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

Well, good morning, ladies and gentlemen, and thank you very much indeed for joining us this morning for the Schroder Real Estate Investment Trust Annual Report webinar. My name is James Lowe. I look after sales for the Schroder Investment Trust business. I'm very pleased to be joined by the chief portfolio managers of SREITs. This morning on the line we have Nick Montgomery, he's the head of U.K. Real Estate and Schroder's Real estate, and one of the Portfolio Managers; and Bradley Biggins, he's also Portfolio Manager on SREITs. Now just before we get into the session with the team, a couple of bits of things to go through on the right of your screen. So we have a Q&A panel where you can ask the team questions as we go along. The team is actually going to present for about 30 to 35 minutes and then we'll go into Q&A. So please do put your questions through that system and I will ask the guys at the end. You can also download a copy of the slides in the Download Docs tab as well. So with that brief introduction, I will hand you over to Nick and Bradley for the presentation. Over to you guys.

Fantastic. Thanks very much, James. Morning, everybody, and thank you very much for joining us. So we're here to present the results for the year ending 31 March, '22, as James has outlined. And I'm delighted to say, and I hope, I'm not tempting fate by saying that actually this is a record set of results for the company. We're announcing today a net asset value of GBP 372 million as at 31 March, and that represented a NAV total return of just under 31% which comprised a NAV movements of plus 25%. So as I say, a very strong set of numbers. Also worth noting, clearly, with momentum still over the financial year to March, we actually had enough movement or enough total return, I should say, just under 9% for the final quarter to 31st of March. Probably more importantly is what we've paid by way of dividends, and obviously, as we've come out of the pandemic and we've seen a recovery in rent collection rates, and alongside that, obviously, the activity within the portfolio, we saw an 80% increase in the dividend paid over this financial year compared with the prior financial year. And that represented dividend cover on an EPRA basis of about 113%. And actually the cash cover, which is a number we've talked about previously, particularly when we've had arrears during the COVID period, is broadly in line. We have a very strong balance sheet and Bradley in a moment will talk to the work that we've been doing with the recent refinancing. But we have a net loan-to-value at the end of financial year just under 29%, so comfortably within our strategic range. All that positive activity and obviously a recovery in sentiment more generally had led to a very strong shareholder total return over the period for our shareholders of just over 53%. So where is the performance coming from? Well, strong performance of the underlying portfolio, as it says in strapline above, alignment with the higher growth sectors, we are now just under 50% invested in industrial and we think significantly almost all of that is within multi-let industrial estates where often distribution warehousing have now led to the continued performance of the portfolio, so that 23.5% return, thus benchmark just under 20%. And actually since inspection, we're now sitting on the 11 percentile of the benchmark and that's the period since 2004. And very positively and deliberately, we've continued to deliver on above average income return, so we've had high capital growth as well as that higher income return over the long run. Lots of activity in the portfolio. A model which we'll talk to you shortly, both in terms of active management, generating net income growth, but also by transactions -- selling. We may well do some more selling alongside some accreted new acquisitions. Now the income focus I've touched on, the higher income return we think will be positive, particularly, as we move into a more slowing market. The rent collection rates back to pre-pandemic levels. And all of that activity has allowed us today to also announce a dividend -- a further dividend increase for the period to March -- quarter to March paid in June of a further 3% uplift. If we take the share price at yesterday's close, that reflects a dividend yield on share price of about 5.8% with the NAV, again based on yesterday's close, reflecting a discount of about 28% to NAV. So again, we've been saying this for a while, we think we're well positioned, we think the shares look very good value. Lots of progress on ESG, and again, we'll talk to this in a lot more detail shortly. But good activity in terms of delivering on the commitments that we made last year, but also, arguably more importantly, delivering on the ground with live asset management projects. And again, we'll come on to it, but a key focus for us on strategy is how we can continue to differentiate from a sustainability perspective whilst continuing to deliver the attractive level of income and returns, that is our overarching objective. The last point to note just on the first page is, we're delighted to announce today also that we are appointing a new non-exec and senior independent director. Priscilla Davies joins the Board. Priscilla will replace Alastair Hughes as Senior Independent Director, as Alastair steps up to be Chair when Lorraine Baldry leaves Board in July. And we're very, very grateful for the support that Lorraine has given the company, and particularly us, over her tenure. She's stepping down having come to the end of her 9 years. And Priscilla has lots of relevant experience for us both in relation to real estate, private assets more generally, but also in relation to sustainability where she's involved currently in a company which is a renewable specialist. So those are the highlights. Just moving on to the numbers in a little bit more detail, I guess the first point to note is, obviously the performance has been driven by the valuation of the underlying portfolio. So if we take the latest MSCI data, the net uplift of GBP 71 million that you can see in the first 2 lines of the chart there, that actually equates to net capital value growth of that 16% over the year, which compares to our benchmark, you can see there, of about 15%. So our performance in capital, as well as I said earlier on, income. The NAV, despite being very strong, obviously was diluted by some transaction costs have acquired the North West industrial portfolio at the back end of 2021. Obviously, we sold an asset in Nottingham at a very strong premium. That was an asset where we delivered the business plan. We couldn't see the further upside in holding that asset. And although, we only purchased a small number of shares over this financial year, the shares that were acquired over the previous financial year as part of that buyback strategy had, had a positive impact in terms of constant growth in the shares and led to that 80% uplift in the dividend per share comparing this financial year to last. From a P&L perspective, I guess, the numbers here perhaps not that surprising in terms of the recovery in income. So you can see there GBP 27.2 million of IFRS income in that first gray bar compared with GBP 24.2 million over the previous financial year with that growth, as I say, partly due to COVID recovery, partly due to obviously a lot of the active management that's gone on within the portfolio. It's worth noting that that's IFRS income over that financial year, so you'll hear shortly. If we look at a snapshot of the valuation at the end of March, our cash rental income is about GBP 30.1 million and that's before the post year end acquisition made in Manchester, which takes our cash income up to just over GBP 34 million. And we've got a build of how that translates from cash rent into our reversionary income later on in the slide. It's worth noting as well that although our expenses have gone up slightly over a financial year, that's for good reasons. So it's because we've done more activity. There are more transactional or related fees to lawyers, to agents. Company has also benefited over this period from our reduced investment management fee. So some of you may know that over the course of last year, we reduced our management fee from 1.1% down to 90 basis points. There is tiering, but we -- over the year we were at 90, and so we have benefited from that. And so, you can see the net result of all of that is a 35% increase in EPRA earnings. The dividends paid, as you can see, up 74% in pound notes, 78% on a per share basis because of the share buyback, resulting there in that EPRA dividend cover of 113%. So we're very pleased with the outcome in terms of delivering continued income growth. And that has