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

Well, good morning, ladies and gentlemen, and welcome to the Schroder European REIT annual results up until the end of 30th of September this year. My name is James Lowe. I look after sales for the Schroder Investment Trust business. I'm very pleased to be joined here in our London studio this morning by Fund Manager, Jeff O'Dwyer; and Finance Manager, Rick Murphy. Just before we get into the presentation, a couple of things you can do on your screen, you now should be able to download a copy of the annual results. You can also download a copy of the presentation we're about to talk to, so you can follow through with a bit more detail. Also, please do ask us questions in the Q&A tab, and I will ask the guys at the end of the presentation. And that's all for me for now, and I'll hand you over to Jeff to start the presentation. Jeff?

Great. Thanks, James. So basically, I'll run through sort of bit of a business update where we are in terms of markets, what we're doing to try and ensure not only the growth in asset values, but the growth in earnings and obviously, putting the company in the strongest position possible to enhance shareholder returns. I'll then hand over to Rick, who will run through the financials. Obviously, it's pleasing to sort of sit today, we're sort of operating in a slightly better backdrop to that, that we started the year with. The portfolio has shown really strong resilience in what has been a fluctuating economic environment. Obviously, the investment volumes have sort of dropped off and sort of close to record lows. I'll cover that in a bit more detail in a minute. But on the back of sort of recent interest rate movements from the ECB, we still believe that there's going to be sort of a stronger focus on real estate not only through the end of this year, but obviously early part of next year. So the medium-term outlook for real estate is looking strong. Obviously, we've seen the share price still sort of trading at a bit of a discount. We think that's fundamentally good value, particularly given the cities that we have exposure to. Obviously, the underlying teams that manage this portfolio and the growth that we expect, not only in terms of potential value but earnings growth going forward. What I wanted to do now is just sort of remind investors as to what the European REIT offers. And it is the only U.K. listed vehicle that gives investors access to a diversified portfolio of commercial real estate in Continental Europe. And as I touched on before, I think we've reached a bit of a floor in terms of where values are. So it's a really appealing opportunity now to get set and come in given that valuation backdrop. A real sort of difference that this investing in Europe has relative to the U.K. is obviously the underlying inflation hedge, with pretty well all the leases subject to indexation. I'll come on to that point a bit more later, but that's a real positive nuance relative to the U.K. We made a decision a little time ago to go very conservative with the balance sheet. So really positive to be sitting here running a vehicle at such low and modest gearing and gives us a lot of flexibility going forward. So at the moment, LTV is about 25%. We've got quite a bit of cash that gives us options to either look at investing in the portfolio to improve quality, looking at potentially new acquisitions, possible share buyback depending on where that discount is, but a really strong position to go forward. And obviously, for a new investor coming in today, this appealing financial proposition where you're getting a fully covered dividend yield which of today's share price is just over 7% and that 30% discount that I touched on, I think it's a really appealing entry point for investors. And obviously, with Schroders having the teams on the ground, you've got investment -- total investment in terms of numbers of over 200 investment professionals. We're in the cities that we have exposure to. And we can leverage off what we do or what we call sort of multi-sector specialism. And we have teams that focus on office, retail, industrial, healthcare, and residential as well. And that operational mindset that we have is becoming increasingly more important in terms of how we're dealing with occupiers going forward. You may sort of notice that within this presentation, we've damped down the sustainability side, and that's because of regulation changes. I can't really say too much and present too much around ESG, because of the anti-greenwashing. But what I can say is that we still are continuing with sustainability being at the heart of our asset management and how we're looking at real estate. We're still continuing to look at making the pivot, and obviously, we need to go through sort of internal and external approvals before we do that. And that's typically to sort of mirror what the U.K. vehicle has done, which is moving towards an STR label. So I'll hand over to Rick to run through some of the financials.

