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

Good afternoon, ladies and gentlemen, and welcome to the Schroder Real Estate Investment Trust Limited Half Year Results Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. And if you could give that your kind attention. I'm sure the company would be most grateful. And I'd now like to hand you over to Head of U.K. Real Estate, Nick Montgomery. Good afternoon, sir.

Good afternoon, Jake, and thank you for the introduction, and thank you very much, everybody, for joining today on the investment company platform. So as Jake said, I'm Nick Montgomery. I'm Head of U.K. real estate, but also alongside Bradley, who is with me on the line responsible for Schroder Real Estate Investment Trust. So we're delighted to have the opportunity to present the results to you today. It's obviously a very interesting time in the market, capital markets more broadly, but particularly in the real estate market. And we're trying to give you here a really good idea about how we see the landscape and the prospects for the company. So moving on, what we're proposing to do is probably have a 40-minute-or-so presentation, a bit of a tag team backing me. And then we're delighted to take questions at the end. So just by way of introduction, so we've announced our results today. So these are the income results for the 6-month period for 30th of September. With a slight tongue in cheek, I made a comment with our year-end results. that it was our best 12 months over the year to March, we've ever seen that I was tempting fate. And that was because we knew that the market was going to slow. Yields were getting to very low levels, particularly in the prime industrial market. And so we were taking steps already to sort of manage that slowdown. Of course, what's happened in the wider markets obviously culminating in the many budgets has led to significant volatility, and we try to be really clear with shareholders within our report today about how we see the outlook. So again the backdrop of the different environment, we've announced today a positive net asset value total return of 0.8%, that obviously includes dividend. The underlying NAV per share or the inline now fell by about 1.3%. Very positively, we paid 20% more dividends over the 6-month period than the corresponding comparative period a year ago. And almost more positively, that dividend is fully covered, and we've reported a per dividend cover today of 110%. So if you compare us to our peer group, based on our very attractive share price yield today of 7%, that screens very well. But importantly, that is 7%, that is 110% covered by recurring EPRA earnings. The other key point to note, I think this is a genuine differentiator. We have the lowest longest duration debt in our peer group. And really importantly, it's fixed. So 90% of our debt is fixed. And later on in the presentation, Brad will give you a lot more color on our debt stack and why we think we are so well placed. Obviously, most importantly is what's going on under the bonnet in terms of the underlying property portfolio and lots of asset management going on and a very encouraging pipeline of asset management. And again, Brad will give you more color on later. So we've outperformed over the period quite meaningfully, albeit relatively low numbers, so 1.8% total return versus an index that actually delivered a negative total return over the 6 months of about 1.2%, I guess probably more relevant is a longer-term performance track record. So over 3 years, our total return at portfolio level is 9.3% compared with the benchmark of 6.1%. I think very importantly, as we're looking forward into a market where we're going to see lower returns and income, therefore, making up a bigger part of that return. Over a 3-year period, our annualized income return was about 6.3% versus the benchmark of 4.2%. So very significant premium over the benchmark. And interestingly, that's the second highest income return out of 160 funds in the benchmark over that 3-year period. And amongst that 160 funds that we know, for example, are on this platform, but are also the broad adhere group that people view as being part of I think the portfolio, as I say, has benefited from the active management across the portfolio. We've done a very significant new lease with one of our existing tenants called Buckingshire New University at our university building that bridge they've extended their lease by 5 years at a higher rent. And that's really important because they had a break option next year, and so we protected that income and again, more on that later. So I've mentioned income, whatever metric you look at, we've had a higher income return, whether it's the initial income return, the reversionary yield. So the yield that reflects market rents rather than the rents we're currently receiving and as well as, obviously, the actual panel notes received over the 6 months with an income return of 2.8% compared to the benchmark of just under 2%, that's been driven by some very high rent action rates in a funny way, actually ahead of the pipeline level, albeit actually, we are looking at the economic outlook, the