Half-year Report

RNS Number : 1701G

Schroder Eur Real Est Inv Trust PLC

25 May 2017

 

25 May 2017

SCHRODER EUROPEAN REAL ESTATE INVESTMENT TRUST PLC

HALF YEAR REPORT AND ACCOUNTS

CLOSE TO FULL INVESTMENT AND

FURTHER PROGRESS ON DELIVERING TARGET DIVIDEND YIELD

Schroder European Real Estate Investment Trust plc ("SEREIT" or the "Company"), the company investing in European growth cities, hereby submits its Half Year Report for the period ended 31 March 2017 as required by the UK Listing Authority's Disclosure Guidance and Transparency Rule 4.2. 

The Half Year Report is also being published in hard copy format and an electronic copy of that document will shortly be available to download from the Company's website www.schroders.co.uk/its. Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/1701G_-2017-5-24.pdf

The Company has submitted a pdf of the hard copy format of its Half Year Report to the National Storage Mechanism and it will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

Financial Highlights for six months ending 31 March 2017:

·     Net Asset Value ("NAV") total return of 2.5% (30 September 2016: -4.6%);

·     NAV of €175.9 million, or 131.5 euro cents (111.7 pence) per share, an increase of 11.4% over the period including a gross equity raise of €16.7 million (FY16: €157.8 million / 130.2 cps);

·     EPRA earnings of €2.6 million (10 months to September 2016: €1.0 million), reflecting growth in rental income from acquisitions;

·     Total dividends declared relating to half year of 2.2cps (including 1.2cps to be paid by way of a second interim dividend in July 2017) representing a 29% increase on prior half year; Further progress on delivering target dividend yield stated at IPO of 5.5% (based on euro equivalent IPO issue price) once fully invested;

·     Profit for 6 months of €4.2 million (10 months to 30 September 2016: -€2.7 million), reflecting additional rental income from acquisitions, property acquisition costs  and valuation uplifts of portfolio;

·     Loan to Value ('LTV') of 22% based on gross asset value of the Company, with a weighted average interest rate of 1.19% and weighted average duration of 7.3 years.

Operational highlights for six months ending 31 March 2017:

·     Acquisition of an office building in Paris for €30 million with a net property income yield of 9.5%, taking the portfolio value to €182.7 million (FY16: €148.2 million);

·     Portfolio comprises eight retail and office properties with c. 100% occupancy, strong income profile and asset management upside;

·     100% of the portfolio is located in winning cities and regions expected to generate higher levels of economic growth;

·     Portfolio to benefit from structural trends of urbanisation, demographics, infrastructure improvements and economic recovery in Europe;

·     Portfolio valued at approximately 6.7% above purchase price.

Post period end, €26 million acquisition in Spain:

·     Completed acquisition of a 50% share in a JV with Schroder managed Immobilien Europa Direkt of a shopping centre in Seville, Spain for €26.2 million (excluding costs) providing a net property income yield of 6.2%;

·     Portfolio now comprises nine assets with a value of €208.9 million and 4.8 years average lease term; 

·     New loan drawn against Seville acquisition taking overall LTV to 26% at a weighted interest costs of 1.3% and a weighted duration of 7.3 years;

·     €30 million remaining investment capacity (including additional debt).

Sir Julian Berney Bt., Non-Executive Chairman of the Company, commented:

"This has been a period of good progress for the Company, against a background of political and economic uncertainty, and we are making further progress on delivering our target 5.5% dividend yield as we complete the investment programme, providing shareholders with sustainable long-term income and the potential for capital growth."

Tony Smedley, SEREIT Investment Manager, added:

"The Company is now almost fully invested in institutional quality, income-producing commercial real estate, in those cities and regions in western continental Europe that demonstrate above average growth prospects and long term structural themes such as urbanisation.

"We continue to focus on maximising investment performance and diversifying the portfolio through the acquisition of well-located assets that offer an attractive income profile and the potential for long term income and capital growth. This will be supported by a prudent debt strategy that enhances income returns from the portfolio without compromising the balance sheet. With an identified pipeline of properties and an increasingly favourable market backdrop, we look forward to the next stages of the Company's growth."

Enquiries:

Duncan Owen/Tony Smedley

Schroder Real Estate Investment Management Limited                    Tel: [phone]

Ria Vavakis

Schroder Investment Management Limited                                        Tel: [phone]

Dido Laurimore/Ellie Sweeney/Richard Gotla                                    Tel: [phone]

FTI Consulting

LEI number: 549300BHT1Z8NI4RLD52

Chairman's Statement

 

Overview

Following our launch just over a year ago, and subsequent equity placings during 2016, the Company is now close to being fully invested. The focus remains on delivering investment performance from the property portfolio and exploring further opportunities to grow the Company.

In 2017 we have added two assets to the portfolio: the Saint Cloud office building in Paris for €30.0 million in February and the Metromar Shopping Centre in Seville, Spain subsequent to the period end in May for €26.2 million, the latter being our first acquisition outside France and Germany. These investments grow the Company's net earnings and increase the dividend capacity.

The target cities in Europe are demonstrating positive levels of investor and occupier demand supporting continued performance, our investment strategy and growth ambitions. 

