number : 1596W

Schroder Real Estate Inv Trst Ld

05 November 2014

 



For release 5 November 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 £260 million or 55.1 pence per share ('pps') as at 30 September 2014.  This reflects an increase of 8.7% per share compared with the NAV as at 30 June 2014, or a NAV total return, including the dividend of 0.62 pps, of 10%.  A breakdown of the NAV movement over the quarter is set out below:

	£m	pps	Comments
NAV as at 30 June 2014	238.9	50.7	Announced 21 July 2014.
Unrealised change in valuation of direct property portfolio	7.3	1.5	The like-for-like value of the underlying portfolio increased by 2.6% over the period.  This includes City Tower in Manchester, included within joint ventures below, but excludes the Olympic Office Centre in Wembley, included within realised gains on disposals below.
Unrealised gain on joint ventures	1.2	0.3	See above comment.
Capital expenditure during period	(1.0)	(0.2)	Principally relates to refurbishment works at Wembley, Salisbury and Chelmsford.
Realised gain on disposals	13.2	2.8	Includes Plots B and C that completed over the quarter as well as the Olympic Office Centre where unconditional contracts have been exchanged.
Post-tax net revenue	3.6	0.7	Reflects quarterly dividend cover of 125%, reducing to 107% excluding exceptional items.
Dividends paid	(2.9)	(0.6)	Reflects an annualised dividend of 2.48 pps.
Others	(0.3)	(0.1)	Adjustment for lease incentives.
NAV as at 30 September 2014	260.0	55.1

Strategy

The Company's growth strategy is delivering benefits to shareholders in terms of NAV growth, increased dividend cover, reduced leverage and improved economies of scale. Against the backdrop of a growing UK economy, lower inflation and low interest rates, the potential returns from the UK commercial property market remain attractive.       

A placing programme, established through the Company's prospectus dated 20 March 2014, and approved by shareholders in April 2014, enables the Company to issue up to a further 120 million new shares over the period to 19 March 2015 with such shares being issued at a premium to the prevailing NAV in order to cover the costs associated with the issue. 

The Company is therefore actively considering a pipeline of potential acquisitions to be funded from disposal proceeds and further equity issues under the placing programme.  As such, through its Investment Manager and brokers, the Company will continue to engage and consult with existing and prospective new shareholders in connection with achieving accretive and disciplined growth via the placing programme over the period to March 2015.

Dividend payment

The Company announces an interim dividend of 0.62 pps for the period 1 July 2014 to 30 September 2014.  The dividend payment will be made on 28 November 2014 to shareholders on the register as at 14 November 2014.  The ex-dividend date will be 13 November 2014.

Over the quarter to 30 September 2014 the dividend cover was 125%.  This includes a number of exceptional items resulting in underlying cover over the same period of 107%.

Market overview

The latest Investment Property Databank ('IPD') Monthly Index confirmed an average total return for the three months to 30 September 2014 of 4.7%, comprising an income return of 1.5% and capital growth of 3.2%.  The retail sector produced the weakest total return of 3.9% with the industrial and office sectors producing total returns of 5.6% and 5.4% respectively. 

Performance versus IPD Benchmark Index

The latest available data for the quarter to 30 September 2014 showed that the Company's property portfolio produced a total return of 7.4% compared with 4.4% 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 30 September 2014 the Company's direct property portfolio comprised 54 properties independently valued at £360.9 million, including the Olympic Office Centre in Wembley.  At the same date, the direct property portfolio produced a rent of £24 million per annum which, based on the independent valuation, reflected a net initial yield of 6.3%.  The portfolio's rental value is £27.5 million per annum, resulting in a reversionary yield of 7.2%.  The portfolio benefits from additional fixed rental uplifts of £1.5 million per annum due by September 2016.

The portfolio void rate was unchanged over the quarter at 10.7%, calculated as a percentage of portfolio rental value.  The average unexpired lease term, assuming all tenants vacate at the earliest opportunity, reduced slightly over the quarter from 7.5 to 7.25 years.  The tables below summarises the key portfolio information as at 30 September 2014:

Sector weightings	Weighting %
	SREIT	IPD Index*
Retail	29.9	40.4
Offices	41.4	30.7
Industrial	23.8	19.4
Other	4.9	9.5

* Latest available IPD Index data as at 30 September 2014 

Regional weightings	Weighting %
	SREIT	IPD Index*
Central London	0	15.8
South East excl. Central London	38.0	43.2
Rest of South	11.0	6.7
Midlands and Wales	25.1	19.1
North and Scotland	25.9	15.2

* Latest available IPD Index data as at 30 September 2014

Top ten properties		Value (£)	(%)
1	Manchester, City Tower	35,125,000	9.7
2	Brighton, Victory House	28,750,000	8.0
3	Leeds, Headingley, The Arndale Centre	17,950,000	5.0
4	Uxbridge, 106 Oxford Road	17,500,000	4.8
5	Brentford, Reynards Business Park	16,000,000	4.4
6	Wembley, Olympic  Office Centre	15,400,000	4.3
7	Salisbury, Churchill Way West	15,380,000	4.3
8	Basingstoke, Churchill Way	11,900,000	3.3
9	Norwich, Union Park	11,800,000	3.3
10	Luton, The Galaxy	11,700,000	3.2
	Total as at 30 September 2014	181,505,000	50.3

