Schroder European Real Estate Investment Trust Plc (SERE) Earnings Call Transcript & Summary

Well, good morning, ladies and gentlemen, and thank you very much indeed for joining us for the European Real Estate Investment Trust results this morning. My name is James Lowe, I look after sales for the Schroder Investment Trust business. I'm very pleased to be joined this morning by 2 of my colleagues. We have Jeff O'Dwyer, Fund Manager of SEREIT; and also Rick Murphy, who is the Finance Manager. Just before we hear from the team, a couple of bits of housekeeping for myself. If you'd like to ask the team a question, please do so in the Q&A tab on your screen. I'll ask the guys at the end of the presentation. Also, a couple of downloads that you can do yourselves this morning. You can now have a look at a copy of the results. There should be a link you can click on. And also, you can download a copy of the presentation to follow along with the slides. But with that, that's all for me. I'll hand you over to Jeff to start the presentation. Jeff, over to you.

Great. Thanks, James, and good morning, everyone, and thanks for dialing in to listen to the interim results. Many of you, if not all of you will be aware that I am trying to price risk value and liquidity at the moment is pretty challenging, and we've seen that sort of increase over the last 6 months. obviously, discount rates are blowing out, trying to sort of value or take a view on sort of the macro risks particularly where sort of interest rates are moving are all challenges that we're facing. Notwithstanding that, the portfolio has performed exceptionally well over the period. And there's a couple of sort of areas that sort of testament to why we're seeing this resilience. Mainly, I think if you think about the strategy of how we set the vehicle up, really focusing on what we deem to be winning cities, and you think about the portfolio being primarily more heavily weighted towards cities such as Berlin, Hamburg, Stuttgart , Frankfurt and Paris. Obviously, we're diversified, and I think that's been really helpful as well. So not just being sector-specific but having that diversification, we've increased our allocation to the industrial side where we're standing at around 30%. We've reduced our office allocation to around 35%, and we have some select retail that is performing well. I'll go into a bit more detail later about some of the positives that go with each of the assets that we've invested in. I mean one of the big pluses and this is one of the real nuances that goes with investing in Europe relative to the U.K. is the indexation and the fact that the leases are linked to that. So all the leases have an element of annual indexation, some of them, particularly in Germany, which about 20% of the portfolio is subject to a hurdle. So once we achieve that hurdle, then you get the index, but we're starting to see some pretty strong growth coming through. And again, I'll talk a bit more detail on inflation later. Other sort of key points. Obviously, we've been able to achieve very strong rent collection. So since the pandemic, we've been at 100% occupancy across the portfolio is very strong at around sort of 96%. We have an unexpired lease term of around 5 years. We did a little deal over the period. We've been very disciplined in how we've been approaching the deployment of capital, and we were able to find and source an off-market logistics asset in the Netherlands. This is an asset that really strengthened not only the income profile but also the sustainability credentials that go across the fund. Just on that, I mean, we are slightly pivoting just in the way we're looking at deploying the capital. We've got about EUR 20-odd million of cash the overall portfolio being EUR 243 million, of which EUR 23 million is cash. We're going to take a slightly more conservative approach instead of sort of running out there and investing that capital. We're going to look at ways that we can improve the quality of the existing portfolio from a sustainability point of view. Again, I'll talk a bit more about some of the sort of findings that we're getting, not only on the ground through occupiers, but through lenders as to why we're looking to focus on that, and we believe that we can drive returns through investing in the portfolio rather than adding to the portfolio. So we're doing a full sustainability audit across each of the assets to take that view. Before I hand over to Rick, and I'll let take Rick's stand here, but I'll just touch on really by maintaining that cash we're strengthening the balance sheet. We know that we've got some headwinds coming up. We know, particularly, we've got some refinancing. We know where the cost of debt is moving. So we want to be in the strongest position possible for this company to deal with these headwinds and hence, retaining some capital is going to put us into that best position. And they will be that come sort of Q1 next year, we may be in a position to do another little investment, and we think markets are moving that way. But for now, we're going to retain that capital and ensure that the company is in the strongest position possible. So with that, I'll hand over to Rick to talk through the financial results.

