Schroder Real Estate Investment Trust Limited (SREI) Earnings Call Transcript & Summary

Well, good morning, ladies and gentlemen, and thank you very much indeed for dialing into today's Schroder Real Estate Investment Trust full year results presentation. My name is James Lowe, and I look after business development for the Schroder Investment Trust business. I'm pleased to be joined on the call this morning by Duncan Owen, Global Head of Real Estate at Schroders; and Nick Montgomery, Head of U.K. Real Estate at Schroders. Together, Nick and Duncan are co-managers of SREIT, Schroder Real Estate Investment Trust, and have been so since the company IPO-ed back in 2004. Now just before we get into the main presentation, I'd like to remind our listeners that you can submit your questions throughout the presentation, and we'll try and answer as many of them as possible following the conclusion of the formal presentation. I'd just also like to point out to our listeners, there's also links in the attachments tab to download the annual report and presentation. And with that, I'd like to hand over to Duncan to take us through the results. Duncan?

Thank you. Good morning, everyone. Thank you for joining us in this first, in 15 years, results presentation over the web. As many of you know me, I'll be presenting the first section in front of you on the overview of the results, talking a little bit about the impact of COVID-19 and also a little bit about dividend and the general company-level performance. I'll hand over then to Nick, who will talk about the portfolio and the real-estate-level returns and the makeup of the portfolio before recapping on the outlook. I'll just add also before I can begin, we do have Rick Murphy with us on the line from our finance team. There are some detailed financial slides in the appendixes, particularly on the comprehensive income statement. And so, if there are any specific questions about the financials, we'll direct them to Rick, who is with us. In terms of the overview, and turning through to the first main slide, which is #3 in the bottom left corner, I think there are 3 or 4 key messages for the 12-month period to 31st of March. The first is it was significant activity, particularly with regard to sales. For the period, including a couple of months before the financial reporting period, we had sales proceeds of some GBP 95 million at sales prices, which were very attractive and would now not be possible. But the other key activity we had was the significant refinancing where we both extended the term of our refinancing to an average of about 16 years, but also significantly reduced cost on terms that wouldn't be possible now. And the third key thing that we would highlight is the performance of the real estate portfolio with continued outperformance, which you can see in the top left-hand box of this chart where the outperformance was 170 basis points over the 12-month period. We continued that outperformance over the 3, 5, 10 and 15 years since we IPO-ed. The key outcome from that in the results was that we actually have had, after refinancing costs, a NAV total return of slightly minus at 1.5%, but we are left with, post the key initiatives in the refinancing, a very strong portfolio. You'll see on the third box from left to right, strong weighting to growth cities, 82%; a very strong portfolio structure where 68% by value is in offices and industrial sector, only 18% is in pure retail. We have very strong reversionary income. And the balance sheet is possibly the most important message, where you will see that we have a loan-to-value of 23.7%. We have reduced significantly the interest rate to 2.5%. So we're saving about GBP 2.5 million. There is very significant headroom in that debt, arrangements where we have the potential for values to fall by some 51% or rent to fall by 66% before we get close to any of our banking covenants, so they're very safe. And we're left in that bottom right-hand corner with the privileged position of GBP 85 million of cash for reinvestment into the portfolio and new acquisitions. If I can then move on, having given that overview, to give a very brief summary of the net asset value. The journey here, where the company delivered a now total return over the period of minus 1.5% before the refinance cost. But in terms of transparency, we set out here the detail of the journey of that NAV performance over the 12-month period. Things of note are there was an unrealized valuation movement down of about GBP 13 million or about 3% -- 3.7% on the valuation falls in total, which are relatively good compared to the market. We continue to invest in the portfolio, which is the capital expenditure, which is refurbishments, et cetera. And we ended up with a situation where we, very importantly, post the refinancing, passed the benefits on of that refinancing and the cost savings of GBP 2.5 million in increased dividends paid. So we increased our quarter dividend a little bit over GBP 3 million to GBP 4 million in the final quarter of the year. In terms of the refinancing costs, I would just highlight, you'll see at the bottom of that page, they were the most significant cost. Clearly, that GBP 27.4 million cost saved the company running cost of GBP 2.5 million per annum. But that, of course, had the corresponding negative one-off impact on the net asset value. In terms of the key initiatives, which I referred to before, I think moving from left to right, summarizing them. SREIT really is well positioned for the anticipated market downturn in the U.K., which has already begun. The asset disposals, the price of GBP 95 million to the 9 assets in total, reflected a net initial yield of 3%, which, as I mentioned earlier, would not be achievable today. And these disposals crystallized considerable profits above the initial acquisition costs and price for these assets, but also significant uplift compared with the previous valuations in 2018, 2019. And that's left us with the ability to continue to complete the refinancing, which took place in October 2019. And as you can see there, we have a refinancing term of GBP 129.6 million for a blended term now between 13 and 20 years, which is averaging about 16 with an expired with a very significant lock-in reduced cost. The active management, which Nick will talk about in detail in a moment, saw 77 new lettings, rent reviews and renewals. That gave us rental income of GBP 6.5 million, which was an increase of GBP 1.4 million of rent per annum over and above the rent that was paid before we did those lettings and renewals on the same properties, so really improving the defensive qualities of the portfolio. And the next sort of key initiative on the right-hand side, we highlight our ability for new acquisitions. We are going to be very disciplined about those new acquisitions, but we are really looking forward to having the opportunity later in the year and the turn of the year to consider acquisitions. And we've given it, as an indication here, from GBP 60 million to GBP 70 million of potential acquisitions at a yield of 6.5% would generate rental income of over GBP 4 million. We do not think there is any urgency because the market is going through the process, as you would imagine, and continuing to soften at the moment. So we're going to be disciplined. There may be acquisitions later this year. We are seeing good deal flow, which is really beginning to build up again. But we're going to buy the right assets in the right sectors at the right prices that give us robust income and not exposure potentially to properties where rents are not being paid. In terms of illustration and dividend, this