Schroder Real Estate Invest H2 Earnings Call Highlights

Key Points

• Schroder Real Estate Invest said it remains positioned for earnings growth despite a slight annual NAV decline and uncertainty in the U.K. property market, supported by rising rents, lower vacancy, and a long-dated fixed debt structure.
• The trust’s vacancy rate fell below 10%, its lowest in three years, while more than 70 lease transactions and higher rent renewals boosted confidence in portfolio income and reversionary value.
• Management highlighted its debt profile as a major strength, with about £130 million fixed at roughly 2.5% for an average of 10 years, helping protect earnings from higher interest rates and reduce refinancing risk.

Schroder Real Estate Invest LON: SREI managers said the trust remains positioned for earnings growth despite a small decline in annual net asset value and continued uncertainty in the U.K. property market, pointing to rising rents, lower vacancy and a long-dated fixed debt profile as key supports.

Speaking during the trust’s annual results presentation, Nick Montgomery, Global Head of Real Estate at Schroders, said the company continued to benefit from “a high income return,” “strong reversion” and a “low fixed debt cost” at a time when interest rates are expected to stay higher for longer.

For the year to March, Montgomery said the underlying portfolio value declined by about 0.1%, while the annual NAV fell by about 1.1%. Including dividends paid of 3.6 pence over the financial year, the trust reported a positive NAV total return of just under 5%. Schroders also provided an unaudited update for the quarter to June, saying the underlying portfolio value rose slightly, though the like-for-like movement was down about 0.3% after allowing for capital expenditure, a small adjoining acquisition and related costs.

Dividend growth and income outlook

Montgomery highlighted a 4% increase in dividends paid over the year compared with the prior year. He said the trust’s quarterly dividend level has increased by almost 40% since a refinancing in 2019.

Management acknowledged that dividend cover had dipped below 100%, with Montgomery saying during the Q&A that the shortfall was about £600,000. He said several levers could help restore cover, led by capturing reversionary income in the portfolio. Bradley Biggins, Fund Manager for SREIT, said the trust’s cash passing rent was £31.2 million compared with an estimated rental value of £39.3 million, leaving £8.1 million of potential reversionary rent.

Biggins said fixed uplifts over the next 12 months amounted to £1.8 million, while five agreements for lease exchanged as of year-end represented £0.9 million of annualized rent. Montgomery said those agreements alone would be enough to “plug the gap” in dividend cover once completed.

The trust also pointed to expense control as a factor. Montgomery said property operating expenses were elevated at £4.3 million, partly due to vacancy and an approximately £800,000 charge from writing off prior-year arrears. Rent collection was about 98%, which he described as trending positively.

Vacancy falls to three-year low

A central focus during the year was reducing vacancies. Montgomery said the void rate had fallen below 10% after activity through the financial year and post-year-end agreements for lease, reaching its lowest level in three years compared with 12% at the start of the period.

Biggins said the trust completed more than 70 lease transactions during the year with an aggregate value of £6.3 million, ahead of the estimated rental value at the start of the financial year. Lease renewals and rent reviews were 24% ahead of previous passing levels, which he said supported confidence in the reversion within the portfolio.

The portfolio remains weighted toward multi-let industrial estates and retail warehouse assets, which Biggins said accounted for 66% of the trust. He cited Stanley Green, where rents on “green units” were 39% higher than older brown units, as evidence of a sustainability-related premium. He said the asset had delivered an unlevered total return of 14.6% per year over five years, compared with 7.9% for the MSCI All Industrial benchmark.

At Millshaw Park Industrial Estate near Leeds, Biggins said the trust acquired three adjoining units for £2 million after the year-end at a 6.4% net initial yield. He also said a refurbished 50,000-square-foot unit had reached an agreement for lease with Slazenger Padel Clubs on a 15-year lease with no breaks, at rent 86% above the previous passing level.

Debt profile remains a key support

Management repeatedly emphasized the trust’s debt structure. Montgomery said approximately £130 million of debt with Canada Life, representing about 75% of the debt book, is fixed at about 2.5% with an average remaining maturity of around 10 years.

He said that debt profile gave the trust “great visibility” on interest payments and allowed management to focus on rental income growth rather than refinancing risk. Montgomery added that if the fixed-rate debt were marked similarly to an interest rate swap, it would have a value of about £19 million, though that value is not reflected in NAV.

Asset sales and office portfolio

Biggins said the trust completed six sales since the beginning of the financial year, generating aggregate proceeds of £13.7 million. Four sales were above book value and two were below, with management saying the disposals were part of a strategy to reduce net loan-to-value and focus the portfolio on larger assets with value-add potential.

In the office portfolio, Montgomery said management was focused on both opportunities and risks. At Store Street in Bloomsbury, Biggins described the asset as the trust’s fourth largest, valued at £37.8 million with a 5.8% net initial yield. He said fixed uplifts could take the running yield to 6.4% by December 2028 based on the current valuation. Management has been pursuing a planning process to improve the potential liquidity and value of the site if sold to a developer.

Montgomery also cited City Tower Manchester as a key focus after it affected both valuation and expenses during the year. He said there had been progress after year-end, including a restructuring with the hotel operator and a new lease with NCP.

Picton proposal and board changes

The presentation also addressed the consortium proposal involving Picton. Montgomery said Schroders was limited in what it could say beyond the Rule 2.4 announcements, but said management had “real conviction” that the proposal would be earnings accretive for both Picton and SREIT shareholders.

In the Q&A, Montgomery said the assets to be acquired were complementary to SREIT’s portfolio and had not been “cherry-picked,” but split by loan pool. He said the assets SREIT would acquire include multi-let industrial, office and retail warehouse properties, with vacancy of about 16% to 17%. He said scale benefits, diversification, fund-level savings and a fee holiday on the Picton portion of NAV were expected to support earnings accretion.

The trust also announced board succession plans. Montgomery said Chair Alastair Hughes will step down at the AGM in September after approaching nine years on the board. Priscilla Davies, currently senior independent director, will become Chair. Schroders also announced that Richard Dakin will join as a non-executive director.

Montgomery said market conditions remain uncertain, citing geopolitical tensions and low transaction volumes, but added that underlying occupational markets remained “relatively healthy” across the portfolio. He said management expects a protracted recovery in U.K. real estate, supported by restricted development, rising construction costs and rental growth in structurally supported sectors.

About Schroder Real Estate Invest LON: SREI

The investment objective of Schroder Real Estate Investment Trust ('the Company') is to provide shareholders with an attractive level of income together with the potential for income and capital growth as a result of its investments in, and active management of, a diversified portfolio of UK commercial real estate.

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