translated into a further increase in the level of dividends. I think it's very significant. I think that we can say that, based on the latest dividends uplift we're announcing today, we are now ahead of a pre-pandemic dividend on a per share basis, as I say, partly enhanced by the share buyback program that we've undertaken. And we are very clear, the Board are very clear that were sustainable we will continue to look to increase that level of dividend. And despite the market uncertainty -- we'll come on to in a moment -- we are happy that there are still opportunities in the portfolio for us to continue delivering that net income growth despite, obviously, as I say, the market slowing scenarios. So very positive in terms of dividend progression. From a performance perspective, this is showing the data that we would always show. So this is showing the performance of our underlying portfolio compared with our MSCI benchmark over 1 year, 3 years and also since IPO. If you move to the top left hand side, you can see the numbers I quoted earlier on. The 23.5% total return compared with the benchmark at 19.9%. Obviously, income for this period represented a much smaller part of our total return and will be a bigger part of the return going forward. And are significance premium in terms of our income compared with the benchmark we think will support our future outperformance. Interesting to note, if you look at the industrials there, their relative outperformance. Very strong absolute numbers from our industrial portfolio. Slight underperformance against a benchmark, that's down to 2 factors. First of all, our industrials are concentrated on the regions, as you'll hear shortly, where we've got higher initial income returns, but we haven't had quite the level of capital growth that's been experienced in the South East, and particularly London. But also our industrial returns are diluted very slightly as a result of the transaction that we did on the back end of 2021. Just briefly, it's worth noting, we have had very good performance from the recent acquisitions. So some of you may know the back end of 2022 we acquired 2 quite sizable industrial assets. One asset in Chippenham where the largest tenant there is Siemens, and also, an interesting different sort of assets in Manchester where we had an income producing element and then some development land. And I'm very pleased to report that over the 12 months you can see that on the right hand side, Chippenham and Stanley Green have outperformed the -- all industrial average. And actually interestingly, if you look at Chippenham, of that 48%, 8.7% came from income. So the acquisitions that we have done, where we have been focusing our income yields have obviously driven because alongside the capital value growth that we're getting from the asset management. Obviously, the portfolio is much lower return, because we first of all, have held it for a shorter period, but also during that period, we've taken the hit for transaction costs. As it happens, we have seen a pickup on the portfolio value already from the GBP 19.9 million that we paid, up to GBP 21.6 million at the end of March. And then finally there, The Arc, in Nottingham, the one disposal that we completed over financial year. We are planning more disposals as we always have done, where we complete asset management, where we believe we can recycle the capital to deliver better returns. So this is that sort of houses the risk slide, but I think it's worth noting, whilst we're obviously highlighting here the discrete yearly performances we have to do is that, so we still have within the 3 year rolling number the impacts of the loan refinancing that we did back in October 2019. And I think, when people are screening us, I think that, that 3 number is obviously relevant numbers. So it's something that we do point out, there was a sizable upgrade cost about GBP 20 million, which at the time, wasn't an easy decision, but actually -- and Bradley will outline it in our balance sheet in a bit more detail shortly -- locking into that long-term debt at a peer group low cost of debt, with hindsight looks actually to be an even better decision, particularly as we're moving into a higher interest rate environment. And so that number, when we present our results next year, that will have fall out of our 3-year number, which I know, as I say, is relevant for many investors when they're screening us. Now just to introduce the strategy before I hand on to Bradley. So these are the 5 pillars of our strategy that many of you will have heard before. I think we've made the point, and I think it's increasingly relevant that as we see the very extreme polarization in the market begin to narrow. That having the ability to tack and change between sectors, and particularly where we've got specialist sector experts within our business, we think that's an increasingly positive thing to have. And I'll come on to the market in a bit more detail shortly. As we all know, the market is becoming increasingly operational and having that specialist expertise in the team allows us to deliver things like the Elevate concept at City Tower, Manchester. We are going to be increasingly disciplined and active in our investments approach. I think there are assets -- we are unlocking couple of assets now. We're very pleased with the investments that we've made over the course of the last couple of years, and we are actively looking at new opportunities like St. Ann's, we saw here in Manchester in order to efficiently recycle proceeds. Our balance sheet, Bradley will talk to in a bit more detail shortly. We think we're very well placed. And then finally, I guess, just from an ESG perspective, we think there is a really interesting opportunity using the expertise that we have both within our team, but with broader Schroders business to differentiate our strategy from an ESG perspective. But not for us sort of go out and buy -- bringing up excellent buildings that are sort of up and ready, but actually to continue doing what we are doing, which is to buy assets that we can improve through active management, exploit best pricing and deliver improved both sustainability and financial performance. And Bradley, again, will touch on that in a bit more detail shortly. Now from a market perspective, clearly, and as we say within the statements, a huge amount of uncertainty out there driven by clearly inflation running ahead of many expectations and the resultant reaction in terms of interest rates. Actually, if you look at the year-to-date information for the real estate market, the MSCI index through April already shows 6% returns. So 2022, I think, will be a respectable calendar year return. But there are signs that the market is beginning to react to both that higher inflation and also rising interest rates and what that means in terms of the cost of debt. There's, clearly, is also the impact of inflation on consumer spending. And again, it's early days, but I think we are expecting that a combination of those factors will lead to a slowdown in capital growth. So what this chart is showing is just really illustrative at the moment, because, obviously, there is so much uncertainty. But we are expecting and we've been saying for a while to have the convergence -- to begin to see the convergence between the main sectors. For the first time, this cycle, for example, industrial yields in parts of the market, particularly London and the South East are below the cost of finance and that negative gap we haven't seen for a long while. And we do expect to see that come through in terms of pricing, particularly for the very low yielding sectors. So although we are not at this stage, expecting a significant fall in capital values. We are, as we've said before, expecting to see less polarization, a convergence between the sectors with returns driven more by income, which we think we're very well placed to deliver, but also still driven by these long-term structural trends. So we still believe that well-specified offices in high-growth locations, particularly where you've got emerging, growing sectors -- tech, life science, for example, will benefit. We think multi-let industrial estates will probably do better than distribution, warehousing. Again, we think we're on the right side of, particularly if we see a slowdown on the consumer side. And we do see that there are, obviously, interesting parts of the retail market -- particularly retail warehousing, we've begun to see that recovery. So I think there are reasons, first of all, I think, to be cautious. But as I say, against that backdrop, particularly given the nature of our diversified portfolio, but one that is focused on those high-growth sectors means that we are well positioned. And with that, I'll hand over to Bradley.