Thanks, Jeff, and good morning, everybody. So turning to the financial highlights for 2024 and just beginning first of all, with the income side of things. So we can see here, I'm pleasing to be able to say a dividend cover of 103% for the financial year, together with a 3% increase in EPRA earnings and that's been driven predominantly by inflation-linked income together with strong portfolio occupancy in the 12 months, and that's offset higher interest costs in the period. Just with regard to rent collection, again, as in previous presentations, very positive to be able to say that all rents are being received on the direct portfolio, just demonstrating the company's strong and robust tenant base. With regard to the balance sheet, as Jeff mentioned, we've got around EUR 25 million on our balance sheet. So as we move towards 2025, we feel that gives the company a real significant opportunity and flexibility moving into the new year. Just on the debt side, two refinancings were completed in the financial year. One was the office assets in Saint-Cloud, Paris, the other an industrial asset in Rennes in France. And that's meant that now there are no near-term refinancings until summer 2026. And then, just moving to the LTV side of things. So we've got modest LTV net of cash of 25%, 33% gross of cash, and with the anticipated near-term disposal of the shopping center in Seville, that would fall by a further 3%. Performance-wise, NAV total return of 0.4% for the financial year against a minus 5% for the prior financial year. And just a bullet point here, it's been in prior RNSs and reports and just -- I note that there is a contingent tax liability in the fund at the moment with a range of values set out on the screen. And currently, with advice received, no provision has been made for that at the current time as we don't believe an ultimate cash flow will be probable. Moving next to the balance sheet slide. This just sets out a high level NAV bridge of where we've moved to over the 12 months. So in opening NAV of EUR 171.4 million, Euro cents per share terms, EUR 1.282. And then we can see an unrealized valuation fall of EUR 6.1 million in the year, and we've got each asset breakdown on the right-hand side. And that was driven by rerating of market yields in the period, predominantly in the first half of the financial year. We can then see that there were no purchases or sales in the 12 months. Some CapEx invested around EUR 1.5 million in the year, largely at two assets in France, Rumilly and Saint-Cloud. With regard to Paris Boulogne-Billancourt, EUR 0.6 million development profit has come through into our NAV in this financial period. And we can see here just in the text that all being well, there's a maximum EUR 0.8 million of pre-tax, NAV uplift to potentially come through in 2025. With regard to Seville, again, just a reminder, the group fully wrote down its investment in the asset back in spring 2021. And there's no reversal of impairments in our year-end numbers. EPRA earnings of EUR 8.2 million, non-cash capital items of EUR 0.6 million. That's a large fall in the fair value of interest rate derivatives as ECB rate cuts have come through. And then dividends paid to investors at EUR 7.9 million, all in all, giving us a closing NAV of EUR 164.1 million or EUR 1.227 per share. Just on the next slide here, we can see a bit more of a breakdown of earnings. So we can see EPRA earnings of EUR 8.2 million this financial year, EUR 8 million the prior financial year. And we can see that's been largely driven by an improvement in net rental and related income of around 5%. Fund costs have been broadly flat. And we can see here the higher net finance costs have run through, but they've been partly offset as well by interest received in the period. So all in all, a dividend cover of 103% for this financial year against 89% for the prior financial year. And just on this slide, just a bit of a reminder of the dividend trajectory over the last few financial years. So we can see here for the financial year '22, dividend cover was 61%. That was borne by the sale of Paris BB and the loss and replacement of that income. And then 2023, dividend cover of 89%. And we can see there as well the rebasing of the dividend post the 2023 interims. And then moving into 2024, again, that 103% dividend cover, which we feel provides protection and headroom at the moment, and hence, why we are pleased to announce this morning a EUR 1.48 per share to be paid out next month in January. And just finally, my side here, we just got a bar chart of SEREIT, the second block on the left and how this stacks up against certain diversified peers. So we can see here with regard to the fund's modest LTV of 25%, fully covered dividends and a dividend yield of over 7%, at least to what we think is a good attractive proposition compared to certain diversified peers in the group. And with that, I'll pass it back to Jeff to go through the portfolio.