risk of a prolonged -- perhaps not that deep, but nonetheless a prolonged recession, and we are very sort of acutely aware that there is the potential risk there and staying on top of our tenants, maintaining that dialogue to keep those rent collection rates up and obviously is very important. That allowed us to pay the dividend, as I said, we've announced a dividend today of GBP 0.08. That's a quarterly dividend for the period to -- or quarter 2 December. That's 4% above the pre-pandemic level. I think we are still the only company in our peer group to now be paying a dividend that is ahead of the pre-pandemic level. And as I said, with our dividend being fully covered over the period. It's worth noting that actually we're very confident that, that dividend will be fully covered over the full financial year. So -- and that's because we can see activity in the portfolio, the coverage that we had in the first half of the year as well as our fixed cost of debt, that gives us the confidence to be able to say that. Having said all of that, of course, because of broader sentiments and directional trouble for values, our shares today at around GBP 0.46 represents almost a 40% discount to NAV. Now we find that very frustrating clearly, and we have a strategy to try and address that, but we think that's a tremendous opportunity for shareholders current and new shareholders to buy in at a very attractive yield of 7%. And again, just to be a pointed out, that is a fully covered 7% with the potential we hope to see further income growth. Now the final couple of points I'll make. Firstly, and we mentioned this when we last presented on this platform, we think there's a significant opportunity to evolve our strategy where there is more emphasis on demonstrating how we're actively managing with ESG being at the core of how we manage our buildings, in terms of data to tenants, but more importantly, how we can decarbonize our existing building stock and fully extract the green premium that we know is out there. And actually, interestingly, also with our specialist expertise perhaps extract is pricing, where there's a brand discount. And more on that as we go through the presentation. And I guess last point to note is we also announced today some change to the board. We take on a new nonexecutive director. We have a new Chairman, who stepped up from [independant]. They're very good changes, and those directors also had an interest and direct experience looking at ESG as part of managing real estate portfolios. So I'll leave the summary there. Moving on to the results. I'm not going to go through all these numbers. But obviously, the headline here is that we did have that positive NAV total return. It is an overused football analogy, but it really was a half year of 2 halves. Over the -- if you look at the top right-hand corner of this slide, over the quarter to June, our portfolio went up by 3% versus the benchmark of 2% over the quarter to September, for the reasons that are very clear, our valuations fell by about 4% compared with the market of just over 5%. So we have seen the market turn. But as I say, because of the way that we're positioned we think we're going to benefit from that, and we'll give you further examples of why that's the case as we go through. Looking at the table on the left-hand side, I think the really important point there is to note the earnings of GBP 8.6 million, that's 20% up on the same period a year ago. And the dividends paid there of GBP 7.8 million, which reflects that cover of 110%. We're also one of a number of companies in the sector that are undertaking share buybacks. We were the first over the most recent cycle going back about 18 months, we brought about GBP 10 million of shares back. We bought most recently about GBP 1 million worth of shares at an average discount of 33%, which was at a small accretive effect to the NAV per share. Moving on, looking at income in a little bit more detail. So you can see the EPRA earnings of GBP 8.6 million. If you look at the sort of the colored lines as we go down there, very positively, we saw a 10% increase in rent and related income. We saw a pickup, as I have said, in EPRA earnings. That was for a couple of reasons, most notably because we've been very careful on managing expenses. So the management fee is reduced about 18 months ago, so we're beginning to see the benefits of that coming through. But generally, across the portfolio, close management service charges, close management of rates, close management of expenses more generally. Finance costs went up because we have redrawn funds on our revolving credit facilities in order to carry out accretive positions such as the assets in Manchester, St Ann's House, which we bought during the period of just under GBP 15 million. It's also worth noting slightly technical accounting point, but actually, because the vast majority of our debt is a fixed rate loan, we're not required to mark that loan to market even our accounts. Just noting were we too because that fits right loan is so attractive in the current environment, there would have been an incremental fair value positive adjustments of about