Thanks, Nick. Points I'd like to draw out on the table on the left-hand side are the diverse nature of our portfolio, which Nick has mentioned. We think this makes the portfolio more resilient. In addition, we've also highlighted the high-yielding profile of our portfolio. And we think there's potential for rental growth for the higher reversionary yield. And this has been assessed by the independent valuer. The point Nick has made about being overweight higher-growth sectors is illustrated by the chart on the right-hand side. So we've highlighted our overweight positions in industrial and also in retail warehouse. And we're also overweight in offices. What we point out that our offices are in higher-growth cities such as London, Manchester and Edinburgh. And as Nick mentioned, we, of course, have the ability to change these allocations for sectors as we enter this new phase of the cycle. To provide more color on our portfolio, we show in the table on the left-hand side, our 15 largest assets by value. So these represent 79% of the total portfolio value. So we think it gives good transparency on the overall portfolio. We've got good quality assets with good fundamentals and in higher growth locations. We set out 3 examples on the right-hand side. At the top there, we've got Stacey Bushes. This is a multi-let industrial estate in Milton Keynes. It's our largest asset by value and has excellent fundamentals. Over the year, we've seen a new rental turn achieved on the estate of GBP 14 per square foot. This was just GBP 5 to GBP 7 per square foot, just a couple of years ago. This has been catalyzed by a new 16,000 square foot tariffs we constructed in summer 2020 and a rolling refurb program across the older units. But importantly, we're seeing the older un-refurbed units to achieve the same top end rent as well. We still have an active business plan at the site, and there's potential for further development, so we're put in planning for an 18,000 square foot development and there's also potential to acquire an adjoining ownership. The asset delivered a total return of just shy of 41% during the financial year. Our office on Store Street in Bloomsbury is in an excellent location. The area is experiencing very high demand from life sciences, in particular. University of Law occupy the building and the rent is very low, GBP 43 per square foot. There's potential to more than double that with the right refurb. We have bid on an adjoining ownership, which could unlock managed value and open up exciting development options for the site. In Bedford, we also own St. John's Retail Park, which is the best park in the area and has performed strongly over the past year. Anchor tenants such as Lidl drive footfall, and we're collaborating with Starbucks on developing a drive-through on the scheme and also to a number of -- at a number of our retail parks in Bletchley, which is in Milton Keynes. St. John's delivered a total return of 32% during the financial year. As Nick said, we aim to provide our occupiers with excellent real estate, and this means we have to adapt to what they want. For example, to drive demand from SMEs in City Tower, which is a mixed-use property in Manchester, City Center, and it has a 24 -- 28 floor office tower. We've developed a flexible solution called Elevate. This can be an excellent way to get tenants in the building, then transition to traditional leases over time. For example, Oodle were originally in an Elevate suite and they now occupy 2 -- almost 2 full floors of the tower. We're involved in this strategy further to create what we're calling a managed workspace solution. This is even more straightforward for tenants to sign up to and move into the property. And we hope their businesses grow over time, and they also take more space like Oodle have. At Millshaw, another one of our large multi-let industrial estate. We've completed the first phase of the business plan we set out to achieve when we acquired the asset in 2015. We paid GBP 22.7 million at the time. The current valuation is GBP 55 million. The site is now fully let to 23 tenants from a diverse range of sectors and it's been a real success for the fund. It delivered a total return of just over 36% during the financial year. There's a station being developed on an adjoining site, which does present a longer-term business plan opportunity, but we are currently reviewing our longer-term plans for the asset. We may crystallize the strong returns we've generated from asset management activity since we acquired the asset in 2015. On this slide, on the left-hand side, we have listed our 15 largest tenants by annual rent as at the year-end. As you can see, these are well-known quality household names, and we think this is a result of the quality of the portfolio and our approach to operational excellence. And as we said before, we think this leads to resilient income. It's pleasing to report our rent collection is now back at the pre-pandemic level of around 96%. And you can see that in the bottom right-hand corner. And we've highlighted a couple of tenants in the table, in particular, Siemens, where we've agreed terms to increase their rent to GBP 1.22 million from just shy of GBP 1 million today. This will mean they become our second largest tenant. Siemens occupy a large amount of space at Langley Park in Chippenham, which is another of our large multi-let industrial estates, and they've got 800 people on the site. The lease expires in 2026, and we're already in discussions to increase our occupation at the site. This is fantastic because we are also working with surveyors and the planning authorities and added more units, and these will be built to an operating net-zero carbon standard. Other tenants at Langley Park are also interested in taking on additional space. We're working with Siemens on how we might improve the ESG credentials of the site, and in particular, their occupation. This could include apprenticeships, and generally making a positive impact on the community. This is the bridge that Nick mentioned earlier. The first bar on the left-hand side, you can see our current annual rent as at the year-end was GBP 30.1 million. Now this is illustrative. We have a lot of moving parts, but I'll quickly talk you through it now. To the left of the dotted red line, that's our reversion. So ERV of GBP 33.8 million. We have fixed uplifts in the next 24 months of GBP 1.1 million. We have vacant space worth GBP 2.4 million of annual rent that we're working hard to let. And we also have the development pipeline in relation to Starbucks, which I mentioned are -- we're developing a drive-through at Bedford and at Bletchley, Milton Keynes that will bring in another around GBP 250,000 of rent. That's how we see ourselves get into the ERV. And then going beyond that, we have capital to deploy, and we have capital that we've already deployed. So for example, post year-end, we acquired St. Ann's House, GBP 14.7 million. This will bring in GBP 1.2 million per annum of rent. And we also have a CapEx pipeline where we plan to spend GBP 20 million. And of that GBP 20 million, almost -- well, GBP 8.5 million is in relation to Stanley Green, where we've already started construction of the