Thanks, Jeff, and good morning, everybody. So turning to the financial highlights for the 6 months ended 31st of March 2023. I'm beginning first of all, with the cash position, as Jeff just said, we think that the cash position as at the financial period end of EUR 33 million puts the company into a strong position looking forward to the next 12 months, whether that's with regard to refinancing or upcoming in the second half of this year and going into 2024. Potentially, the opportunity for a small acquisition, maybe going into next year and in particular, with regard to sustainability led initiatives and capital expenditure to enhance value. The EUR 33 million on the balance sheet is after and post the EUR 12.2 million that was invested to acquire the industrial asset in Alkmaar, the Netherlands during the interim period. From a gearing perspective, modest LTV net of cash of 23%, 32% gross of cash, which is comfortably below the company's net LTV cap of 35%. With regard to refinancings, we have 3 refinancings coming up in 2023, and the largest of these was the Hamburg and Stuttgart loan facility. And it's pleasing to be able to say that this has already been refinanced in the interim period. And not only was it successfully refinanced, but the loan principal increased from EUR 14 million to EUR 18 million, and the margin on that loan was held at 85 basis points. Again, as Jeff touched upon very, very good rent collection across the portfolio, all rents received on all assets, excluding the Seville Shopping Center for which the company wrote down its equity investments 2 years ago. From a dividend perspective, EUR 3.7 per share has been declared over the period. That's EUR 1.85 per share for each of the December and March quarters giving an attractive dividend yield of just over 7% on the current share price. Again, with regard to income, in particular, in the current inflationary environment, we can see here that all company leases are inflation linked in some way. 80% of those being annual indexation and 20% linked to some form of a hurdle. And just finally on the highlights, increase in net earnings of 5% over the 6 months against the 30th of September 2020. Moving next to the NAV. Here, we can see the bridge of the NAV between the closing NAV at 30th of September 2022, which is EUR 188.2 million or EUR 140.8 per share and how we've got down to our closing NAV at 31st of March 2023 of EUR 177.1 million or EUR 132.4 per share. So all in all, in that bottom line, we can see a 6% fall in the NAV. And then just moving back to that top line of that 6% fall, we can see 5.2% relates to unrealized valuation losses in the 6-month period. So we can see in the comments on the right-hand side that there have been small gains on certain Dutch industrial assets over the 6 months, but these have been offset across the portfolio, in particular with regard to offices, Saint-Cloud ,Paris, Stuttgart and Hamburg as yields have moved out over the 6-month period. With regard to transaction costs, EUR 1.2 million was invested over the 6 months to acquire the Alkmaar asset in March. Capital expenditure in the direct portfolio, EUR 2.2 million was invested predominantly at the office in Saint-Cloud, Paris and industrial assets in Houten, the Netherlands. With regard to Paris Boulogne-Billancourt , no further development profit has been recognized in this period, and there still remains approximately EUR 1.3 million of pretax profits that come through. We're expecting in the second half of this calendar year. With regard to Seville and the JV investments, as we can see here, we fully wrote down the group's and company's exposure to that shopping center in Seville, Spain back in March 2021. And has been no reversal of that impairment in this 6-month period. EPRA earnings, IFRS earnings less capital items were EUR 3.8 million. Noncash capital items were EUR 0.7 million, in part deferred tax reversals of some of those valuation losses in Germany in particular and a dividend paid for investors of EUR 2.5 million during the financial period in January 2023. And then just moving to the summary income statement. Here, we've just set out the EPRA earnings before exceptional items for March 2022 versus March 2023. And we can see the growth of those EPRA earnings EUR 3.14 million was where we stood a year ago and EUR 3.77 million is where we stand now. So an EUR 0.63 million increase over the 6 months. And we can see here that whilst finance costs have increased on the like-for-like period, not least with 3-month Euribor moving to positive last summer. This has been offset by impartments income and some of those indexations and also small falls in the property cost base and their fund cost base over the period. So all in all, that's meant that dividend cover was 63% as at March 2022. It's 76% now. And then just a final point I wanted to draw out is that the company acquired its investments in Alkmaar, the Netherlands in mid-March. So that rental income of about EUR 700,000 hasn't started really running through to these numbers yet but that will be a boost of around 5%, 6% to dividend cover. So the current run rate of dividend cover going into the second half of the financial year will be more around the low 80s. And with that, I'll pass it back to Jeff to talk through the dividend.