Thanks, Rick. I talked about sort of the resilience of the portfolio over the year. And I think that's a testament to where we have exposure. And you can see here, this is the 15 assets that we have, it's well diversified. We're in cities such as Berlin, Hamburg, Stuttgart, Frankfurt and Paris. Obviously, we've got 1/3 in offices, 1/3 in industrial, which is definitely a growth sector, and we're seeing good rental growth coming through in particular to that sector, and we've got about 20% exposure to retail. And we've got some alternative exposure being the mixed-use data center and the car showroom and the rest which we have in cash that I touched on before. I'm not going to go through every asset, but just to sort of highlight maybe some of the areas in terms of how we've invested. And I think we've done this well in terms of picking submarkets within growth cities and submarkets that would outperform in terms of not only transport connectivity. Where there's supply constraints, where there's competing demands for uses or fundamentally buying buildings at least of affordable and sustainable rents. So those attributes are putting us into a strong position now, particularly as we're starting to go through a bit of regearing and there's a couple of bigger tenants that I'll talk about in a minute, where we need to regear those leases, and we'll see some growth going forward on the back of that and also shoring up the earnings and the unexpired lease term through that. But I think I'm really comfortable in terms of the positions that we have in terms of the cities and the type of real estate that we have. Just talking about investment volumes, and you can see this bar chart on the left, and the line sort of highlighting the things have really fallen off a cliff. I think, we have found a bit of a floor now. It's not as bad as sort of the GFC. We've just seen, I think, for Q3 investment volumes starting to tick up. And I think the Q4, particularly on the back of the rate movements that the ECB have come out with over the last few months. I think that's still to come through to investor demand. So I think for the latter half of this year, we will see that line start to tick up. One of the real positive things here is that really the volumes have been centered on the smaller lot sizes, which is where our strategy has been. So that's sub EUR 30 million. It's the bigger institutional lot sizes of sort of EUR 50 million, EUR 100 million plus, particularly around offices where there's just no demand at the moment. So for us, in terms of liquidity and our ability to sell assets if we had to, I'd feel very comfortable, particularly given the cities that we have exposure to. And just on that point, we are testing the market in relation to one of the assets, and I hope to have some positive news in January. We're in exclusivity at the moment. And this is in relation to the Frankfurt retail asset that we have there and a disposal of that will prove value in terms of how we're holding that asset value in the book. So some positive news to come out with there. Right-hand side is, again, just highlighting that we're not the buyer of the Prime real estate. And you can see here that we've invested across the different sectors. So for instance, industrial, our current valuation represents around a 6.6% net initial yield. And if you think about where debt -- and the cost of debt is at the moment where 5-year swap rate has now fallen to just sub-2%. If you add in a margin into that, you can get an all-in financing cost of sort of mid-3s and against a net initial yield for industrial of 6.6%. You can see why debt is accretive and why I feel comfortable that if we were to offer those assets to the market that value would be proved. And that's delivering a fairly strong premium to where sort of the risk-free rate is. Here, we've used a blended risk-free rate across the three jurisdictions that we've invested in, which is Germany, France and the Netherlands. And you're getting sort of around a 4.5% premium. And historically, Prime real estate has traded at somewhere around a 200 basis point premium to the risk-free rate. So again, having regard the fact we're not an investor in Prime real estate, but I think that 450 basis points definitely prices in the risk that we have. Just on offices, I think, I know, I touched on that, we found a floor for most sectors. I think, there is certain offices and certain, particularly for regional offices, where I still think there's a question mark and probably some more values to fall. I'm going to talk a bit more on offices in a bit more detail in a minute. But again, our exposure is in Hamburg, Stuttgart and Paris and in particular, for the German exposure, I feel really comfortable given the lot sizes that we have at around 20 million and the fact that they're both fully tenanted and one in particular being fully leased to the government. Retail, I touched on. We're looking at selling the Frankfurt, so that will improve value there. And then we're left with the DIY asset in Hornbach in Berlin, which is sitting on 4 hectares of land, and the play for that is longer term to try and look at alternate use. The data center is the KPN single-tenanted. We're trying to work with KPN about trying to derisk that at the moment. Their lease expires in '26. So the way the valuers are looking at this, and that's why the yield on this is so high, is that they're saying, look, we're going to price the remaining income, which is effectively 2 years and the residual land value. So this particular asset will continue to fall in value until we've regeared that particular lease, and then we've got the car showroom in Cannes, which is a bit of an alternative for us. So just touching on what we've done and obviously regearing a number of the leases over the years, so about 16 leases, total rental income of about EUR 1.4 million. We've extended the unexpired lease term on that to about 8 years. Just conscious of the things that we can now improve or work on, obviously, Saint-Cloud is our biggest vacancy. The overall portfolio vacancy is relatively modest at 4%, but the bulk of that is really