Results

The Company's net asset value ("NAV") at 31 March 2017, excluding non-controlling interests, was €175.9 million or 131.5 euro cents per share (£149.3 million or 111.7 pence per share). Including dividends the NAV total return over the period was 2.5%. 

Portfolio

The portfolio valuation has risen by 2.5% to €182.7 million during the period from 1 October 2016. This valuation increase includes the valuation uplift from the newly-acquired Saint Cloud, Paris asset against its purchase price. Following the acquisition in Seville post period end, the portfolio value increased to approximately €209 million.

The Company now owns nine institutional grade office and retail assets across winning cities and regions in France, Germany and Spain. These are beneficiaries of improving economic growth and the long term theme of urbanisation. This diversified portfolio provides both a stable income base as a result of its high occupancy rates and also the opportunity for long-term capital growth through active asset management.

Strategy

The key strategic objective is to continue growing the Company in a disciplined and accretive way that improves earnings, shareholder value and brings benefits such as improved liquidity and economies of scale. This was an objective set out at launch and, as long as the market opportunity remains attractive, is one to which the Board remains committed.

During the period, the Company raised €16.7 million of gross proceeds from an equity placing to fund further investments. The Company currently has authority to issue up to a further 10% of its share capital.

Further investments to support growth will be focused in those locations in Europe which are growing most quickly. These assets are likely to benefit from strengthening occupier demand to support investment performance. The seven locally based investment teams across Europe, and the in-house research at Schroders, offer a competitive advantage with the execution of this strategy.

Debt strategy

Including the new loan for the acquisition of the Metromar Shopping Centre in Seville, the Company has total third party debt of €60.4 million representing a prudent Loan to Value ("LTV") of 26%.

The Company is focused on maintaining a robust balance sheet and overall leverage is capped at 35% at the time of drawing debt. Debt is used with the objective of improving shareholder returns with the Company's average weighted interest rate on its debt facilities being 1.30% compared to the average net initial property yield on the portfolio of 6.1%. Given the positive yield spread it is likely the Company will draw further debt facilities and target overall gearing at around the capped level.

Dividend

The Company has declared a second interim dividend in respect of the year-ending 30 September 2017 of 1.2 euro cents per share payable on 7 July 2017 to shareholders on the register on 23 June 2017. This represents the third consecutive increase in dividend rates since the Company's IPO.

The latest declared dividend represents an annualised rate of 3.5% based on the euro equivalent of the issue price at admission. The Company is targeting an annualised euro dividend yield of 5.5% based on the euro equivalent share price as at admission and fully covered by contractual income receivable from the portfolio.

Outlook

The Company has executed the strategy outlined at IPO and has constructed a portfolio aligned to the investment objective. It provides shareholders with a regular and attractive level of income together with the potential for long-term income and capital growth.

Recent political developments and economic data suggest the backdrop in Western Europe is stable, which is expected to have a positive impact on the local real estate markets. Alongside this, occupier demand may also be further strengthened as the outcome of the Brexit negotiations becomes clearer. Some international businesses have already made announcements about relocating operations to Continental European cities in which the Company is already invested. Such winning cities are also likely to be more resilient in the event of a change in market conditions.

We will continue to implement the strategy and actively manage the portfolio in order to maximise investment performance. This will be important in supporting the growth of the Company.

Sir Julian Berney Bt.

Chairman

24 May 2017

Investment Manager's Report

Results

The Company's NAV as at 31 March 2017 stood at €175.9 million, or 131.5 euro cents (111.7 pence) per share, and achieved a NAV total return of 2.5% for the six months ended 31 March 2017.

The table below provides a breakdown of the movement in NAV during the reporting period as well as a corresponding reconciliation in the movement in the NAV cents per share:

Net Asset Value ("NAV") Movement	€ million	Cps	% change per cps
Brought forward as at 1 October 2016 1	157.8	130.2	-
Net equity raise impact	16.4	0.1	0.1
NAV post equity raise	174.2	130.3	-
Transaction costs of investments made during the period 2	(3.0)	(2.2)	(1.7)
Unrealised gain in valuation of the property portfolio	4.6	3.4	2.6
Post tax net revenue	2.6	1.9	1.5
Dividends paid	(2.5)	(1.9)	(1.5)
Carried forward as at 31 March 2017	175.9	131.5	1.0

Management reviews the performance of the Company principally on a proportionally consolidated basis. As a result, figures quoted in this table include the Company's share of joint ventures on a line-by-line basis and exclude non-controlling interests in the Company's subsidiaries.

¹NAV as at 30 September 2016 based on the number of shares pre-equity October raise of 121,234,686; all other numbers are based on the number of shares subsequent to the equity raise of 133,734,686 shares.

²Represents mainly transaction costs for the Saint Cloud purchase. There was no other capital expenditure on the portfolio during the period.