net-zero carbon operational estate, and that will bring in around GBP 1 million -- well, a conservative estimate of GBP 1 million of rent. And then once we spent the CapEx that's on hands, we'll have GBP 20 million of remaining resources to deploy, so we've assumed a yield there of 5.5%, bringing in another GBP 1.1 million. So the point is we see opportunity to grow rent over the next period. On this slide, I set out some details on the acquisition we made in December. This acquisition is an excellent example of the benefits of having a large real estate team in terms of sourcing acquisition opportunities. We acquired this portfolio of 4 industrial assets, the largest of which is a multi-let industrial estate of Birkenhead in December for GBP 19.9 million. This reflects a very attractive net initial yield of 6.9%. The cap value was also very low at GBP 53 per square foot. It can cost GBP 90 to GBP 100 per square foot just to build a similar asset in this area. The deal was off market. The valuations increased by some 9% during the quarter in which we own the asset, and we've made good progress in letting the void space that we inherited at Birkenhead. We're also in talks with Balfour Beatty, who are the largest tenant at Birkenhead, and they used this location to service nuclear contracts in the North West, so we'll talk to them about them taking more space in the estate. As Nick mentioned, we acquired St. Ann's House in May. This is another higher-yielding acquisition. We paid GBP 14.7 million for this mixed-use office and retail asset, and it will generate GBP 1.22 million per annum of headline rent. This asset is prominently located in the city center. It's near to the prime retail core, and we emphasize it really is a prime location. Compared to other major cities, we see Manchester currently has the lowest office vacancy rate, and we expect relatively higher growth in office rents over the next 5 years. So not only does the asset have excellent fundamentals, but we see an opportunity to improve sustainability credentials, and we've included more than GBP 4 million of CapEx in the business plan to achieve this. So despite this high CapEx budget, the IRR acquisition was very attractive. So we've got 2 debt facilities. We've got a term loan from Canada Life and an RCF from RBS. On the left-hand side, you can see the key points on our term loan in Canada Life. It's GBP 129.6 million. It's at an attractive average fixed interest rate of 2.5%, and this is locked in for a long duration of 14 years on average. We think this is a competitive advantage compared to our peers. And clearly, in a rising interest rate environment, having that locked in low interest rate is very helpful. On the right-hand side, you can see the key points in our RCF. We completed the refinancing on this yesterday. We increased the facility to GBP 75 million. It was previously GBP 52.5 million, so that gives us another GBP 22.5 million to deploy in the portfolio. We extended the term to 5 years. It was previously 1 year, and we secured a low margin, which is broadly in line with the previous margin. We're also in the progress -- in progress of agreeing green loan KPIs of RBS. This is floating, but we do have, at the moment, GBP 30.5 million of interest rate caps, which provide a hedge to rising interest rates, and we think these caps will start to pay out over the next year. We are going to implement a phased hedging strategy, and we're in the process of negotiating that at the moment. Overall, at the year-end, we had GBP 32.7 million drawn on the RCF, which combined with our Canada Life term loan and net of cash, leaves with a loan-to-value of 28.6%, which is within the strategic range of 25% to 35%. As Nick said, we've made significant progress in developing our sustainability strategy over the year, delivering the commitments we made last year in our Annual Report. Our strategy is shaped by the issues that matter most to our stakeholders and targets areas where meaningful contributions to be made. We defined 3 pillars of impact, people and planet and align these with the United Nations Sustainable Development Goals. Our targets apply to our business, our funds and the assets we manage. We communicate on our intent and we measure and improve the outcomes, and we'll get to that shortly. So to our mind, the successful delivery of a sustainable real estate strategy is dependent on thorough consideration of environmental and social characteristics throughout the asset life cycle. At Schroders, we assess environmental and social characteristics as part of acquisition due diligence, and this is reviewed by the investment committee to ensure integrity of our governance process. We've produced a number of guidance documents and towards to help manage sustainability considerations as part of our active management approach. And we continue to engage with the occupiers of our assets to support the successful delivery of joint sustainability ambitions. We mentioned examples of Siemens. Given the need to improve U.K. building stock, refurbishment and redevelopment will provide a critical opportunity to deliver future-proof assets. And we're also announcing today our net-zero carbon pathway, which you can see in the red box in the top right hand corner. In addition to making these commitments, it's increasingly clear to us that there's evidence of a green premium or a brown discount. We see an opportunity to manufacture the green premium where managers have the asset management capability to do so. Research today shows the valuation premium can be as high as 20% and the rental premium can be as high as 10%. Whilst this focuses on London offices, we believe the opportunity extends to other sectors and regions. St. Ann's House is an excellent example of this. Our work will be focused on improving the sustainability credentials of the asset to enable us to achieve these higher rents and hopefully manufacture the green premium. In summary, the build environment has a profound impact on our climate. It accounts for almost 1/3 of CO2 emissions according to the IPCC. Therefore, to achieve net-zero carbon, we have to address this. The nuance of real estate is that the majority of today's existing stock will still be in use in 2050. This means simply acquiring or building green assets is not going to address the challenges we faced in real estate. In our mind, this presents a propelling opportunity to evolve our strategy. We aim to acquire assets that are not reaching our full potential from a sustainability perspective and implement our active management approach to enhance sustainability credentials and hopefully manufacture the green premium we discussed in the previous slide. This placed our asset management expertise with the set of specialists we have within real estate and also utilizes our deep resources in ESG, both in real estate and across the business more broadly. We've worked with our colleagues in BlueOrchard, who have been in part investing for more than 20 years to develop a holistic scorecard by which we can transparently measure the progress we make in developing our assets, and we will use to communicate progress to investors. I'll pause there and hand back over to Nick.