Saint-Cloud, which has about 15% vacancy. It sits in a submarket that has been challenged in terms of occupation. Notwithstanding that, we're actively managing this, and we are in the process of trying to do another floor from a leasing point of view. There's potentially about EUR 570,000 of ERV that we can add here if we get that to a fully leased basis. Frankfurt, I've touched on. We regeared all the leases in there, particularly the Lidl supermarket on a new 15-year lease. And we've done this really to prepare this for sale. And we've had some good feedback from the market. And that's something, as I touched on, will come out likely in January with some positive news around that. On Metromar, Rick touched on this. It is an asset that we don't talk too much about. We have written the equity on this to zero some years ago. As post-pandemic, it didn't really survive. We are in the process, we're in exclusivity with a group at the moment. The positive here is that if we get this off the balance sheet, because we've kept the liability, and even though we don't have regard to any of the income that actually removing this would reduce our gearing by about 3%. So a really positive reduction even further and strengthening the balance sheet. So looking forward, obviously, sustainability, and I'm officially not allowed to really talk about that word from an anti-greenwashing point of view, because we are an Article 6 vehicle. Our aspirations are to obviously move this to being more of an Article 8 and also to get an SDR label, and that's very similar to what the U.K. vehicle has done. Notwithstanding that, we are continuing to manage the assets with sustainability at the heart of our mindset. So whenever we're looking to do a lease regear, we're making those investments or encouraging tenants to make those investments as well. Again, providing a solution to the tenants that improves the quality of the assets. And that's one way that we believe that we can grow earnings going forward and also secure existing tenants and try and strengthen the unexpired lease term and income quality. So our immediate sort of focus is really around those sort of four assets there on the right-hand side being Berlin. So we're in discussions at the moment with Hornbach about regearing that lease. Rumilly, which is leased to Nestle, it's the industrial asset that we have in France. We've got a couple of proposals out with them about regearing that on a longer-term basis. Really positively in Stuttgart. We've got the government in there, so the State of Baden-Württemberg, we're in discussions with them about extending that lease. So that we would make some investment from a sustainability point of view. And on the back of that, we'd have them sign a new 10-year lease. And then in Apeldoorn, which is really the -- one of the key sort of income generators, it represents about 80% of our income. We're conscious there about working with KPN. We're trying to get them to make a bigger commitment and turn this into a hub location for them. They're still assessing their potential for this location. The lease doesn't expire to '26, but there's a number of angles there that we're working on in terms of trying to enhance the options. And then longer term, I talked before about, well, how do we invest in real estate and obviously, transport infrastructure and the changes that go with that is quite key. And again, with Saint-Cloud, there's going to be a train station come outside the building for 2030. Similarly, in Stuttgart, we've got the Stuttgart at '21, which is the repositioning of the main train station to cater for faster access to the airport and throughout Germany and Europe as well. So we think offices around that sort of location will benefit. Just on the offices, and I get this question a bit in terms of how European offices are performing, and these are the submarkets that we have exposure to. On the right-hand side is our two German assets. So in Hamburg, we're in the City Sud submarkets, one stop from the City Center. We're off rents here of about EUR 14 per square meter per month. To put that into perspective, prime rents in Hamburg one stop away in the City Center of Hamburg, one stop away, we're now at EUR 35. To build a new office building, you've really got to be hitting rents even north of that to justify construction as to where construction costs have got to. So it was a back-office location, this is stacking up really well. Vacancy has held up exceptionally well at sub-5%. We're fully leased for this particular asset that we've got, and I feel really comfortable about holding an investment like this, particularly in an area where you are accessible and you're affordable, there's a number of tenants out there that want to tick those two boxes, even though it's not a Grade A prime asset, it's a Grade B building, is still holding up very well. In Stuttgart very similarly. We're in the City Center of Stuttgart, with rents of around EUR 14 to EUR 15 per square meter per month. And again, relative to prime rents, it's a huge discount. Obviously, having the government in here, they are not typically a user of prime offices. They have sort of VAT restrictions where they can't claim back for the newer buildings. So therefore, they're forced into taking buildings like ours. And there's just no availability, as you can see here. Vacancy in Stuttgart is around 1.5%. So there's just no choice for occupiers. So I'm really positive that we can regear that lease with the government and grow rents on the back of that. The slide sort of I guess problem child in the portfolio is the Saint-Cloud office building. It sits in a submarket where vacancy is increasing. And I touched on before, we've got 15% vacancy there. Our teams are working really hard from an asset management point of view to derisk that. The value of this asset and the liquidity of this asset will be really down to how we manage and try and reduce that vacancy. One of the positives is that we are of relatively cheap rents. So our rents in here are around EUR 200 a meter. So it's a huge discount to where prime rents are in the Southern Bend, which are now EUR 540 