Market overview

The Eurozone economy is displaying a number of positive indicators. GDP is growing above trend; business confidence is strong; unemployment fell to 9.5% in March and core inflation is steady at 1%. The Investment Manager expects the Eurozone economy to grow by 1.5%-1.8% p.a. through 2017-2018. While higher energy prices will dampen consumer spending a little, the improvement in the world economy, and last year's depreciation of the euro against the dollar, should help exports and that, in turn, should support an increase in business investment. Germany, the Nordics and Spain are likely to lead while France and Italy will probably lag behind.

Office

Most European cities saw an increase in prime office rents last year. Sustained growth in Eurozone employment over the last three to four years has meant that a lot of the office space which was vacant in 2013 has now been reoccupied. The other supporting factor has been high residential prices which have encouraged developers to convert obsolete office space into apartments and discouraged them from building new offices. We think that the rise in office rents has a lot further to run, particularly in winning cities such as Hamburg, Paris and Stuttgart.

Retail

While the recovery in employment is boosting retail sales in continental Europe, a lot of the sales growth is online rather than through physical stores. The internet now accounts for around 10% of retail sales in France and Germany and, although the percentage is lower in southern Europe, it is increasing.  Accordingly, the Company's strategy is to focus on mid-sized supermarkets, convenience stores and retail warehouses selling goods which are relatively internet immune.

Industrial

Despite the rapid growth of online sales, industrial rental growth has been modest, partly because logistics operators work on thin margins and partly because of the supply of large distribution warehouses has increased. Smaller industrial estates which are benefiting from the growth in "last mile" deliveries and urban logistics in built-up areas appear better value. 

Investment markets

Strong competition between domestic and foreign investors caused further yield compression with prime office yields in many major cities now at 3.0-3.5%. While that might suggest that European real estate is now expensive by historic standards, the investment market is different from the last cycle in several key respects. First, prime yields are currently 2-3% above 10 year government bond yields, whereas in 2007 they were 0-1% below. Second, investors have not bought indiscriminately and whereas the gap between prime and secondary office yields narrowed to 0.3% in 2007-2008, it is currently around 1.25% (source: CBRE). 

Property portfolio

As at 31 March 2017 the Company owned eight properties independently valued at €182.7 million, reflecting a net initial yield of 6.1% against valuation.

Post reporting period end the Company completed the purchase of a €52.4 million shopping centre in Seville, Spain reflecting a net initial yield of 6.2%. The acquisition was made via a 50:50 joint venture with another Schroder-advised fund, Immobilien Europa Direkt (IED). Following completion, this purchase has increased the portfolio value to approximately €209 million meaning the Company is close to being fully invested.

The statistics all reflect a 50% ownership of Seville and a 70% ownership of the Biarritz and Rennes assets.

Lease expiry profile

The assets are fully-let generating €14.1 million p.a. contracted income. The average unexpired lease term, including Seville, is 4.8 years to first break and 7.1 years to expiry (5.1 years and 6.8 years excluding Seville).

The near-term lease expiries provide asset management opportunities to renegotiate leases, extend weighted average unexpired lease terms, improve income security and generate rental growth.

Top ten tenants

As at 31 March 2017 the ten largest tenants account for 81% of contracted rents. This falls to 68% following the completion of Seville.

Valuation

The 31 March 2017 valuation of €182.7 million reflects an increase of 6.7% compared to the combined purchase price of the eight asset portfolio. Almost 90% of the transaction costs have been recovered through valuation uplifts since acquisition.

The portfolio valuation, excluding transaction costs, has risen by 2.5% during the period from 1 October 2016.  This valuation increase is also reflecting the valuation uplift from the newly-acquired Saint Cloud, Paris asset against its purchase price.

Strategy and investment

The Company invests in European growth cities and targets institutional quality, income-producing commercial real estate in major continental European cities and regions. Consistent with this strategy, over the half year to 31 March 2017, the Group acquired an additional investment in Paris for a total purchase price, excluding costs, of approximately €30 million.

Post period end, the Group acquired a fifty per cent interest in a retail asset in Seville, Spain for €26.2 million bringing the total portfolio to €209 million. Further details of these two assets are provided below:

Saint Cloud, Paris, France ('Le Directoire')

With completion in February 2017, this asset was the Group's eighth investment and the second in Paris. The property was acquired for c.€30 million at a net initial yield of approximately 9.5%. The investment is located in Saint Cloud, a mixed use office and residential area that will benefit from a new train station on the Grand Paris extension. The investment is fully let at modest rents and is a good example of the strategy to invest in growth cities and micro locations where there are competing demands for different uses and that will benefit from infrastructure enhancements. The business plan is centred on a rolling refurbishment and establishing tenant relations to maintain the attractive yield and improve income security.             

Metromar, Seville, Spain ('Metromar')

Metromar is the Group's first investment outside of its core markets of France and Germany. The €52.4 million (100%) acquisition generates a 6.2% net yield and was made via a 50:50 joint venture with the Schroder-advised Immobilien Europa Direkt (IED). The 23,500 sqm shopping centre is let to 50 tenants, anchored by a Mercadona grocery supermarket and other major occupiers including Zara, Mango, Sfera, H&M, Pull & Bear, Stradivarius, Bershka and Cortefiel. The centre also has an enhanced leisure offering compared with peers including a 12 screen cinema and a number of restaurants. The centre trades well with an annual footfall of four million people of which 50% are classified as 'walk-in' and a dominant local catchment. The asset business plan is focused on redesigning the leisure offer and improving the energy, vibrancy and consumer appeal. There are a number of added value initiatives already in hand to improve value.      