Great. Thanks, Bradley. So I think we're getting close to 35 minutes. So just to wrap up before we go to questions, I think the 3 really important points are on the right-hand side of this final slide. So first of all, we have had very strong performance over the year. It's come through as a result of having the overweight position to the parts of the market that have delivered the strongest performance. Obviously, industrial now are obviously half of the portfolio, but also retail warehousing and high growth office locations. We think we are also well positioned going forward with both, obviously, those weightings and as I say, I think multi-let, I think will continue to deliver good returns, particularly where we're invested in the regions where the yields are a bit higher, but also where we've got potential in the portfolio, as Bradley has outlined, to manufacture income through active management. We have lots of opportunities, we believe, still to add value even against the backdrop, obviously, of a slowing market and the very strong growth of capital value growth that we've enjoyed slowing. And I guess the final point and probably most interestingly looking forward is how we can evolve the strategy. Really, as we have been doing in the last few years against the backdrop of these really important structural changes, but in particular, to see how we can differentiate ourselves from an ESG perspective. We do have both in the real estate team, but also within the wider parts of the business, great expertise in this area. And we think there is a real opportunity to evolve our strategy so that we do differentiate on our ability to improve buildings and therefore, still being able to attract this pricing from buying a high yields, delivering the active management and continuing to deliver our investment objective. So with that, I will hand back to James, and we'd be delighted to take any questions.