a meter. And we're seeing even stronger prime rental growth in the center part of Paris, which is now nudging north of EUR 1,000 a meter. So therefore, back-office locations like Saint-Cloud will improve. And I touched on before that with the transport infrastructure from 2030, we think these locations will benefit from that. And that's obviously still some time away, but that's certainly one of the key opportunities going forward. Obviously, inflation, talked about before, all the leases are pretty well subject to indexation. Typically, it's annual index other than in Germany where you have to wait for the compounding to reach a hurdle before you get that index. Obviously, across the continent, different countries are expected to benefit from different inflation rates. We've seen in the Netherlands, some pretty heavy inflation over the last sort of couple of years. That's now tapered back to to sort of mid-2%. Similarly with Germany, there's a bit more inflation pressure there. And obviously, France, probably a bit more modest at around 1.4%. That's for 2025. So on a positive note, inflation has come back, but it's still reasonable levels that we start to -- can implement just given the nature of the leases and the annual indexation that we can achieve. Just on the debt, I sort of obviously focused on why we've gone conservative, and it's really pleasing to manage a vehicle and gives us a lot more flexibility going forward. Obviously, net of cash, we're at about 25%. If we remove Seville, that will fall to about 22%. So a really, really strong position going forward. I talked about the potential sale in Frankfurt. That particular asset is linked to Berlin. So we'd have to repay that debt, so that would actually reduce the gearing even further and presenting us in a stronger position to go forward. I think, one of the other real items to sort of highlight here is really the 5-year swap rate as to where we sit today. In Europe, that's now nudged below 2%. And if you think about when we actually entered into the 5-year swap for the Dutch loan, which was September last year, the 5-year swap was 3.3%. So we really have -- and rates have really come off quite significantly around that. And I think the availability of debt, particularly for a manager like ours is still there, particularly those banks want to work with those managers that can derisk not only the solution side with tenants, but also the sustainability side, and I think that's what we do well, and that's why we don't have a concern about refinancing risk. There's probably a bit more sort of refinancing risk around offices going forward, particularly secondary decentralized offices. And I think that's probably an area of distress that we still think is still to come out in the market. And that was one of the reasons why we elected to refinance the Saint-Cloud loan a bit earlier. We did that earlier this year, and we've taken a cap in relation to that as well. So I think as a -- from a balance sheet point of view, in a really strong position and the next refinancing opportunity is not until June 2026. So really comfortable as to where we sit with that. Obviously, priorities. I'm conscious about the income exposure that we have and you think about whether it be Hornbach, Nestle and KPN, that represents about 26% of our income. So it is a large number. We're working hard to derisk that. And I think until we've derisked that, I can understand why the share price is reflecting that sort of risk. But I do feel comfortable that we can regear those leases, particularly with Hornbach and Nestle. KPN, I think that will stay for the data center as to what they want to do with the rest of the building is the question. Obviously, we pride ourselves on our relationships with tenants and our ability to retain tenants and provide a solution to them. And I think that's one of the things in terms of having specialists on the ground and the relationship management that we have is putting us in strong stead to regear those leases. Frankfurt, I talked about. I think, there's a real opportunity here to recycle some capital. We've done all the asset management that we could do there in terms of regearing those leases. I think for us, the returns investing that capital elsewhere. I think we can drive returns in a better way than holding that particular asset, notwithstanding, we do like the sector being in terms of grocery retail in a strong city. Obviously, energy and carbon continue to manage the assets with this at the heart of our management. We haven't been able to sort of come out with a formal pivot just yet. We've got to go through various internal approvals and then apply to the FCA, but it continues to be our intention to pivot this. And the rationale for that is really -- allows us to broaden to a stronger set of investors, particularly those investors that are more sort of thematic-driven and also having a label it sort of aligns with some of the benefits that the U.K. trust has done as well. It's how we're managing real estate anyway. And that's our intention, and that will probably be really for 2025 that will formally come out with that pivot. So just in summary, I mean, it's a really strong entry point today. I don't want to harp on the discount, but really for an investor to come in today. I do believe it's a compelling proposition. You're coming in at 30% discount. You're getting an attractive dividend yield. It's fully covered. We've got teams on the ground that are actively managing this. We can derisk some of those expiries that I've touched on. We're well diversified. We're looking at sort of selling down some of the retail exposure. There's -- with the strength of the balance sheet, we've got some opportunity to either invest in the portfolio, improve quality or potentially look at a new acquisition. But it's a really exciting time to get set into a unique proposition. It's the only listed vehicle here in the U.K., and it's a good diversifier for investors being able to get access to some really strong cities in Continental Europe. So I'll stop there. Happy to answer some questions, James. I'm sure there is some questions here.