Just on the dividend, we have, obviously, in the past, paying the EUR 1.85 per quarter, and that has been uncovered. And really the key part of that was until we reinvested the sale proceeds from Paris Boulogne-Billancourt . Obviously, today, there is a bit of a change that we haven't announced. We have declared the EUR 1.85 for this first quarter, but giving some direction going forward that we're going to be moving the dividend policy and rebasing the dividend back to a sustainable basis. So therefore, paying out 100%. The rationale for that, I mean, it was a heavily discussed point with the Board. I mean there was an option to continue doing an uncovered approach, which some of the U.K. peer group do. But we felt that it was probably the most prudent and responsible thing really to reassess, particularly in light of some of the headwinds that we're facing, whether those be the macro headwinds, some of the refinancing that we have over the next 18 months, general market sentiment. And also at this point that I alluded to before, where we are looking at the sustainability side and how can we improve the quality of the assets. And I think that's a key area where we're seeing particularly banks being much more discerning on the type of real estate that they're investing in and also the counterparty that they are willing to lend to. So very clear that particularly for offices that actually sustainability is becoming much more important, therefore, that need to invest and move the needle and the profile of those assets and the certification is something that we need to do and hence, the rationale for retaining some of the capital and moving the dividend back to 100% approach and therefore, that EUR 1.48 is the direction that we're giving. And then growing that as we see indexation coming forward as we can do some asset management and also potentially through some further acquisitions down the line and also that investment into the portfolio through those sustainability and creating value that way. So just on the refinancings. I mean, Rick touched on what actually now in hindsight is a fantastic refinancing that we did in Germany around the Hamburg and Stuttgart office building, being able to secure the margin there at 85 basis points. That's the main reason why we elected to increase the loan principal from EUR 14 million to EUR 18 million. We've used that additional EUR 4 million to now repay remilling, so that's the top margin there. It was a small or is a small asset, small loan banks, really, their preference is to be lending on sort of [ 10 million ] ticket sizes. So this is -- there was one that was a bit of an anomaly where you're really dealing with regional banks and the cost of that was going to increase. So we felt actually it was more appropriate to use the cheaper financing out of Hamburg and Stuttgart to repay that. So overall LTV falls a little bit. So at the moment, it's [ 32% ] there, but subsequent to the payment falls to about [ 31% ] . And then if you reflect the cash that we've got, so net of cash, we're at sort of low 20s, which is a really strong position to be going forward and particularly setting us up to deal with these refinancing risks. Just to give you a bit of color on some of those discussions that we're having. Obviously, the loan, it's a group of logistics assets in the Netherlands with HSBC that expires in September. We're in the market talking to a couple of banks, pretty comfortable that we'll be able to refinance that and potentially add margins in line, if not slightly lower than the margins that we have in place there. We're going to add the outcomes of the recent sort of long income deal that we did. So that will improve the loan pool across that. And depending on what those final terms are, we'll probably take that debt and help secure the position there. The next loan that we have is sort of early next year, again, a logistics asset, again, a sector where banks are very keen to lend on so I don't have any concerns about refinancing. That's the asset in Rennes. And then thirdly, we have the Saint-Cloud, which is an office building, EUR 17 million to refinance at the end of next year. That probably sits in a sector that banks are increasingly being a lot more discerning on how they're looking at offices. So that's probably one area where we're trying to sort of bring forward discussions now to secure and manage that expiry. And it may well be that we use some of the capital that we have to repay some of that loan depending on where we go and some of the discussions that we have with lenders. And then outside of that, it's really only one loan, which is really in 2026 against the 2 very strong retail assets that we have in Germany. So again, feel very relaxed about the position that we have and the type of profile for that retail and being able to refinance that. So that's the loan book. Just to be clear, we set up our debt as nonrecourse. So again, Seville, just to touch on that, that is ring-fenced. There is no course back to the PLC. We're working with the lender. Obviously, that loan expires middle of next year, but trying to sort of move that asset on and working and everything we do is with the bank in conjunction, but we'll start probably in a marketing process on that over the next few months. There's a couple of assets that are unlevered, in particular, Apeldoorn, which is the data center mixed-use asset that we have. We have sort of intentions to invest in that, and we'd probably look to leverage that asset to pay for any refurbishment that we do there. And then a couple of the small logistics asset, particularly in North and Apeldoorn are unlevered as well. But with Apeldoorn , we'll probably add that