Great. Thanks, Nick. Thanks, Bradley, and thank you everyone for sending your questions. So I'm just going to start on the ESG topic, I think we just covered that, and there's been a couple of questions on ESG and the green premium. I think a couple of questions just been asking for a bit of an example as to where we have executed sort of an ESG type project within one of the assets and whether we have been able to capture that green premium. Could you provide some sort of demonstration of that?

Yes. So -- yes. So I guess, the first thing to say is, we're talking about evolving our strategy, but that is against a backdrop of having established procedures in place already so that all refurbishment activity that we are currently undertaking is designed to deliver an improvement in ESG performance and achieve, for example, a minimum EPC rating of the -- where possible. So across our office portfolio, Citi Tower, being a good example, as we've refurbished those floors, particularly for the Elevate concept, we have been delivering to those standards. And I think that's allowed us to deliver the continued performance. And actually, given the high yield that we've got, perhaps somewhat surprisingly, higher rental value growth than the benchmark, so 6.8% rental growth over the year compared to the benchmark of just over 3%. I think what's probably more interesting is where we go from here. And I think where we're doing any new development now, our procedures require us to sort of comply or explain if we're not delivering to an operational net-zero standard. And so that's why, for example, the standing green development that we're undertaking, we're in the ground now. We're delivering that to operational net-zero. The cost of delivering that is probably 5% to 10% higher than it would otherwise be delivering to a sort of a good standard. But we're more than confident that doing that actually will, first of all, lead us to lease it more quickly. But also importantly, there is a shortage, obviously of operational net-zero assets, and that scarcity means that we think it will also be supportive in terms of value. So we're seeing that evidence increasingly across the portfolio. I think it's also worth noting that we're seeing planning authorities increasingly focused on the question of embodied carbon, and that's the sort of the elephant in the room really, which is why we think our strategy is particularly relevant, because the majority of the building stock, we can all see out of our windows now, will still be around in 2050. And so, a strategy that we think focuses on, first of all, buying those assets at a price, which allows you to invest the money to deliver that improvement as well as that financial return is actually a really interesting opportunity.

Thanks, Nick. I'm going to take you away from ESG now and towards some of the financials. Actually, before that, I'll take this question from one of our clients, which is -- they're interested in a bit more information on the lease expiry. Could you sort of comment on the lease expiry? I'm also going to bundle another one of the questions we've had into that around our exposure to inflation. I know there is a chart in one of the slides we saw showing there was some degree of RPI linkage in some leases. But could you expand on the expired leases and also then the degree of inflation protection we might see?