Asset management activity

The initial portfolio provides a solid foundation of income to support the Company's income distribution objective. In addition, there are a range of asset management initiatives to be implemented as follows:

·      Lease extension in Le Directoire where an existing tenant will take an additional 550 sqm;

·      Creating new income sources such as a new antenna license (€15,000 p.a.) and letting vacant storage space (€30,000 p.a.);

·      Surrendering the lease to City BKK in Hamburg in return for a capital payment and agreeing new leases with sub-tenants; and

·      New letting in Metromar to a new children's leisure operator to grow revenue, increase footfall and provide an additional point of difference to strengthen the dominance of this scheme in its local catchment. 

Finance

The use of leverage is assessed on an asset-by-asset basis and secured against those properties that are most suitable for debt financing and where financing costs and terms are attractive.

As at 31 March 2017 the Company's total external third party bank debt was €48.7 million across three loan facilities. This represents a loan to value of 22% against the Company's gross asset value. The loans drawn are secured against the four German properties in Berlin, Frankfurt, Stuttgart and Hamburg and the two retail assets in Biarritz and Rennes.

The blended all-in interest rate as at 31 March 2017 was 1.19%, significantly below the portfolio yield of 6.1% p.a. The average unexpired loan term was 7.3 years.

Financing has been drawn against the Seville asset post period end. The loan has a seven year duration at an LTV of approximately 45% and all-in fixed rate of 1.76%. Following this, at portfolio level the blended all-in interest rate is 1.3% and the loan to value is 26%. The average unexpired loan term remains at 7.3 years.

The German and Spanish loans are fixed rate for the duration of the loan term. The French loan is based on a margin above 3 month Euribor and the Company has acquired an interest rate cap to limit future potential interest costs if Euribor were to increase. The strike rate on the cap is 1.25% p.a. The market value of the interest cap is positive at €0.3 million as at end of March 2017.

Outlook

A high quality, income-producing portfolio in growing European cities and regions has been established. The portfolio has both an attractive, long-term income stream and value add potential.

Investing the final €30 million of available capital will result in a fully invested portfolio of approximately €230 million. This should enable a 5.5% dividend yield on the IPO issue price to be fully covered by income.

The economic recovery in the target markets is robust and rents are growing at a faster rate than for many years. The investment opportunity therefore remains compelling and the team continues to identify attractive opportunities in growth markets. Maximising shareholder value remains the Company's priority. This will be done through actively managing the existing portfolio and continuing to find value in the market to support the Company's growth ambitions.

Tony Smedley

Head of Continental European Investment

Schroder Real Estate Investment Management Limited

24 May 2017

Principal risks and uncertainties

The principal risks and uncertainties with the Company's business fall into the following risk categories: strategic; investment management; custody; gearing and leverage; accounting, legal and regulatory; and service provider. A detailed explanation of the risks and uncertainties in each of these categories can be found on pages 28 and 29 of the Company's published Annual Report and Accounts for the year ended 30 September 2016. These risks and uncertainties have not materially changed during the six months ended 31 March 2017 and are not expected to change during the remaining six months of the financial year.

Going concern

Having assessed the principal risks and uncertainties, and the other matters discussed in connection with the viability statement as set out on page 29 of the published Annual Report and Accounts for the year ended 30 September 2016, the Directors consider it appropriate to adopt the going concern basis in preparing the accounts.

Related party transactions

There have been no transactions with related parties that have materially affected the financial position or the performance of the Company during the six months ended 31 March 2017.

Directors' Responsibilities Statement

The Directors confirm that to the best of their knowledge:

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

• the Interim Management Report includes a fair review of the information required by 4.2.7R and 4.2.8R of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.

Sir Julian Berney Bt.

Chairman

24 May 2017

Condensed Consolidated Statement of Comprehensive Income

		Six months to	Six months to	Year to
		31/03/2017	31/03/2016	30/09/2016
	Note	€000 (unaudited)	€000 (unaudited)	€000 (audited)
Rental income		7,416	-	4,891
Property operating expenses		(2,011)	-	(969)
Net rental and related income		5,405	-	3,922
Net profit/(loss) from fair value adjustment on investment property	3	1,588	(650)	(4,537)
Realised loss on foreign exchange		(6)	(314)	(101)
Net change in fair value of financial instruments through profit or loss		158	-	(60)
Expenses
Investment management fee		(962)	(540)	(1,402)
Valuers' and other professional fees		(418)	(125)	(425)
Administrators and accounting fee		(146)	(88)	(185)
Auditors' remuneration		(148)	(62)	(161)
Directors' fees		(64)	(67)	(129)
Other expenses		(155)	(27)	(122)
Total expenses		(1,893)	(909)	(2,424)
Operating profit/(loss) before net finance costs		5,252	(1,873)	(3,200)
Finance income		5	2	5
Finance costs		(471)	(2)	(157)
Net finance costs		(466)	-	(152)
Profit/(loss) before income tax		4,786	(1,873)	(3,352)
Income tax expense		(158)	(5)	(47)
Profit/(loss) for the period		4,628	(1,878)	(3,399)
Other comprehensive profit/(loss) items that may be subsequently reclassified to profit or loss Currency translation differences Total other comprehensive profit/(loss)		35 35	(247) (247)	(226) (226)
Total comprehensive income/(loss) for the period attributable to the equity holders		4,663	(2,125)	(3,625)
Total comprehensive profit/(loss) attributable to: Owners of the parent                                        Non-controlling interests		4,246 417 4,663	(2,125) - (2,125)	(2,742) (883) (3,625)
Basic and diluted profit/(loss) per share attributable to the equity holders during the period (expressed in € per share)	2	3.2c	(1.7c)	(2.9c)