to the loan pool that I touched on earlier. So just to sort of give you a bit of flavor around the increasing cost of debt at the moment, we have an average cost of debt of around 2.7 -- sorry, 2.5%. If we take out Seville and we repay Rumilly, obviously, that average cost goes up to about 2.7%. And we're trying to give you a bit of flavor here on what impact is that having on sort of interest expense and then how we offset offsetting that and where can we cover that and you can sort of see the look through here as we move through the refinancings. So Q4 '23, we've done the Dutch rig year, and we've assumed here that we do that at an all-in cost of, say, early 5s. We have an increase in quarterly interest of about EUR 100,000. Roll forward another months, we've done the Dutch rig gear. We've done the REN refinancing. Average cost of debt go to about 3.4%. So therefore, quarterly interest cost increases by about EUR 150,000. And then finally, if you roll forward to the end of next year, and we've refinanced Saint-Cloud what is the impact on, again, on quarter. So you can see here that actual annual increase or costs on interest expense is about EUR 1 million a year. So we need indexation of around 6% to sort of be covering that, and we're starting to see that if not in some countries, even higher indexation on the inflation side that's helping sort of pay for that or cover that interest expense. We've given a bit of sensitivity around values. I think there's still a little bit more nervousness still to come out, particularly as rates will potentially increase particularly on the office side where we may see a bit more deterioration in asset values. But giving you a bit of a doomsday case here, the value across the whole portfolio with the full 25% well what impact does that have on our LTV, it's still within reasonable limits. We're not breaching any covenants at that, and we're still pretty comfortable. I think we're much more comfortable to be sitting here today at the leverage that we're coming off, bearing in mind the headwinds rather than, say, coming off the LTV of sort of 50% plus, I would be a pretty nervous manager, if I was in that position. So thankfully, we're coming off a very strong balance sheet. So inflation I talked about earlier. And you can see here that we have had some pretty, I guess, heavy numbers and all our tenants have been paying that index that's been coming through, and it's pretty disparate across the different countries with France being probably the lowest levels and the Netherlands being the highest ECB similar to the U.K. and most central banks really working to try and reduce inflation. This is a consensus view. We -- within Schroders, we have a probably slightly more bearish view on where inflation and controlling inflation, we think it's going to take probably a bit longer and will certainly be beyond 2024, where any levels of sort of ECB targets being met and that's probably going to be pushed out more to 25% and inflation here for certainly probably somewhere between 2% and 3% for a little bit longer. But obviously, having a natural hedge and the indexation clauses that we have, that's a real differentiator that you have for Europe versus sort of U.K. investing. So we have an element of cover here and a hedge that goes with the style and nature of leases. Just on the strategy, we're not changing in terms of the diversification story, having that sort of strong hospitality mindset having entrepreneurial teams on the ground, that local expertise, that's where we see how you're going to control and create value going forward. It's not going to be through financial engineering. It's about really sweating the assets and more traditional asset management and really need specialists to be doing that. Equally, through the ESG side, we're doing the full order across the portfolio. We are, as a house, have expertise across a broad range of sustainability. It's an area that Schroders is pushing across all of their products. The moment the portfolio has a gross rating of 4. We've got aspirations to get to 5 and some of the items that we've identified in terms of how we can move the needle from a sustainability point of view, we believe that we can get to that 5-star rating. Obviously, the change we've done the little investment in the Netherlands that I talked on, but we are going to retain a bit of capital, not only to look at what we need to be investing in the portfolio to improve that sustainability, but also maybe potentially doing another transaction sort of Q1 of next year. But until we've actually done -- gone through the audits, we will reserve what -- the intention of what we do in terms of a new transaction. I think just on the sustainability side, what we are finding is not just occupiers, particularly at the sort of the larger corporate side that are increasingly looking at the nature of the buildings that they're occupying and making sort of their post-COVID occupational decisions, the style and the nature of the building is becoming much, much more key and how sustainable that is. So the better rated buildings are certainly seeing stronger rental growth and therefore, much more demand and much sort of lower vacancy rates. And on the flip side, we're seeing sort of banks also a willingness to lend on that type of real estate, particularly on the office side and being much more discerning on that type of real estate. And also the counterparty that is taking that debt, they want to know that they can manage that risk and they can manage the sustainability risk. We're a proven manager of that. We've just done that in Paris with Boulogne-Billancourt very successfully. That allowed us to create that profit and return