Yes, of course. So I think if investors want to turn to slide, we won't put it on the screen, but Slide 12 provides the headline leases of our information. So you can see that as at the end of March, our earnings by the lease term, and this assumes all tenants break at the earliest opportunity is just under 5.5 years. Now our benchmark is slightly misleading because the benchmark at 11.4 years includes all of the very long lease funds, so it is distorted. And if you compare therefore us to a more representative peer group, we're broadly speaking, in line. The average tenants by lease terms has grown a little bit over the year. But a key part of our strategy, and Bradley touched on it, and if investors can turn to Slide 30 -- slide, I'm sorry, Slide 15, is trying to focus on where we can undertake new leases with tenants to increase the average lease term. So for example, the lettings, Bradley mentioned that we are literally about to exchange with Starbucks in 2 locations. Those are 2, 15-year leases without breaks with CPI-linked reviews. One of the transactions that we're doing at Chippenham, which we refer to in the accounts, is where we are, again, about exchange a new lease with an existing tenant where we're taking their lease term from some of its expires in December to a new 10-year lease, no breaks with RPI. That's a very large American manufacturer of something -- forget what it is now -- they're tech-related -- semiconductors. So I think when we look at the portfolio and we look at the activity that we're doing at the moment, I think we're confident that we can extend that average lease duration. But I think we -- it's not going to move materially for 5 to 6 years because part of our strategy is about buying buildings, grade buildings that we can reposition, and therefore, as evidenced by St. Ann's in Manchester, we're buying assets with slightly shorter lease terms, implementing the improvement and that will lead us to always have a 5/6-year on expired lease term. Now on the inflation question, I think we set this out in the deck. So around 10% of our portfolio has some form of inflation linkage, whether that's RPI, CPI, CPI plus 1. And about 15% of the portfolio has some form of minimum guaranteed uplift. And we obviously illustrated how much of that comes through over the next 24 months. That's not terribly surprising because, again, if you look at what we are owning, where we've got 50% of the portfolio in multi-let industrial, typically, those leases tend to be about 5 years. Typically, you're therefore not having long leases where you've got some form of RPI. What we're trying to do is manufacture that. So rather than going out and paying a very low yield for a long lease of inflation linkage, because yields that are currently very low we're more about buying grad B buildings like the Headingley the asset where we got Premier Inn on a new 20-year lease, like the transaction I just mentioned in Chippenham where we're turning 1-year lease into a 10-year lease. So where we can, we will build more inflation into the portfolio. But I think the last point, James, on the question is, our inflation protection comes from 2 really key points. First of all, 14-year term loan at a fixed 2.5% that's peer group alone. But also importantly, actually a very large reversion in the portfolio. So although we've got less, if you like, guaranteed growth through inflation linkage, actually we just got a lot more potential pound notes coming through having that high reversionary potential.

Great. Thanks very much Nick. So one of the specific questions that has come through on lease expire was just whether there is anything in the next 12 months that you're looking at, at the moment that needed to be through renegotiated?

Yes. So there's one key one, which is our second large -- well, actually seem to become our third largest tenant when Siemens -- when that's contracted that's -- is Buckinghamshire New University. So they have a lease break in November 23 and they have to serve notice by November 22. It's an interesting one because they're currently paying us GBP 1.15 million. If they don't break, then the rent ratchets up by about 15%. We are in discussions at the moment. It's currently unclear whether they are going to break or not. My gut feel is that they probably won't. But again, we're in discussion to see whether actually we can -- rather than having that just actually see whether we can work with them to invest in the building, improve the performance and deliver stronger returns through some sort of long-term lease extension. So those discussions are running in parallel. If they do break, fundamentally, it's a good asset. It's located on the edge of retail center. It's low density, and we think there might be an opportunity to increase massing in some form of alternative use. So I think that's -- we've got 315 tenants, James, now, so we're very diverse. That's the only one really which potentially moves the needle a little bit, representing just under 4% of rent if they do break. But we will -- at least the key thing there is, we will know in November, one way or the other, which gives us time to plan to those alternative uses in a worst case.

Thanks, Nick. I'm now going to take a bit of a step back and go into -- there's a question here that has come up on the multi-sector approach and how important is it to take a multi-sector approach at this point in the cycle? I know there's been a lot of money raised in specialist strategies, but could this be the return of the multi-sector strategy? And I guess, bundling another one of our clients' questions into that, where are we expecting to see the best future growth from a sector position going forward?