All items in the above statement are derived from continuing operations. The accompanying notes 1 to 11 form an integral part of the condensed consolidated financial statements.

Condensed Consolidated Statement of Financial Position

		31/03/2017	30/09/2016	31/03/2016
Assets	Notes	€000	€000	€000
Non-current assets		(unaudited)	(audited)	(unaudited)
Investment property	3	199,881	165,365	65,650
Non-current assets		199,881	165,365	65,650
Trade and other receivables		3,542	2,377	7,351
Interest rate derivative contracts	4	359	200	-
Cash and cash equivalents		42,977	58,476	91,454
Current assets		46,878	61,053	98,805
Total assets		246,759	226,418	164,455
Equity
Share capital Share premium Retained earnings Other reserves	5	15,751 31,379 (1,817) 130,597	13,994 14,882 (3,486) 132,370	15,298 16,270 (2,125) 129,948
Issued capital and reserves attributable to owners		175,910	157,760	159,391
Non-controlling interest		7,221	6,804	-
Equity		183,131	164,564	159,391
Liabilities Non-current liabilities
Interest-bearing loans and borrowings	6	58,707	58,724	-
Deferred tax		141	30	-
Non-current liabilities		58,848	58,754	-
Current liabilities
Trade and other payables Current income tax liabilities		4,729 51	3,084 16	5,059 5
Current liabilities		4,780	3,100	5,064
Total liabilities		63,628	61,854	5,064
Total equity and liabilities		246,759	226,418	164,455
Net Asset Value per ordinary share	7	136.9c	135.7c	131.5c

The accompanying notes 1 to 11 form an integral part of the condensed consolidated financial statements.

Condensed Consolidated Statement of Changes in Equity

For the period from 1 October 2016 to 31 March 2017 (unaudited)
Group	Note	Share capital	Share premium	Retained earnings	Other reserves	Owners of the parent	Non-controlling interests	Total equity
		€000	€000	€000	€000	€000	€000	€000
Balance as at 30 September 2016		13,994	14,882	(3,486)	132,370	157,760	6,804	164,564
Total comprehensive income		-	-	4,211	35	4,246	417	4,663
Dividends paid New equity issuance Share premium reduction Unrealised foreign exchange Investment from non-controlling interest	8	- 1,390 - 367 -	- 15,288 - 1,209 -	(2,542) - - - -	- (232) - (1,576) -	(2,542) 16,446 - - -	- - - - -	(2,542) 16,446 - - -
Balance as at 31 March 2017		15,751	31,379	(1,817)	130,597	175,910	7,221	183,131

For the period from 1 October 2015 to 31 March 2016 (unaudited)
Group	Note	Share capital	Share premium	Retained earnings	Other reserves	Owners of the parent	Non-controlling interests	Total equity
		€000	€000	€000	€000	€000	€000	€000
Balance as at 30 September 2015		-	-	-	-	-	-	-
Loss for the period		-	-	(2,125)	-	(2,125)	-	(2,125)
Dividends paid New equity issuance Share premium reduction Unrealised foreign exchange Investment from non-controlling interest		- 16,576 - (1,278) -	- 149,874 (122,156) (11,448) -	- - - - -	- (4,934) 122,156 12,726 -	- 161,516 - - -	- - - - -	- 161,516 - - -
Balance as at 31 March 2016		15,298	16,270	(2,125)	129,948	159,391	-	159,391

The accompanying notes 1 to 11 form an integral part of the condensed consolidated financial statements.