those special dividends that we did to shareholders last year. So again, having that proof in that on-the-ground expertise around sustainability management, moving what is a Grade C building to a Grade A and rated building. That's one of our expertise and de-risking asset and creating value is what we're looking to do. So just on the portfolio. I won't go into too much detail, just conscious of time. But again, being diversified, we've reduced our allocation to offices to around 35%, increased our industrial allocation to around 30% and the retail exposure, really at around sort of 17%, and we have that alternative on the data center and the car showroom at around 10% and that sort of cash position, which is around 10% as well. So really well balanced I think going forward, that all has helped us with the returns that I touched on earlier and set us up, particularly relative to sort of other specialists. And I know that we've never been a house that has gone out and bought the best asset on the best rate or the primest asset. We've always been very considered in identifying submarkets that are supply constrained that would benefit from sort of rental growth, where there's competing demands for users and above all where there's transport connection changes, and that's where we're starting to see some positives there and that affordability, accessibility and affordability that goes with assets we're starting to see and that's why the valuation resilience is remaining. Overall, sort of net yield is around 6.2%, again, so not buying prime real estate. We're never chasing assets at sub 3%. That's probably seen the biggest deterioration, if you send sort of 100 basis point changes in yields coming off of 3%, you can understand why you sort of seem big -- sort of negative total returns around that rather than with us where we're seeing sort of 50 basis points moving from, say, 5% or high 5s to early 6s, that's sort of less of an impact on total return. But again, being diversified, a bit of vacancy, that vacancy is mainly primarily focused on the Saint-Cloud office exposure, working very hard about trying to derisk that. It will be an asset will continue to be bumpy just in the nature of that and the location of that. But outside of that, the rest of the portfolio is pretty well 100% occupied with an average unexpired lease term of about 5 years. So I feel really comfortable with the diversification that we have. Obviously, many of you have probably seen this slide before. I'm not going to go through each asset, but again, mainly just to talk about the office and the retail, I mean, office is still getting a very, I guess, heavy sort of view, particularly what's happening in the U.S. and a lot of investors are trying to read through what's happening there, which I think is quite incorrect to take that direct read through to what we have in Europe. We've got, in Germany, we've got 2 office assets, both in very accessible locations and in areas where supply is really constrained. And Stuttgart is the best example. It's in a market where vacancy rates are at the lowest level in the whole of Europe, so at about 1.5%. There's just no choice for occupiers. This is a building that is a Grade C, Grade D office building, but we're off rents that are less than half of where prime rents are. We have the ability to -- just like we did in Paris with Boulogne-Billancourt, the ability to do to invest in this asset, move the needle in terms of rents and help pay for that sustainability investment and turn this into a grade A building should the tenant when the tenant is the government tenant, should they require that. Equally, if they don't want to be in a better quality billing, we're happy to sit with them, regear that lease. Do some minor sort of sustainability works in terms of the moment we're looking through some LED improvement and things like that. But we've got flexibility, and that's the nature of being in a submarket where there's no availability and rents are affordable, you can actually get a lot more to play with equally in Hamburg. Same example here. We're off rents that are nearly 1/3 of where prime rents are. We're in a submarket that competes from multiple users. So it's a very strong residential area as well. It's a fully occupied building. So again, multi-tenanted. We have a number of occupiers in here that we'd like more space. So I feel very relaxed it's a Grade B building, but very relaxed about being able to maintain full occupancy for this. So that's the type of offices that we like to own. The Saint-Cloud in Paris slightly different it's going to be asset that will continue to be a little bit more bumpy, mainly because it is an older style building, and it's part of a condominium. We don't have 100% ownership. So we need to work with the other owners in order to implement those sustainability initiatives. The big rationale here of why we bought this building was the main train station, why train station was going to come outside the building in 2029. So until that happens, we probably won't see the reversion growth that goes with that. So hence, that sort of bumpy comment, but it is off rents that are extremely low at around sort of EUR 200 a meter, relative to where prime rents in the submarket at EUR 450 and prime rents in Paris at around EUR 950. So it was a back-office location, a really good story that goes with that. And on the retail side, it's really only 2 retail assets that we have, Berlin, sitting on 4 hectares of land, lease to a DIY specialist in Hornbach. Berlin being the capital being massively undersupplied in terms of residential. There's a real angle here to create a higher and better use of a multi and high-density mixed-use