GBP 18 million coming through the NAV, that's not reflected, but that just illustrates the value of that long-term loan that we have. The other point to note, I guess, here is there is a line you can see bad debt provisions and write-offs. We have about GBP 600,000 of bad debts currently. We are starting to see trade related arrears really come through now. We have a very low level of arrears. And that's reflected also on the rent collection rate, which we noted earlier on in the presentation at around 98% from the most recent quarter. Now dividends. We own the company for dividends. And you can see here, following the 8 consecutive uplifts following the pause on the immediate onset of the pandemic. We've continued to increase the dividend on the basis that we will continue doing so where we think it is sustainable. Our aim is to continue to adopt a progressive dividend policy. We advising the board, and the board agreed, felt that given the current volatility we should just pause. We were very confident paying GBP 0.08, as I've said earlier on, we expect to be fully covered for the financial year. To be absolutely clear, our #1 objective is to continue to grow the dividend. And as we go through the presentation, there's lots of activity, which we hope will enable us to do that. But just in a moment, reasons that I hope are clear we have paused. Property performance, so a lot of you will know that companies like ours and peers compare the performance of their underlying assets to an MSCI property benchmark, so you can look at proper like-for-like performance on a relative basis. And I won't spend too long on this, but you can see in the bottom right-hand call there the relative performance versus our peer group. And again, that peer group includes companies that are on this platform as well as a wider REIT universe. And you can see over every period now, right away over the 6 months, but also going back at sustained outperformance. And that's come from active management, and it's come from a higher income return. Just to do with the pointed F, if you look at the top left-hand bar chart, you can see the brown bars representing the total return over the 12 months to September, which gives you that 4.9% relative outperformance. But importantly, the income return that we generated over that 12-month period of time from 9% compared to the benchmark average of the U.K. and just under 4%. So we've got a significant yield pickup as well as a higher income potential in the portfolio as we delivered around the past management. Now again, briefly, this is normally sort of your house is at risk slide, but I think it's an important point to make here, which we've highlighted in the red dotted square there. So again, some of you would have heard this before, but going back almost exactly 3 years, we refinanced our principal loan with Canada Life. So that was a fixed rate loan, which had 8.5 years left to go at that point and had an interest rate of about 4.4%, which is high versus peers, and it was acting as a bit of an anchor and dragging our returns. So we made the decision back then and perhaps say it wasn't an easy one to refinance that loan. We pay Canada Life GBP 27 million basically to tear that loan up, reset that loan for 16.5 years, so 8.5 years to 16.5 years and reset the interest rate from 4.4% to 2.5%, and that is fixed for the duration. So we have reason that a lot of investors and analysts will scream companies based on 3-year now total return. And of course, because this was done in October '19, it still sits within our 3-year period. That will not be the case next quarter. And so we made that point because it's important people understand that is a reason for the negative return, but equally why we're now benefiting from having the lowest cost longest duration debts within the peer group. Now moving to the market. So what this chart shows, and some of you would have seen before, the blue bars show the monthly capital value movements on the NFCI monthly index. So the average for all property and that includes our data and myriad of other funds data. And then what we're showing with those orange dumbbells, if you like, it's a spread between best performing sector and the worst performing sector. And really, ever since the Brexit vote, the referendum, because of those very strong structural tailwinds, particularly through the pandemic that were driving retail online and at retailers and pure-play internet retailers, obviously, had a water space the industrial market has delivered absolutely stellar returns. And our view, and certainly when we presented earlier in the year was that clearly, that wasn't [what we want] forever. And interestingly, we got to the point in April, May time, where it was clear it was going to turn principally because parts of that market were moving into deficit financing. So the cost of borrowing to buy those industrial assets was in -- was above the initial income return on investors we were getting from buying those in the first place. Now of course, what's happened is the unexpected sharp rise in gilt rates has exacerbated that. And so the cost of borrowings jumped quite significantly, and