Condensed Consolidated Statement of Cash Flows

			Six months to	Six months to	Year to
			31/03/2017	31/03/2016	30/09/2016
		Note	€000 (unaudited)	€'000 (unaudited)	€'000 (audited)
Operating activities
Profit/(loss) before tax for the year			4,786	(1,873)	(3,352)
Adjustments for:
Net valuation profit/(loss) on fair value adjustment in investment property		3	(1,588)	650	4,537
Realised foreign exchange losses			6	314	101
Finance income Finance expense Movement in fair value of derivative        interest rate contracts			(5) 471 (158)	- - -	(5) 157 60
Operating cash generated/(used) before changes in working capital			3,512	(909)	1,498
Increase in trade and other receivables			(1,614)	(742)	(2,376)
Increase in trade and other payables			2,288	1,379	2,728
Cash generated from/(used in) operations			4,186	(272)	1,850
Interest rate cap purchased			-	-	(260)
Finance costs paid			(424)	(2)	(903)
Interest received			5	2	5
Tax paid			(12)	-	-
Net cash generated/used in operating activities			3,755	(272)	692
Investing Activities
Acquisition of investment property			(33,185)	(62,736)	(169,647)
Payments in advance for investment property			-	(6,609)	-
Net cash used in investing activities			(33,185)	(69,345)	(169,647)
Financing Activities
New bank loan advance New loan advance - non-controlling interest Loan repayment - non-controlling interest			- - -	- - -	56,500 10,753 (7,689)
New equity - non controlling interest			-	-	7,687
Share issue net proceeds			16,446	161,632	161,477
Dividends paid		8	(2,542)	-	(970)
Net cash generated from financing activities			13,904	161,632	227,758
Net increase/(decrease) in cash and cash equivalents for the year			(15,526)	92,015	58,803
Opening cash and cash equivalents			58,476	-	-
Foreign exchange losses			27	(561)	(327)
Closing cash and cash equivalents			42,977	91,454	58,476

The accompanying notes 1 to 11 form an integral part of the condensed consolidated financial statements

Notes to the financial statements

1. Significant accounting policies

The Company is a closed-ended investment company incorporated in England and Wales. The condensed interim financial statements of the Company for the period ended 31 March 2017 comprise those of the Company and its subsidiaries (together referred to as the "Group").  The shares of the Company are listed on the London Stock Exchange (Primary listing) and the Johannesburg Stock Exchange (Secondary listing). The registered office of the Company is 31 Gresham Street, London, EC2V 7QA.

These condensed interim financial statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 30 September 2016 were approved by the Board of Directors on 13 December 2016 and were delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

These condensed interim financial statements have been reviewed and not audited.

Statement of compliance         

The condensed interim financial statements have been prepared in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom Financial Conduct Authority and 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 30 September 2016. The condensed interim 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 30 September 2016. The financial statements for the year ended 30 September 2016 have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board. The Group's annual financial statements refer to new Standards and Interpretations none of which had a material impact on the financial statements.

Basis of preparation

The financial statements are presented in euros rounded to the nearest thousand. They are prepared on a going concern basis, applying the historical cost convention except for the measurement of investment property and derivative financial instruments that have been measured at fair value.

The accounting policies have been consistently applied to the results, assets, liabilities and cash flow of the entities included in the consolidated financial statements and are consistent with those of the year end financial report.

Going concern

The Directors have examined significant areas of possible financial risk including cash and cash requirements and the debt covenants. The Directors 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.

Use of estimates and judgements         

The preparation of interim 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. These estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. 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.   

The most significant estimates made in preparing these financial statements relate to the carrying value of investment properties, including those within joint ventures, which are stated at fair value. The Group uses external professional valuers to determine the relevant amounts.

Segmental reporting   

The Directors are of the opinion that the Group is engaged in a single segment of business, being property investment, and in one geographical area, Continental Europe. The chief operating decision maker is considered to be the Board of Directors who are provided with consolidated IFRS information on a quarterly basis.

Financial risk factors

The Directors are of the opinion that there have been no significant changes to the financial risk profile of the Group since the end of the last annual financial reporting period for the year ended 30 September 2016 of which they are aware.

The main risks arising from the Group's financial instruments and properties are: market price risk, currency risk, credit risk, liquidity risk and interest rate risk. The Board regularly reviews and agrees policies for managing each of these risks.

2. Basic and Diluted Earnings per share

The basic and diluted earnings per share for the Group is based on the net profit for the period, excluding non-controlling interests and currency translation differences, of €4,211,000 and the weighted average number of ordinary shares in issue during the period of 131,811,609.

EPRA ¹ earnings reconciliation

		Six months to 31/03/2017	Six months to 31/03/2016	Year to 30/09/2016
		€000	€000	€000
Profit/(loss) attributable to equity holders		4,211	(1,878)	(3,584)
Adjustments to calculate EPRA Earnings exclude:
Net valuation gain/(loss) on investment property		(1,588)	650	4,537
Changes in fair value of financial instruments		(111)	-	60
Deferred tax		111	-	-
EPRA profit/(loss)		2,623	(1,228)	1,013
Weighted average number of ordinary shares	131,811,609		113,640,347	118,319,687
IFRS earnings/(loss) per share (cents per share)	3.2		(1.7)	(2.9)
EPRA earnings/(loss) per share (cents per share)	2.0		(1.1)	0.9

¹ European Public Real Estate Association ('EPRA') earnings per share reflects the underlying performance of the company calculated in accordance with the EPRA guidelines.

Headline ² Earnings reconciliation

		Six months to 31/03/2017	Six months to 31/03/2016	Year to 30/09/2016
		€000	€000	€000
Profit/(loss) after tax		4,663	(1,878)	(3,625)
Adjustments to calculate Headline Earnings exclude:
Net valuation loss on investment property		(1,588)	650	4,537
Adjustment for Minority Interests net revenue		(370)	-	(185)
Finance costs: interest rate cap		(158)	-	60
Headline earnings		2,547	(1,228)	787
Weighted average number of ordinary shares	131,811,609		113,640,347	118,319,687
Headline and diluted headline earnings per share (cents per share)	1.9		(1.1)	(0.7)

² Headline earnings per share reflect the underlying performance of the company calculated in accordance with the Johannesburg Stock Exchange listing requirements.