sort of concept here. That will probably take a longer term given Hornbach will probably exercise their options here. So we're again happy to take the income is valued today of around a 5.5% net initial yield. And with Hornbach, we've got 3, 5-year options, they'll probably stay there for that duration. But it's sort of a land banking play particularly once you get bank in position, I think the value of this line will be substantially more. So we've really relaxed about taking that income. And then equally in Frankfurt, having a legal grocery, again, the type of retail that we like working with the retail about expanding their footprint and regearing that lease. It's in a very strong urban location and really that particular subsector of retail, we see stronger legs in. And on the logistics side, again, in very sensible locations, buildings that are fully leased and off rents that are affordable, and we certainly believe we'll see stronger rental growth going forward. So that's probably nothing in terms of detail on some of the assets. A little bit on where we see how we can create sort of value, obviously, talked about Berlin longer term. I talked about sort of some of the vacancy in Saint-Cloud about derisking that and creating the opportunity there to achieve about EUR 450,000 in annual income if we were to derisk that. Metromar, we're sort of working on really trying to stabilize that for sale. Frankfurt in terms of expanding the lead and creating a little bit more value and income through there. And then really medium term, it's some sustainability angles around Stuttgart and also in Apeldoorn, it's an asset leased to KPN, so the leading Dutch telecommunications company. They have a data center here on an office portion. They're still trying to work out what they're post-COVID sort of desires are. It's a subregional sort of location. We're trying to entice them into turning this into a hub location. So it's not just a data center, but we turn it into a call center office building in a high security part of their business as well. We're still 3.5 years left on that lease. That particular market from a data center point of view is changing very quickly. There's no more licenses being granted in the Netherlands. Power is a concern. So if you have an existing data center, it's a real plus, and that's something we're increasingly getting more advice around to really understand what we have there. So that's sort of angles of how we can improve the quality of the portfolio, particularly around some of the sustainability angles and where we can allocate some of the capital that we have. Just on markets, apologies, there's a lot on this, and I can't necessarily read all of that from where I'm sitting, but I won't go through everything in detail. But I think the sense here that the really rates we'll continue to potentially sort of increase here as central banks, particularly the ECB users monetary policy to try and curtail inflation. We think there will be a couple more -- potentially 2 more increases in interest cost. Notwithstanding that, office markets are remaining pretty positive. And I think one of the key reasons here is that we didn't see banks lending on speculative development. We didn't see occupiers taking too much space. So things are much more balanced. I think in terms of -- my other comment about this slide is more on the investment side. We definitely have seen volumes really fall to less than 1/4 of what we have historically seen. Investors are pausing at the moment. You can understand, I think you asked my opening comment about trying to price risk trying to sort of price sort of macro concerns, pricing liquidity at the moment is very challenging, and hence, a lot of investors are staying on the sideline and therefore, we're not seeing the volumes and transaction evidence and therefore, value is having a very difficult time in terms of trying to get that evidence. So we think that will probably continue certainly for the rest of the year, but we may see a bit more opportunity. I won't call it distress, but I think there will be a number of owners out there that when they try and sort of refinance, as I've touched on earlier, then I think banks will be a bit more and certainly a lot more discerning on the type of borrower that they're lending to. They want to be lending to specialists. I think there will be a couple of parties that will be struggling to get the same financing terms and therefore, maybe looking to sell assets or may have to free up equity for other requirements. So we think there will be better buying opportunities over the next 6 to 9 months. Just to sort of give you a read through, and I know many of you look at the U.S. markets as well and certainly reading from an office point of view, it's pretty dire, it's very different. And I think a couple of comments I'll make here. One of the reasons it's very different is that leading into the pandemic has a massive oversupply of offices in the U.S. There was also -- you think about space per capita, probably double what we have here in Europe. So there was that sort of overhang where the U.S. needed to deal with sort of moving away from sort of big traditional offices and more sort of open plan and hence, sort of higher density. You've got a situation where, I guess, a lot of sort of U.S. commute using cars and transport rather than public transport and typically live outside of cities as well and have a little bit more space, whereas in Europe, a lot of people live in the city center in urban locations public transport is a lot better. So they're back, utilizing the office in a much, much higher way than relative to the U.S. and hence, why we're starting to see and less work