has been a key question that we've got from a number of analysts and shareholders in anticipation of these results. And whilst the results we recognize are very important, we equally recognize people's forward-looking. And what we've done and we'd accentuated in the heading here that we've tried to take a cautious but prudent position to postpone the dividends until we get further clarity and more facts. That's not a case where we do not intend to pay a dividend or intend to pay catch-up. But it's really a situation that is taken in light of the fact that we just do not know what impact this is going to have on the wider economy and thus, corresponding impact on the wider real estate market. So far, however, it's been quite good. We've collected rents for the March quarter of 74%. We would put that in the context that we need to see what will happen in June and September. But when we get clarity on the rents that are due in June in a few weeks' time and then subsequently September, we then are going to be sitting down with the Board to review the dividend policy. And at that stage, we're more likely to make a better-informed announcement about reinstatements and any catch in the dividend. I would highlight on the second bullet point, if you -- or I talk to the illustrative cash flow, that it's very important to recognize that about 50% of the rents is accounted for in the running cost of the company. That would cover operating expenses, general portfolio expenses, importantly, of course, the bank and finance costs. And at this stage, I just talk to you very briefly through the illustrative income statement. We've taken the snapshot here on the 31st of March for the year-end, where post the sales, the annualized income before reinvestment was about GBP 26 million for that year. And if you then net up operating expenses for running the portfolio, you end up with a net income figure of GBP 23.8 million. And then we have the normal expenses, fees, costs, legal fees, leasing fees, et cetera, and finance costs, which would leave us with a net income, post all running costs fully loaded, at GBP 12.7 million. By way of illustration on the right-hand side, if you assume that we're receiving approximately 75% of the rent as we did in March, that would mean we get a GBP 20 million cash flow from the rental income. That would transport to a net rental income figure of GBP 17 million. And less-than-normal running cost of GBP 11 million would leave us with about half of the current net existing income. So if you were to pay a fully covered dividend off the back of things as they currently stand today, without any further change, we'd be funding about a 50% dividend. However, the key points, which are in our advantage here, which are not highlighted on this, is that the company is very well capitalized. We have the ability to recover this rent if we receive 75% of rents in the future. We're estimating from the conversations we are having with tenants that approximately 60% to 2/3 of that rent not paid will be repaid as part of arrears, and we're in the process of agreeing repayment schedules during the course of 2021. In addition, where some of those rents we may actually give holidays or rent-free period, we're receiving other beneficial economic returns such as lease extensions or tenants are agreeing, in return to us waiving a quarter's rent, for us to be able to, for example, remove break clauses. So we get perhaps longevity of income where we give some rent holiday. Also, importantly, in that bottom bullet point is it doesn't take account of acquisitions, which present a really value-add opportunity for shareholders. As we say, if we take the view conservatively, if we recover about 60% of the arrears currently, it would mean we would have rents paid at 90% of those contracted in total. That would be, on average, about another GBP 4 million annualized. And the acquisitions equally could give us more than GBP 4 million of new net rent when we complete those acquisitions. So that would mean the illustrative cash flow would look really quite positive and that's why we're taking, however, a prudent approach at the moment to just see where all those pieces fall over the next 3 or 4 months before we review the dividend and when to reinstate it with all of the facts in front of us. So what next? A very brief recap on what we're thinking about for our long-term strategy. The current situation, which is why we're being prudent, again, is it's the first global health crisis in living history. And so we do not know what the outcome will be, but we can see the economic data is horrendous in terms of unemployment and drop-off of GDP. We're seeing that it's really accelerating the mega themes and the structural changes, if you like, that we've been centering our strategy on now for close to a decade. In terms of the rent collection, which I've talked about, it does seem that our rent collection is above the industry average. The listed sector has done well. But from the MSCI/IPD data for March, as of last month, the industry average is collapsing about 60% of the rent. The SREIT portfolio in the granular nature of tenancy is holding up pretty well. And we've also got a very low loan-to-value balance sheet, which will add greater stability to the -- to any changes in the net asset value. From the future and our strategy in the future, well, we really have focused on real estate that's going to be the beneficial end of the polarization of return, and that's going to be well-located stock that is good, high-quality, safe real estate that companies are happy to occupy with this increased sensitivity, which is here to stay, about wellness and health and safety. We're anticipating average prices could fall a further 10% in values. But of course, the average is misleading as ever. There could be a further 20% or 25% falls in retail and shopping centers, for example. We're also anticipating that there'll be greater focus on onshore of manufacturing, on warehousing as people don't wish to rely anymore on shortened, or I should say, long supply chains, and they bring manufacturing closer to home onshore. And also we're seeing in SREIT's case that the significant cash looking forwards gives us real benefits for generating greater net income, bearing in mind only 50% rent collection gives us, well, very strong coverage of the total running cost of the fund. So the real potential was to drive the net income forward. So in terms, to recap what we think, we've had our 5, 6 key mega themes. We think they're gradually evolving and changing. We think they're going to be accelerating. But as we all know, it's well publicized. We're moving to perhaps less globalization, greater growth and strength in the TMT sector, which will lead to tech wars, but it will lead to particular demand for certain types of offices that are flexible and agile. We're going to lead to more government intervention. There's going to be greater taxation. And so we need to have a mind's eye on that and how it affects our strategy. The health and the general health care, public health, the increased focus on ESG, which has been a big part of our strategy in improving the built environment around our buildings and reducing, for example, the use of energy. And of course, looking at the new customers, the continued structural impacts, which will be negative on retail and physical retail but positive on other sectors and in growth sectors. So they're the key things we're looking at in the long term. At this point, I'll hand over to Nick Montgomery, who's going to talk us through the portfolio and the overview of the portfolio performance. Thank you.