There are some questions, Jeff. And there are some questions. You just mentioned the discount. There are some questions on the discount. I'm going to come back to that. But we're going to start with a couple of the more investment-led questions, and thank you, everyone, for sending in your questions, please do send in any other questions you have as we go through this Q&A session. So Jeff, maybe starting coming to you. One of the questions that's come in is sort of highlighted some of the major expiries you described in the presentation that you said you're looking to derisk. You've given us some information on that. I guess the question here is, does that mean potential for news flow in the first half of next year? And the second part of that question is, is there scope outside of Apeldoorn to be pushing rents on next year?

Yes. Look, I think, there's a couple of the assets that are a little bit lumpy in terms of you think about KPN, Hornbach, Nestle sitting here today, I can't come out with any clear news. And we are in discussion with those tenants in various different stages. Obviously, Hornbach is the market sort of leading DIY operator. Interestingly, they've got two locations in sort of the southwest of Berlin. They dominate the market share there. I don't think they will leave this location. It is a bit over rented. So that's an angle that we do have here in terms of trying to use that as a means to have them regear. What we're thinking is actually trying to have them regear on a longer-term lease. But also, we're conscious that we have opportunities here having a 4-hectare site, that if we can get planning, there's a way that we can maybe create some further value. So we don't want to lose sight of that either. Obviously, the planning process in Germany takes a long time. So entering into, say, a 10-year lease wouldn't be the worst thing in terms of protecting our income, but it gives us opportunity to go for that rezoning and planning as well. So yes, I think to answer the question, we'll come out with some news on that probably in January. Similarly, with Nestle, we're in discussion with them, around regearing, that lease has two options that we've given them at the moment to secure them. It's a strategic location for them. It's located a 1 kilometer from their cereal manufacturing business. They've been in this asset for 20 years. They've made some investments themselves. We've also done some investment in terms of improving the fabric. So again, I don't think that they will leave here. There's just no option for them. KPN slightly, sort of, more difficult. I mean, they -- and what we do know is that they have some data in this building that is quite sensitive, particularly around defense and healthcare. So I don't think they can readily move that, and their lease expires in '26. But we've been actively working with them and trying to sort of convince them, look, we'll turn this into a hub location. So not just a data center, but let's turn this into your call center, your offices, maybe work with you in terms of some of the AI improvements that they're working on as an occupier. So there's a number of different angles there. Equally, we're thinking about, okay, if they don't want to be there, is there another data center company that wants to be there because we've got power to this building. That's becoming a real resource and real value. And then outside of that, we're also mindful that there's medium-density residential surrounding us. There is existing zoning to build over 100,000 square meters of residential on this site. It's 3.5 hectares. So there is angles there as well. So to answer the question, yes, we'll be coming out with some news around that through the course of the early part of next year.