3. Investment property

	Leasehold	Freehold	Total
	€000	€000	€000
Fair value as at 31 March 2016	-	65,650	65,650
Additions	-	103,602	103,602
Net valuation gain/(loss) on investment property	-	(3,887)	(3,887)
Fair value as at 30 September 2016	-	165,365	165,365
Additions	-	32,928	32,928
Net valuation gain/( loss) on investment property	-	1,588	1,588
Fair value as at 31 March 2017	-	199,881	199,881

Fair value of investment properties, as determined by the valuer, totals €200,000,000 (30 September 2016: €165,500,000) with the valuation amount relating to a hundred per cent ownership share for all the assets in the portfolio.

None of this amount is attributable to trade or other receivables in connection with lease incentives. The fair value of investment properties disclosed above includes a tenant incentive adjustment of €119,000 (30 September 2016: €135,000).

The fair value of investment property has been determined by Knight Frank LLP, a firm of independent chartered surveyors, who are registered independent appraisers. The valuation has been undertaken in accordance with the RICS Valuation - Professional Standards January 2014 Global and UK Edition, issued by the Royal Institution of Chartered Surveyors (the "Red Book") including the International Valuation Standards.

The properties have been valued on the basis of "Fair Value" in accordance with the RICS Valuation - Professional Standards VPS4(1.5) Fair Value and VPGA1 Valuations for Inclusion in Financial Statements which adopt the definition of Fair Value used by the International Accounting Standards Board.

The valuation has been undertaken using appropriate valuation methodology and the valuer's professional judgement. The valuer's opinion of Fair Value was primarily derived using recent comparable market transactions on arm's length terms, where available, and appropriate valuation techniques (The Investment Method).

The properties have been valued individually and not as part of a portfolio.

All investment properties are categorised as Level 3 fair values as they use significant unobservable inputs. There have not been any transfers between levels during the period. Investment properties have been classed according to their real estate sector. Information on these significant unobservable inputs per class of investment property is disclosed below:

Quantitative information about fair value measurement using unobservable inputs (Level 3)

		Industrial	Retail (including retail warehouse)	Office	Other	Total
Fair value (€m)		-	€94.5m	€105.5m	-	€200m
Area ('000 sq m)		-	50.273	35.504	-	85.777
Net passing rent € psm per annum	Range Weighted average 2	-	94.73 - 145.32 108.54	131.03 - 345.10 241.50	-	94.73 - 345.10 178.68
Gross ERV psm per annum	Range Weighted average 2	-	96.45 - 157.80 112.66	126.12 - 413.10 267.84	-	96.45 - 413.10 194.51
Net initial yield 1	Range Weighted average 2	-	4.62 - 5.72 5.25	4.68 - 9.08 6.50	-	4.62 - 9.08 5.91
Equivalent yield	Range Weighted average 2	-	4.60 - 5.93 5.27	4.56 - 7.50 5.58	-	4.56 - 7.50 5.43
Notes: 1 Yields based on rents receivable after deduction of head rents and non-recoverables 2 Weighted by Market Value

Sensitivity of measurement to variations in the significant unobservable inputs

The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the Group's property portfolio, together with the impact of significant movements in these inputs on the fair value measurement, are shown below:

Unobservable input	Impact on fair value measurement of significant increase in input	Impact on fair value measurement of significant decrease in input
Passing rent	Increase	Decrease
Gross ERV	Increase	Decrease
Net initial yield	Decrease	Increase
Equivalent  yield	Decrease	Increase

There are interrelationships between the yields and rental values as they are partially determined by market rate conditions. The sensitivity of the valuation to changes in the most significant inputs per class of investment property is shown below:

Estimated movement in fair value of investment properties at 31 March 2017	Industrial €	Retail €	Office €	Other €	Total €
Increase in ERV by 5%	-	+€2,875,000	+€4,700,000	-	+€7,575,000
Decrease in ERV by 5%	-	-€3,000,000	-€4,700,000	-	-€7,700,000
Increase in  net initial yield by 0.25%	-	-€4,350,000	-€5,350,000	-	-€9,700,000
Decrease in  net initial yield by 0.25%	-	+€4,700,000	+€5,850,000	-	+€10,550,000

4. Derivative financial instruments

The group has an interest rate cap in place purchased for €260,000 from Credit Agricole Corporate and Investment Bank on 10 August 2016 in connection to a €26.0 million loan facility drawn from the same bank with a maturity date of July 2023. The cap interest rate is 1.25% with a floating rate option being Euribor 3 months. In line with IFRS 9 this derivative is reported in the financial statements at its fair value. As at 31 March 2017 the fair value of the interest rate cap was €359,000 reflecting an increase in the interest rate curve since the interest rate cap was purchased. Transaction costs incurred in obtaining the instrument are being amortised over the extended period of the above mentioned loan.