Great. So thanks, Duncan. Morning, everybody. So a few slides on the portfolio. And starting on Slide 10, which gives an overview based on the valuation at the year-end. I will draw out a few key points. The really important numbers are those that we've highlighted in that green color, which show that the portfolio continues to deliver a materially higher both initial yield compared with the benchmark peer group but also importantly, the reversion yield. So looking at what the potential income growth in the portfolio looks like. And then in pound notes, you can see there that the rent demanded as at March is GBP 24.9 million compared with our rental value of just under GBP 30 million. Now we are, of course, realistic and have said for some time that we don't expect to crystallize all of that reversion, but I will come back to how we break that down in a bit more detail. But importantly, of that, approximately GBP 2 million is contracted. So provided the tenants of that pay us the rent, we know that there is an annualized GBP 2 million of rent per annum that is already baked in. The other point to note is just in connection with the retail weighting. So we're providing a headline retail weighting number toward the bottom of the slide at 24.6%. We've noted before, but again, it's important to note that, that includes both retail, where it is sole use, but also where retail forms part of some of our larger multi-let assets, such as City Tower, which is principally offices with retail and leisure below. If you take out the retail performance part of multi-let assets, then our pure retail weighting is now around 18%. On the right-hand slide -- right-hand side of the slide, we give a bit more color on the more detailed segments of the market. I think that there are 4 points to draw out here. The first 2 are that the Office Rest of U.K. and Rest of U.K. Industrial are our significant overweight positions. So we have 3x the weighting towards Rest of U.K. offices versus benchmarks, just at 23%, and double the Rest of U.K. Industrial. And we continue to believe that those will be certainly taking a medium-term view to the better-performing segments of the market. The other point to note is that our office Mid and West End weighting is 9%. Now that reflects our single asset that we own in our current structure in Bloomsbury. We think that's a fantastic opportunity. We actually think, and we've noted this pre-COVID, that public-private partnerships, particularly in medical research and education will mean that locations like Bloomsbury and lovely areas like King Cross should benefit further from increased investments in those areas. And the last point to note is, I've touched on it already, but we have a below-average retail weighting with, really importantly, no exposure to shopping centers. So what does that mean for performance? Very briefly, we continue to outperform at property portfolio level over every period. On the bottom right-hand corner of the slide outlines the 1.7% over this current financial year of outperformance. Probably more importantly, particularly today, given how we're viewing the market, is if you look to the top left-hand bar chart, you can see that our income return for the 12 months to March was 6.1% against a benchmark of 4.4%. And so a combination of a lower-growth market but also how we think our income squares off against the peer group means that we are well positioned from an income perspective. So moving on to Slide 13. We've only got one slide highlighting a few examples of asset management. And I think the point we're trying to get across here is that these are typical of the assets that we own on Slide 13, and they are generally really good quality assets and importantly, let at rents that we believe are sustainable for their locations. So very briefly, from left to right, Bedford, St. John's Retail Park. This was, in fact, a real drag on our performance over the year. It was our biggest negative contributor in terms of return. But actually, we think the fundamentals remain positive. And the key things to highlight are, notwithstanding the wider retail climate, we've done some really good transactions at the park over the year, its lease extensions at Currys and most importantly, the transactions with Lidl and Home Bargains, where you can see on the image there, we are surely to complete those works in June. Our view here was always Lidl will be a fantastic footfall driver. And I think in a post-COVID world, I think that, if anything, that view is even stronger now. And in fact, we have a vacant unit, you can see to the right of the Lidl and we have interest in that already ahead of ERV, underlining the magnet we will anchor we think Lidl is in that location. The last point to note is we have seen the values fall in Bedford and we think to a level which is fair. So the valuation yield or completion of that Lidl letting will be 7%. Moving to the right, The Tun in Edinburgh. Obviously, Edinburgh, we view very much as a winning city. This acquisition we'd done 3 years ago. The strategy was to move the rents on from an acquisition rental value of about GBP 19 a foot. Because its proximity to both Holyrood and a number of tech occupiers, we've seen really good occupational demand. Tenants like World Wildlife Fund and a big university we're now building. And we've seen rents move on from GBP 21 a foot to GBP 26 a foot over the course of the last 12 months. And in fact, we are very near agreeing a deal with the BBC, who are the anchor tenant in the building, to remove their break option in 2021 and move the rents on, again to a very healthy level. Assuming our BBC deal completes as we hope, we'll be standing on a yield on cost of that asset of around 7%. So we've done exactly what we set out to do when prime yield in Edinburgh remain in and around 5%. Moving to the right to finish off. Leeds, Millshaw Industrial Estate, a really great-quality industrial estate right on the edge of Leeds city center, tenants including Alliance Healthcare, The Store's lockers and storage, housing association. We