So I guess -- yes, so I'll take that second question first. We are expecting that over the next 2 years, multi-let industrial will probably continue to deliver the strongest level of rental growth, okay? Because those structural tailwinds are still there, even though I think we have a slight concern about how a consumer slowdown could affect the distribution market in particular, which is more driven by retailer demand, okay? So I think we feel comfortable owning the assets that we own in the regions, because we think we will see that rental growth come through. The issue is -- and I think the benefit we have by being able to invest across sectors is just how low industrial yields are now. So ultimately, we think people want to own us for income. They want to own us for long-term sustainable dividend growth. And we will not deliver that buying industrials in the mid-3s. And I think what we're seeing with inflation rising rates means that we think those yields in parts of the market are getting to levels where they just can't go any lower. And so for us, and our strategy and the fact that our dividend today reflects -- I mean, a very high level of about 5.6%, 5.7% evens their share price move. The best way that we can deliver continued growth in net income is being able to tack and change between sectors. So as Bradley's noted, the estate we own and leased is in great state. There's a long-term potential phase 2 strategy, if you like, of redevelopment long-term on the back of the new station. But actually being able to rotate out of an asset like that at a yield below 4%, and move into good quality -- whether it's good quality regional offices or good quality retail warehousing at a yield of 5.5%, 6% or in the case of -- St. Ann's House in Manchester 8% -- almost, is something that if you're a strategy that's only got the ability to invest in industrial you just can do. So I think we have -- whether investors agree with us ultimately is clearly debatable. But actually, at this point in the cycle, we think it's very clear that there is a benefit in having the ability to tack and change between sectors.

Right. Thanks, Nick. Just one -- time probably, we're coming up to 45, 50 minutes now. So probably time for just one final question here and this is a very good question that someone sent in just on office market and probably a good one for us to sort of end on. But we're 2 years on now from the start of pandemic, and clearly, there was a lot of concern around offices and retail of that matter at the time. Looking back now over the last few years, how has it gone in the office sector and how are we looking now? And clearly, from the rent collections we've seen it's looking up within the portfolio, but how do you see the office sector now as a whole 2 years on from pandemic?

Bradley might want to add to this. I guess, polarized within the office sector. I guess, we've been a bit surprised at how certain markets have been slow than others to see a recovery in occupancy. And that's for a whole host of different reasons, commuting patterns being a key one, if you look at the range across the U.K. I think polarization, because we genuinely have conviction that the sort of the higher growth cities, obviously part of London, so take Bloomsbury, incredible demand driven by life sciences, tech, media, education and hence, the spillover from Kings Cross. So you got locations like that, which are echoed in cities like Manchester where you've got equal as relative for the size of the city strong demand from university-related uses, public-private partnerships, et cetera. So I think we have -- what we've seen in our office locations like Bloomsbury, Manchester, Edinburgh is if you provide the right quality space and if you offer tenants a level of flexibility, then the occupational demand is there. It's weak than it was, but it is there, and we do see it recovering. Fortunately, what we don't own and where we have much more concern is where you've got either out of town locations where you're relying very much on sort of back-office admin type occupiers, where there just isn't the same level of demand and a lot of that demand structurally, we think is weaker because of businesses being able to operate more flexibly people from home. But also where you've got sort of a satellite towns around Manchester, for example, where we see continuous flow into the city simply because there's that war for talents and people want to be in locations where they've got amenities and so on. So I think -- I guess the market -- the office market has been slower than we thought in terms of recovery in occupancy. But I think if you've got the ability to create the right sort of space, particularly when you're coming off a yield, take in terms of7% or 8% relative to other sectors, we think it is looking actually quite interesting.

Great. Thanks, Nick. We've just gone over the 50 minute mark. I'll hand it back to both of you for any final comments you want to make before we be close.

Well, look, James, thank you, and thanks for those questions. Look, I think I summarized it in those 3 key points. I think we're very pleased with the performance. It's been a huge effort. We think we are well positioned against the backdrop of clearly greater levels of uncertainty. And we think with the expertise we have in the team and the broader, wider Schroders business, we think we're well placed to evolve our strategy, still delivering the same level of performance but with much greater emphasis on sustainability and going that sort of brown to green strategy to deliver improved returns. So thank you, everybody for your time, for your support, and we're very happy to take any follow-up.

Great. Thanks, Nick and thanks Bradley for the presentation, really, really, interesting. Thanks, everyone, for joining us this morning, and thank you very much for sending in all your questions. If you do, as Nick says, wants any follow-up, please do feel free to get in touch with myself or your known Schroders contact. And you can also head to the website for more updates and you'll see a copy of the Annual Report on there, shortly. And you'll be able to watch a recording of this presentation, if you so wish. So with that, thanks, Nick. Thanks, Bradley. Thanks, everyone, for dialing in and speak to you all again soon. Goodbye.

Thank you.

Thanks, James.