5. Issued capital and reserves

Share capital

The share capital of the Company is represented by 133,734,686 Ordinary Shares with a par value of 10.00 pence.

Issued and fully paid share capital

As at 1 October 2016 the Company had 121,234,686 ordinary shares in issue.

On 28 October 2016 a further 12,500,000 shares were allotted under the placing programme at a price of £1.20 per share. Issue costs in relation to this placing were €232,000.

As at the date of this Report, the Company has 133,734,686 ordinary shares in issue (no shares are held in Treasury). The total number of voting rights of the Company is 133,734,686.

6. Interest-bearing loans and borrowings

		Six months to 31/03/2017 €000	Year ended  30/09/2016  €000
Brought forward		58,724	-
Receipt of borrowings		-	67,523
Repayment of borrowings		-	(7,689)
Capitalisation of finance costs		(81)	(861)
Amortisation of finance costs		64	21
Carried forward		58,707	58,724

Bank Loan - Deutsche Pfandbriefbank AG

On 3 August 2016 the Group entered into two loan facilities totalling €30.50 million with Deutsche Pfandbriefbank AG.

Of the total amount drawn €14.0 million matures on 30 June 2023 and carries a fixed interest rate of 0.85% payable quarterly; the remaining €16.5 million matures on 30 June 2026 and carries a fixed interest rate of 1.31%.

The facility was subject to a 0.35% arrangement fee which is being amortised over the period of the loan.

The debt has an LTV covenant of 65% and the debt yield must be at least 8.0%

The lender has a charge over property owned by the Group with a value of €67,700,000. A pledge of all shares in the borrowing Group companies is in place.

Bank Loan - Credit Agricole Corporate and Investment Bank

The Group entered into a €26.0 million loan facility with Credit Agricole Corporate and Investment Bank on 29 July 2016.

The facility matures on 29 July 2023 and carries an interest rate of 1.35% plus Euribor 3 months per annum payable quarterly. The facility was subject to a 0.85% arrangement fee which is being amortised over the period of the loan.

The debt has an LTV covenant of 65% and the interest cover ratio should be above 200%.

The loan is collateralised by property assets owned by the Group with a carrying value of €57,800,000.

Business Partner Loan - Mercialys

On 28 June 2016 the Group entered into a €10.75 million loan facility with Mercialys, a 30% minority investor in the share capital of SCI Rennes Anglet, a 70% owned subsidiary of the Group. The loan matures on 28 June 2031 and carries an interest rate of 2.08% payable annually.  The interest can be capitalised if not paid. On 1 August 2016 €7.69 million was repaid leaving a loan balance outstanding as at 31 March 2017 of €3.06 million. 

7. NAV per ordinary share

The NAV per ordinary share is based on the net assets of €183,131,000 (30 September 2016: €164,564,000, 31 March 2016: €159,391,000) and 133,734,686 ordinary shares in issue at the Statement of Financial Position reporting date (30 September 2016: 121,234,686, 31 March 2016: 121,234,686).

8. Dividends paid

In respect of the six months ended 31 March 2017	Number of		Rate	31/03/2017
	ordinary shares		(cents)	€000
Second interim dividend for the year ended 30 September 2016, dividend paid 27 January 2017		133,734,686	0.9	1,205
First interim dividend for the year ended 30 September 2017,		133,734,686	1.0	1,337
dividend paid 17 March 2017
Total			1.9	2,542

In respect of the year ended 30 September 2016	Number of		Rate	30/09/2016
	ordinary shares		(cents)	€000
First interim dividend for the year ended 30 September 2016, dividend paid 7 September 2016		121,234,686	0.8	970
Total			0.8	970

9. Related party transactions

Schroder Real Estate Investment Management Limited is the Company's Investment Manager.       

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 EPRA NAV of the Company. The Investment Management Agreement can be terminated by either party on not less than twelve months written notice, such notice not to expire earlier than the third anniversary of admission, 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 €962,000 (six months ended 31 March 2016: €540,000, year ended 30 September 2016: €1,402,000). At the period end €480,000 was outstanding (six months ended 31 March 2016: €540,000, year ended 30 September 2016: €438,000). 

Directors are the only officers of the Company and there are no other key personnel. The Directors' remuneration for services to the group for the six months ended 31 March 2017 was €64,000 (six months ended 31 March 2016: €67,000, year ended 30 September 2016: €129,000) equivalent to £54,055.

10. Capital commitments

At 31 March 2017 the Group had no capital commitments (30 September 2016: £Nil).

11. Post balance sheet events

Acquisition of Investment Property

In May 2017 the Group exchanged and completed on a purchase of a fifty per cent share of a shopping centre in Seville, Spain.

The transaction was structured as a JV with another Schroder-advised Fund, Immobilien Europa Direkt, with the Group paying approximately €26.2 million for its fifty per cent share excluding costs.

This acquisition was part funded by a new loan facility secured against the asset. The Group's share of this debt is €11.68m representing a loan to value of approximately 45%. The respective loan term is 7 years and the interest rate is fixed at 1.76% per annum.

 

END

 

 

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