did 10 lettings over the year, and we've moved the rents on to as high as GBP 7.25 a foot, for good reason, the valuers are not giving us all the credit for that. And so the average rental value today remains at GBP 6.50. I think it's evidencing that we think there's still income performance to go. So there, we've been -- we're obviously being asked to provide more granular information on rent collection rates. So what we've provided here is an analysis as at 4th of June based on the March rental demands. And the big picture, I think, is what you'd expect. Duncan's touched on the fact that at 74% of rent collected, we think we're in a good place, relative to peers. But when you dig down, there are no surprises. In the offices are very -- are the highest rate, so 90%, with retail and leisure lagging. Now we're obviously hoping to continue increasing that number. And indeed, the service charge collection rates are a little higher, which is encouraging. But there are a lot of individual sort of case-by-case discussions going on with tenants. And we try to give you a flavor on the right-hand side of the chart of what those look like. One of the real benefits of having the large team at Schroders is we've got boots on the ground to have the discussion with tenants. And in some cases, we're having discussions with tenants across multiple portfolios so we can use our leverage and knowledge to our advantage. But in simple terms, the transactions that we're talking about in relation to the remaining arrears go into rental deferment where we're simply taking the quarter's rent and putting it on to a future period. We're obviously trying instead to focus on more positive situations where tenants are willing to extend leases in return for rent-free. And in some cases, we've got discussions here on where we are removing brakes in return for rent-free. So of that remaining balance, approximately 10% is subject to transactions where there may be no element of rent-free, but where equally there could be some value to be added through extending leases. And then the remaining part, a roughly sort of 1/4 of the remaining discussions that we're having, we're deciding to leave tenants in arrears. We are expecting the government moratorium on forfeiture to be rolled over to the June quarter. It would be interesting to see how the government's announcement on a potential code of conduct looks and what it does for landlords. But there are certainly some retailers who fall into the category of can pay, won't pay. And in those cases, we will leave them in arrears and take whatever action we need to when that moratorium is lifted. Moving on, last couple of slides. So what we've stated previously is approximately 3/4 of our tenants are assessed by MSCI and Dun & Bradstreet as being low negligible risk. The challenge, and again, we've made this point before pre-COVID is that that's very much in the rearview mirror. And so what we've done is provide a bit more color than normal on our top 20 tenants, whereas we normally just disclose our top 10. And you can see that actually, it's a good mix. It's diversified. Of the 6 retail tenants that are in the top 20, they are all a combination of either food or bulky, where we believe those businesses are more sustainable. Our largest 2 tenants, both of whom are paid up in full, are education-related tenants. And of those -- of our entire list, only one tenant has either not paid and is failing to engage on a discussion regarding those arrears. On the right-hand side, again, I won't go through this in detail, but instead of providing Dun & Bradstreet data, we thought it would be interesting to give you a sense of the granularity of the portfolio by looking at the industry our tenants are in. And you can see, again, so it's a clock going from top right round alongside those categories. And you can see that the portfolio, we've made the point lots of times, we think is well positioned because of its diversification. Moving on, so 2 more slides. So this is an analysis of the -- our income and the potential reversion as at 31st March. So you can see on the left-hand side, the contracted income of GBP 24.9 million and you can see how the reversion up to the GBP 29.5 million is made up. The key points to note are that the fixed uplift over the next 24 months are fairly granular. So again, it's very well spread, albeit with the largest-single fixed uplift comprising Lidl in 2 locations, totaling just under -- or just over GBP 400,000. In both cases, 15-year leases with CPI increases. The rental value growth, the GBP 2 million -- sorry, the GBP 1.7 million that you'll see unsurprisingly, most of that comes off the industrial estates, and we hope to make an announcement shortly with further updates on activity and there's a small element of overrent, principally in 2 locations. And then the final point to note on the right-hand side is the -- whilst we accept that we will probably lose an income, and we will see rental values decline, we are in a very good position with the capacity to invest and generate approximately GBP 4 million of income from making GBP 60 million to GBP 70 million of acquisitions. And just to finish off on the acquisitions. I think the key point is in the light blue. There is no urgency. We think the market is coming to us. Our focus will be on resilience of income. But alongside that, we will be true to the sort of principles we have around ensuring that we are deploying capital in those winning cities. We are acquiring assets that have some stable income, but equally provide us with the opportunity to add value through asset management. We will continue to be sector-agnostic but again, with a focus on those winning cities and obviously a cautious approach towards residential and leisure and other sectors are more impacted by COVID. And through those acquisitions, we obviously hope to continue to increase the average lot size because typically, we're getting more bang for our buck through asset managing the bigger assets. And with that, I will hand back to Duncan to wrap up.