from home and certainly on the continent people back in the offices. And I guess the balance and I touched on earlier, where we didn't see that disequilibrium where we saw an overbuild or we saw occupiers taking too much space and that's why sort of vacancy across Europe has remained much more in check. And in particular, if you were to draw down, and I don't have a slide on this, I think I have it in the appendix actually where if you look at sort of Grade A offices and the type of office that really occupiers want the availability of that sort of space is probably less than 1/3 of what that vacancy is. So again, a very, very tight availability of office space from an A grade. And that sort of ties in with the strategy around that sustainability comment about improving the underlying certification. So in summary, look, we think the European rig is a very compelling investment case, particularly gives you a diversifier away here from the U.K., not only in terms of economies that you're investing in but certainly, the cities that you're taking exposure to. The underlying indexation is a real key positive here. It is a natural hedge that we're providing. We've got disciplined and specialist teams on the ground. I think that's a really key part. Again, going forward, looking about real estate creating value, it's going to be through active asset management that you're going to drive that and having a specialist team that can deliver that, being in and having our strongest teams in the Netherlands, Germany and France, sits well with where we're allocated. Obviously, we're in the strongest growth area. So again, a key part of the story was investing in those areas that would grow faster from a GDP or population or an employment perspective. We haven't deviated away from that. So again, a really strong, and we see stronger growth as we start to see GDP improve and we come out of the recessionary concerns. We'll see stronger growth in those cities that we have allocated to. The sustainability side again, improving the quality is not only going to improve the liquidity to occupiers, but the liquidity to investors and also the ability to get better financing terms as well. So we see that as a key part of being able to invest in the portfolio going forward. So I think overall, we're well positioned to deal with the headwinds that we have, having a strong balance sheet coming into these headwinds. I'd rather be in this position with a low LTV and having some cash and to be able to have that flexibility rather than being at a higher and managing a higher levered vehicle, I feel much more comfortable on the Board and the direction that we're giving investors that we're being able to set this company up to deal with those headwinds. Yes, we've taken a bit of a haircut on dividend, but the quality of the portfolio is going to improve and being able to ensure that the company gets through what we still see in terms of those headwinds. That's the main priority. And look, come once we do these refinancings come sort of Q1, Q2 next year, there will be the ability to look at new acquisitions and tying in with that is sort of a better buying opportunity as well. So here's the opportunity. We're trying at a 30% discount. We do think that's compelling. Based on sort of current dividend even if you rebase that back to the 80% on today's share price, you're about 6% dividend yield fully covered. And again, that sort of headroom and strong balance sheet that we have, we think that's a very compelling case. So I'll stop there. I'm sure there's questions that are coming in, and happy to answer. So over to you, James. Thank you.

Thanks, Jeff. There are indeed lots of questions. And if you do have a question as we go through this Q&A, please do send it in. I will ask the team. Jeff, just sort of circling back to one of the comments you made in your concluding remarks there around some of the differences that we see in the European real estate market that of the diversified U.K. REITs. One of the points you made at length was around inflation and the inflation linkage within the portfolio indexation of the leases. One of the first questions we have here is around that inflation linkage and whether there's caps involved. I know that you get that on some of the longer-term income products. Is that the case?

In all the portfolio, there's no caps other than the recent Alkmaar deal. So it's the first time actually we've come across a cap and a lot of the occupiers are starting to think through as part of their leasing renegotiations, they're saying, okay, we'll we want to cap this. They don't want to be dealing with the 14.5% that happened in the Netherlands for those leases that were coming up for an index in January of this year. So I mean, it's going to be market-led and also depending on what, I guess, rent you're starting off as well as all part of the overall negotiation story. But the big -- and you're right, the big differentiator, and it is a hedge relative to what you're facing here in the U.K. is that our index -- our assets are either annual index or in the case of Germany, you're waiting for that hurdle. So we are getting that growth going forward. you get to capture, obviously, market rental growth at the end of the lease. The question is, well, is your ERV growing at the same level of indexation. I think for some sectors it is, and for some sectors, it's not. And I think certainly on the logistics side, I would say that we are seeing sort of rental growth that's at least in line with indexation. So yes, really positive. All our tenants have been paying the indexes. We haven't had any concerns of nonpayment and hence, that 100% rent collection that I touched on earlier.