Top ten tenants		Rent p.a. (£)	% of portfolio
1	Wickes Building Supplies Limited	1,092,250	4.5
2	Norwich Union Life and Pensions Ltd	1,039,191	4.3
3	The Buckinghamshire New University	1,018,267	4.2
4	BUPA Insurance Services Limited	960,755	4.0
5	Mott MacDonald Ltd	790,000	3.3
6	Recticel SA	731,038	3.0
7	Lloyds TSB Bank PLC	710,000*	2.9
8	Sportsdirect.com Retail Limited	657,177	2.7
9	Booker Limited	570,000	2.3
10	Irwin Mitchell LLP	555,000	2.3
	Total as at 30 September 2014	8,123,678	33.5

*Lloyds rent reflects the income post expiry of rent free in Liverpool

Transactions

There has been significant transactional activity over the quarter that is summarised below:

Wembley, Olympic Office Centre:

During the period the Company sold two non-income producing sites adjoining the Olympic Office in Wembley, known as Plots B and C, for combined proceeds of £22.8 million.  This compared with the independent valuation as at 30 June 2014 of £13.8 million.  The disposals are the culmination of the successful asset management and disposal strategy that involved securing outline planning consent in September 2013 for 400,000 sq ft of residential and student accommodation.  

On 9 September the Company also exchanged unconditional contracts to sell the Olympic Office Centre to Network Stadium Housing Association Limited ('Network'), a tenant in the building, for £15.4 million.  This compared to the independent valuation as at 30 June 2014 of £10.75 million.  Completion is due on 19 December 2014 to coincide with expiry of Network's lease. 

The combined proceeds from these disposals total £38.2 million compared to the value as at 30 June 2014 of £24.6 million.  Since acquisition of the property in July 2004 the property has produced a total return of 19.5% per annum, compared with the IPD Index of 4.1% per annum over the same period.

Milton Keynes, Stacey Bushes

On 21 August 2014 the Company acquired Stacey Bushes Industrial Estate in Milton Keynes for £9.2 million. The property produces a rent of £755,726 per annum which results in a net initial yield of 7.8% per annum, increasing to approximately 8.9% on expiry of on-going rent free periods and approximately 10% assuming the property is fully let. 

The freehold property comprises a well located 213,536 sq ft multi-let industrial estate on the west side of Milton Keynes. The property has recently undergone an extensive refurbishment to provide modern accommodation with unit sizes ranging from 3,700 sq ft to 10,000 sq ft.  The property is let to 12 tenants on 18 leases with an average unexpired lease term, assuming all tenant breaks are exercised, of 4.5 years. 

Brentford, Reynards Trading Estate

In September 2013 the Company exchanged conditional contracts to sell Reynards Trading Estate in Brentford to Notting Hill Home Ownership ('NHHO') for £20 million, with completion subject to NHHO securing planning permission at their own cost.  The 173,132 sq ft property is currently a vacant multi-let industrial estate situated on a 5.9 acre site with a value of £16 million as at 30 September 2013. 

On 30 October 2014 NHHO secured resolution to grant detailed planning consent for 195 residential units subject to planning conditions, entering into a section 106 agreement and referral to the Greater London Authority ('GLA').  Heads of terms for the draft section 106 agreement have been agreed between NHHO and the London Borough of Hounslow.  The GLA approval is a standard process enabling them to confirm that their requirements relating to material issues such as affordable housing have been incorporated within the final application.

Following discussions with NHHO and the Company's planning and legal advisors, the detailed planning consent to be granted should comply with the conditions in the disposal contract with NHHO.  Assuming the section 106 agreement completes as planned and GLA approval is forthcoming, a planning permission should be issued which will be subject to a six week Judicial Review ('JR') period.  Assuming there is no challenge during the JR period the disposal to NHHO should complete around the calendar year end.  

Asset management

Liverpool, Church Street

During the quarter the Company completed a 10 year lease without tenant break to Lloyds Bank PLC ('Lloyds') at the retail property on Church Street in Liverpool.  Lloyds have taken a lease of the basement to first floors at £350,000 per annum with a six month rent free period.  The whole property was previously let to Lloyds on a lease expiring in December 2014 at £664,000 per annum.  Under the terms of the transaction the Company will refurbish the property at a cost of approximately £1 million and seek to re-let the second to seventh floors that are currently let at £73,000 per annum with a rental value of £152,000 per annum.  As a result of the transaction the value increased over the quarter from £4.4 million to £4.6 million.

Salisbury, Churchill Way West

During the quarter the Company completed the refurbishment works at its retail warehouse investment at Churchill Way West that resulted in completion of the letting to TK Maxx, trading as Homesense.  TK Maxx have taken a 15 year lease with a tenant break option at year 10, at a rent of £255,068 per annum or £17 per sq ft.  As a result of the transaction and increasing demand for good quality retail warehouse investments, the value increased over the quarter from £14.2 million to £15.38 million.    

Debt

The Company has a single loan in place with Canada Life totalling £129.6 million.  As at 30 September 2014 the loan was secured against 51 properties with a combined value of £294.19 million.  The loan has a weighted duration of 12.5 years with a fixed interest rate of 4.77%.  Details of the loan and compliance with the principal covenants 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	44.1	65	298	185	260	185
25.9	16/04/2023

*              Loan balance divided by property value as at 30 September 2014

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

In addition to the property portfolio secured against the Canada Life facility, the Company has unsecured properties with a combined value of £66.7 million and cash as at 30 September 2014 of £27.8 million, after adjusting for transaction costs.   This results in a loan to value ratio, net of cash, of 28.2%.   

-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 / Ellie Sweeney	020 3727 1000

 

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