Thank you, Nick. Well, the summary, we split into 2 halves. The left-hand side of the page, you'll see the key messages from the financial year to March 2020 this year. And that's clearly, we sold well. We sold in anticipation of a market correction, but never, of course, envisaged it would come in the form and shape it has with COVID-19. But the GBP 95 million of proceeds, which was sold at an income return of 3%, has put us in a very good position. It enabled us to complete the refinancing. And we have, post that refinancing, still some GBP 85 million of cash available for reinvestment in the portfolio and of course, new acquisitions. And we've got continued outperformance at the property level, which I think is probably the best that we have in the entire house because it's over 1, 3, 5, 10 and 15 years. In the outlook, the pandemic really has accelerated a number of trends that were already in motion. People will see that in last-mile delivery, the demise of physical retail, the focus on healthier and safely and better-built environments, so really playing to our hand in our active management and refurbishments, improvements of properties, which really goes to the heart of management of income and active management to maintain and grow that income, which has been the key, as you'll see from the chart from Nick, has been the key driver of our outperformance at the real estate level over 15 years. The cash for reinvestment is a massive advantage for us. There is no urgency to reinvest. We think, to put it bluntly, things will be cheaper in the fourth quarter this year than they are in the second quarter and then may well be cheaper in the first quarter or 2 of 2021 than they are in 2020, and we're determined to be disciplined. So as we build that, we will build reinvestments with robust income that gives us upside potential of further rentals of over GBP 4 million. In terms of dividend policy, we'd like to give a guidance. We'll really review this when we have clearer lines of sight post the September rents payment date. At the moment, we're not going to overpromise, but the rent collection data that we have is relatively strong. And also, the number of active discussions and agreements we've already come to with tenants suggest that the majority of outstanding arrears will be recovered, or we will get, as landlord, some other alternative benefit such as an extension to lease. In terms of the company's intention, when we review that, obviously our hope, recognizing the importance of dividend to shareholders, is that we will be able to reinitiate the dividend and also when we get clear lines of sight about acquisitions, but also perhaps even more importantly, the short-term recovery of the 25% of current arrears, we would hope that we would be able to return to a healthy dividend and pay any catch-up as will be possible from a sustainable perspective, but without cannibalizing the cash and the capital that we've built up for new investments. So I hope that's clear. There may well be 1 or 2 questions I've seen popping up on the screen. Thank you for your patience and for joining us online. It's never as good as face-to-face, but we hope this has been useful and informative for everybody. And I'll hand over to James, who I think is going to try and compare, as it were, any particular questions that we'll take now, but we're happy to take questions, as always, later for either Nick or I via e-mail or just if anybody wishes to, please feel free to give us a call. So thank you, and back to James.