And that's a great segue way into the next question just came through, which was around tenant risk. So you just made the comment there around the ability of occupiers be able to pay the inflation uplift within their leases. Are there any other risks around tenants that you're seeing at the moment other than the fact that there's not a risk that they won't be able to pay the inflation uplift.

Yes. In the appendix, actually, we do give a bit more detail around sort of diversification and the type of industries that we have allocations to. I think probably the biggest concern is really on the, I guess, smaller moms and dads retail side, and we've obviously written the Seville Shopping Center to 0. So we -- it doesn't impact us. If you think about the retail that we have lead all Hornbach to very, very strong companies, we've got no concerns around that. You think about our biggest rent allocation is to KPN, again, a massive public company market cap of EUR 15 billion or something. So got 0 concerns around them paying their rent. You look through some of the office. We've got the government in Stuttgart. We have a good cross-section of SMEs in Saint-Cloud. Also in Hamburg as well. So that cross-section, you can see here on this slide, the different sectors that we have, and again, some of these sectors are benefiting from some of the headwinds that we have or the markets are facing. So I think we're pretty well set up and don't have any concerns around rents being -- or our tenants being able to pay the rents that we're charging.

And sort of moving then slightly on to another good question that's come through, we've just obviously discussed the sustainability of rents there being relatively strong in our view in the portfolio. Moving on to the point of sustainability, which you actually also talked about, we've had a question that's just come through just where one of our listeners want to understand how the regulatory landscape in EU differs that in the U.K. just for listeners benefit in the U.K., there is a requirement coming in that commercial buildings get to an EPC level of C and above by 2027. Is that something you're seeing in EU regulation also?

Well, actually, the U.K. have copied the Dutch. I mean the Dutch were very, very early, sort of provides if that's the right word, but very, very early into identifying that actually minimum requirements. So they said actually your office building needed to be a C by 2023. And so today, we don't have any offices in the Netherlands, but I mean the one asset that is part offices the Apeldoorn on asset, which is AC. I mean, Germany is starting to deal and move their focus on -- They want a quality EPC ratings and they're looking at a different system. But again, it is increasingly becoming a key point like the U.K. here, and we are conscious that occupiers are requiring this as well. So as a responsible investor, and we want to be giving the best buildings and creating and obviously, reducing our footprint as well. And we have aspirations within traders in terms of what we signed up to in terms of net zero as well. So that's all part of the order that we're doing. And we're not just going to invest in these buildings just for the sake of, but we have to link it to moving rents and also regearing leases. But certainly, there is change occurring across the different countries, but the U.K. has probably followed where the Netherlands was.

That's really useful context. There's actually been a number of questions on sustainability come through whilst we've been discussing that. So I'm going to stay on sustainability from a minute. I will go on to other questions, I promise. But there's just a question here that's just building on the conversation we're already having Jeff here on sustainability around -- you're obviously going to do these audits on each building. This is maybe too early to say, but can you say anything about whether you would consider either sort of selling any assets on sustainability grounds going forward? And then I guess those sales press -- press proceeds and going back in to fund new CapEx and acquisitions more sustainably focused buildings?

Possibly. And that's part of the whole critique and your sort of wholesale analysis and the due diligence that we do on assets going forward. I mean, I would like to think -- I mean, I use Stuttgart as a good example. I'd like to think that we would be able to manage that investment and create value through that. I mean we're coming off rents there of around EUR 15 per square meter per month, prime rents there are early 30s. So there's a really strong opportunity to move the needle on that. Yes, we need to invest in the sustainability initiatives. But that's, for me, feel a bit like a Boulogne-Billancourt where we were successful in taking what was a Grade C building tenant in to Grade A and rated building to make it much more institutional creating a longer-term lease with the tenant, that's what we're good at. That's sort of our expertise. We've got, in terms of teams on the ground, that deliver that may will be that we look at a new position that sort of ticks and we can derisk and I won't necessarily be sort of brown to green, but we can, I guess, derisk those type of items where some other investors can't do that. So look, it's all part of the equation. There may be some assets where it's not worth our while to be investing. And it doesn't mean that we won't achieve the value, but we may well sort of pass that asset on to someone else. And we'll always look at the best use of that capital. So yes, it's part of the overall equation.

And just a final question that's come through on the sustainability side, just building on that concept of brown to green. Are you seeing transactional evidence starting to come through of the so-called green premium?