Great. And you've mentioned a couple of potential opportunities there from the investment side, asset management angle. Another question that's come through here is just highlighting that clearly with the modest LTV that you have and the cash available and your comments around valuation stabilizing in the market. Are you seeing other areas attractive investment opportunities on the ground where you might look to deploy capital?

Yes, we are. And I think one of the things that we would continue to do is really stay in France, Germany and the Netherlands. I don't think we would be deviating just given we have a relatively small vehicle despite we see sort of stronger growth in maybe some of the Nordic areas. I think, we will continue to focus on these jurisdictions. I've said before that we would like to add to our industrial exposure. Currently, we've got about 30% exposure. It is the one sector that from an ERV growth going forward, that's the strongest returns that we see. So that makes sense in terms of getting sent there. So obviously, conscious that trading at a 30% discount, trying to stack up a real estate investment relative to buying your own shares, it's going to have to be a really strong performer. So we're sort of juggling that. And I have that debate with the board regularly. But at the moment, we're thinking, well, actually the capital that we have, are we better off investing in the portfolio, try and grow earnings that way, improve the quality of the assets. We know that better quality assets not only seeing sort of better tenant demand, better rental growth, but obviously better liquidity not only to the investors, but also to lenders as well. So that's probably where we're thinking and particularly around some of the audit feedback that we have on the sustainability and how we can sort of position the assets. We think with probably a better opportunity to invest in the portfolio rather at the moment given the discount to just buy new investment.

Yes. So that was really useful answer, because you've now answered two of my next questions, which were actually about buybacks and whether we're looking at that -- I mean. You've already expanded on it. So I'm not going to ask you question unless you got anything else to add, because we have a couple of questions here on just the, I guess, questioning the rationale between investment and share buybacks.

Yes. Look, it's -- there's a number of vehicles that have been doing buyback. And you know this well, James, in terms of it doesn't always work in terms of closing the discount. It's the -- mathematically, it's hard, not to dispute it's the best use of capital given at 30% discount, where it sort of gets slightly more tricky as if you're at sub-20%, you should be able to find a real estate investment that outperforms. We were thinking more seriously when we're at the 40% discount about doing a trade. But I do think if we certainly coming out with some of the news and derisking some of that leasing that we've just talked about. I think that will be very helpful, more helpful in closing the discount than, say, doing a share buyback.

Yes, sure. Thanks, Jeff. Maybe just moving on slightly. There's a question here around the dividend. So I mean, I'm not sure how much you can say forward-looking, probably not a lot, but a -- the question here, and I'll ask you anyway, because one of our listeners is interested, is where would the dividend cover need to get to before you consider raising the dividend again? I know that's a simple question, but probably lots of complexity behind that conversation with the Board. But any thoughts?

Yes. Look, I can't give you any direction. We don't really give any direction on dividend. I mean, we have been focused on dividend cover. I think that's a fair point. You can see on this slide how we've actually gone from being heavily uncovered, which was primarily due to the Paris repositioning that we did. We elected to go conservative. Hence, why we cut the dividend. That was that sort of was more the reason for the divi cover moving over 100%. I think if we can derisk the leases that we've talked about, that's going to be, put us in a much stronger position to then answer that question. But yes, I mean, we've got a number of, I guess, different levers to pull. We've got some of the growth to come through with a indexation, some of the ERV growth as well de-risking Saint-Cloud from a vacancy that will all be helpful. But yes, if we get those right, I would like to think that the Board would be supportive of relooking at where we are with the dividend.

Yes, there's some really good questions coming through that make my job very easy here, because they're all flowing in the right direction. So just to add to the point we just made there, one of the questions that has just come through is around, how would you -- I mean, I'll ask you the whole question. Where do you see your asset base in 5 years' time? And then the question off the back of that is the European REIT, do we see this in 5 years' time as a dividend paying progressive dividend type proposition? Or is it more going to focus towards growing the asset base? You obviously mentioned sustainability transformation there. How do you see the European REIT evolving over time?