Yes. Thank you, Duncan. We've had a couple of questions coming through from our audience. So trying to sort of pull a couple of them together. There seems to be a common theme, Duncan, Nick, about the move towards digitalization and the impact that's going to have on a number of sectors and obviously you've alluded to the overweight we have in the regional office market. How would you sort of foresee that impacting portfolio strategy going forward and also sort of the new acquisitions that you'll be looking to do over the next year?

Yes, yes. Let me go first, Nick. And maybe that you -- you can add. I think the offices in our portfolio are going to be major beneficiaries of it. And by that, I mean, I do not think that demand for offices is going to reduce with working from home and digitalization. I think it's going to change. I think the poorer, weaker buildings are going to have faster obsolescence and are going to be in greater need of capital expenditure to improve their ability for flexible and agile working and to take greater capacity in IT and bandwidth. To put some color on that, where, for example, and we've been very successful at this, where, for example, we may have done a cheap and cheerful refurbishment, improve the reception, et cetera, in a building, an office in the past, we probably would now do a more extensive refurbishment that would make a building even more user-friendly from that perspective. I think we will end up, as a consequence, with some stronger income growth as a consequence of having the right types of properties, which have good locations that people can access, not just for our public transport, but by other means of transport, and are in a very good and healthy-built environment. And we're going to continue to focus and evolve in improving the environment inside as well as immediately outside our office properties. The other point I would mention on digitalization is it's self-evident with people, home shopping. But I think it is going to be something which continues to improve real estate in all sectors, whether it's a hotel, whether it's a warehouse or logistics, whether it's any form of real estate, the right type of building will be able to be utilized more efficiently. I think occupiers will measure density differently. I think they will measure density not by just the number of people, for example, they can get into an office at any one time. They will measure density on how many square feet or square meters they need per member of staff, for example, in the U.K. And you may well be able to have twice as many staff, say, 10,000 staff for the same amount of office accommodation because of people agile working, working from home, so long as that office is capable of supporting that IT infrastructure. So I think in one word, the answer is going to be polarization, the better assets are going to get better. The weaker ones, if you don't invest in them, will suffer from greater obsolescence. Nick, is there anything you'd add to that?

I think only a couple of points. I think in a post-COVID world, I think people will view office design differently, whether it's sort of a touchless interface that tenants have with the building. And I think that's fine if you're building ground up. But as Duncan has said, I think the key is to own -- if you're owning secondhand buildings, are they capable of being adaptive? I think the other point is actually in relation to digitalization is we are already producing thousands of lines of data every day within our -- particularly our multi-let office buildings and how we use that data to generate value from which is increasingly important, particularly as it relates to reducing our energy consumption. And that has been a key focus for us over the course of the last 2 or 3 years. And then obviously, we included in the accounts an update on our improved GRESB ratings. But I think tenants increasingly are going to demand minute-by-minute data on their energy consumption in buildings. Again, so just to emphasize that point around buildings that can be adapted to provide that will be fine. But what we need to do is avoid buildings where there's great obsolescence risk because they can't be adapted to provide occupiers on what they want.

Thanks, Nick. Thanks, Duncan. We're just coming up to 40 minutes. So we've probably got a chance for one last question. This one's come through from the audience, and it's around sort of what you were talking about earlier, Duncan, the fact that trust has a strong balance sheet, a lot of cash to go with that. And you also mentioned that we'll be looking for the right assets in the right sectors at the right prices. Can you give us any more specific detail of anything that's sort of come over your desk in the last couple of months and also a little bit more on transactional volumes and what you're seeing on the ground in the market?

Okay. On the market, volumes are surprisingly are down. One of the reasons for that is a type of Mexican standoff. We've begun to see, particularly the last month, quite a lot of deal flow, but a number of the vendors that are selling are still trying to sell at yesterday's prices. And for that matter, there is -- I think there are some transactions that are happening and is evident. But most transactions that have been reported in the press and the public began before the lockdown on the 23rd, 24th of March. So volumes are considerably down. We anticipate they're going to be higher in the second half of the year. In terms of what we're seeing, I think there are a number of opportunities. There is a question mark, attractive as the structural changes are to industrial, industrial warehousing, there is a question mark that if you do not own it today, there is a very full pricing in some of the -- in some parts of that market with the lowest yield in history on record as well as the highest rents on history in record. And so if you own the right things now and you can benefit from that growth, that's great. But if you don't own them now, you need to be careful not to overpay. In terms of what we're seeing in deal flow, again, our main focus has always been locations in winning cities, which are capable of multiple uses, which will compete for one another and will give sustainable income and income growth. And we would still focus on that, and we are seeing opportunities in those winning cities. And of interest, London is beginning to come back on to the radar. There are some interesting opportunities, in 3 particular locations in London that we would focus on, the benefit from this broad and deep demand of occupiers. And we are seeing that some of the market corrections in parts of London are, and has begun to happen, they're a little bit more attractive. The final thing I'd say on this, just regards to, if I use London as an example, I think some of the questions that we've had in the past have been very much related to nautical use. So one of our largest tenants is the University of Law, that's a good example. Digitization will help them. They can do lots of livestream lectures. They can end up with more students with the same office accommodation they have from us in Bloomsbury or in Manchester in City Tower. And their business actually can grow, they can get more students. And most of those students are graduates already that are employed by law firms and their fees are paid by a very high proportion directly by the top 10 or 20 legal practices in the U.K., some very secure fee income that's coming from tenants such as that, that perversely can really get operational leverage through digitalization of upside in the right properties, in the right locations that they want to occupy and there's upside from the digitalization of the use. So we are seeing deal flow. Those are the types of things that we'll be looking at. I think we will be very disciplined, as I've said in the past. We would be disappointed if we didn't make some investments in 2020. But it would be better to make investments at the back end of this year and maybe in 2021 at the right prices. The main logjam is making sure that we -- the vendors are realistic when they're putting assets up for sale. And we think that is in the process of coming, but perhaps not yet commonly been in place with some of the assets that we've seen on the market. Nick, would you want to add anything on that?

No. I think that's good, Duncan. Nothing to add.

Okay. Great. Thank you, Duncan. Thank you, Nick. I think that's all we have time for this morning, ladies and gentlemen. Duncan, Nick, thank you very much, indeed, for the presentation. And thank you to all our listeners for submitting your questions. If you don't feel that your questions were directly answered or you'd like any more information on the trust, then please do reach out to either myself or your normal Schroders representative. Equally, more details can be found on the full annual report in the attachments and via our website where you'll be able to sign up for further updates on the trust. Other than that, that brings us to a conclusion this morning. And don't forget that this particular web conference has been recorded so you'll be able to watch it back again via our website. And it just leaves me to say thank you very much indeed to our audience for joining today. Thank you, Nick and Duncan. Wish you all the very best, and goodbye.

Goodbye. Thank you, everyone.

Thank you.