we'll come on to that slide in a moment. But what that has meant is a very sharp change in sentiment towards the industrial sector, and that's obviously been compounded by mini budget and pools, but then selling across pension funds, some of those opening on suffering from redemptions and investors needing to sell. Now the key point here is we are benefiting from it in a sense because we are diversified. We are not a pure-play industrial owner. We own 50% of the portfolio is in very good quality multi-let estates, and we'll give you a flavor of those in a moment. But what it means is when you've got, for example, Greta warehousing performing somewhat better than the industrial sector, where [they don't reason] warehousing. When you've got offices in places like Bloomsbury, which is benefiting from life science demand, match city center, where we've got a very large mixed-use asset. Again, we are benefiting from being diversified, both in terms of not experiencing the full decline in values because it's smooth across portfolio, but also because by owning some of those alternative asset types, we are enjoying a higher income return. So that's the key point that slide that we're benefiting from diversification Now in terms of the market, unsurprisingly, as I've noted, we've seen a sharp fall in liquidity in the market. So over Q1 to Q3, about GBP 40 billion of investments were traded across the U.K. market. That was actually the most since about 2015. But no surprises that the majority of that was in the first quarter, first in earnings second quarter. Interestingly, there are still deals happening. And although we are expecting further capital value declines and of course, valuations are lagging prices in the market. Prices in parts of the market to get into levels where we are beginning to see some investor interest. So we are expecting at the moment the current correction to be quite quick. That is qualified, of course, by the autumn statement tomorrow and no more surprises. But if we do see gilt rates settle at or around 3.5%, they're about 3.3% for 10-year, then it's reasonable if you look at historic averages to assume that average real estate yields might land between 5 and 5.5 million, and that implies that we may see a capital value decline and perhaps in average terms up to 20%. Now that's an average. Average is misleading. We may -- I would hope we would do better than the average, but that's effectively what is baked into the market currently. And in fact, interestingly, if you look at the most recent MSCI base to sort of monthly they tried you shared with you. The most recent date for October showed a single month capital value decline of about 7%. So we are seeing that correction come through. But to be clear, this is not something we see as being remotely comparable to the GFC, even the only 90's of the dotcom bubble person. This is a correction which at the moment is principally being driven by the risk-free rate effectively. And that's really what we've shown on the right-hand side here. And you can see on the chart, the dark gray bar, as you can see, represent the yield spread effectively between average property yields and the 10-year gilt. And it's, on average, over the long, long run, it trends anywhere between sort of 1% and 2%. And therefore, you can see how the sharp uptake uplift in the 10-year bond yield, the blue line, which we think was set around maybe a little bit less. The real estate yields, we think are going to move in line with that historic average for the premium over that risk-free rate. And that's where we think the market is heading and to a certain extent, that appears to already be being baked into prices. I guess the qualifying statement I make is things remain very volatile. I think the first point to note is that this would work in our favor interest rate swap through, I believe over the course of the last month, have fallen by about 150 basis points. So that -- I think that's the first important point. The second point, I think, is and we think we're well placed given asset quality. But clearly, the next phase of the correction could be more influenced by tenants' affordability, potentially seems in distress in the retail market. But again, we think we're well positioned for that. And the last one I'd noted, and this is a reason I think why I was drawing distinction between the GFC and previous periods, we don't have the issue with having historic cycles. We don't have a significant pipeline of new development which we did, obviously, going into the downturn of 2008, where banks have been pretty prior lending to the sector. We -- so the only areas, I guess, where you are a little bit more supplies in logistics, but again, we don't own any. Our exposure to industrial is limited to multi-let industrial states. The other point to note is, again, we've sort of remembered the lessons from the GFC -- the banks have not lent to anything like the same levels at LTV that they did pre-GFC. Most companies in real estate in the U.K. now, their borrowings are there or thereabouts anywhere between sort of a little bit higher in some cases, but we don't have that leveraging the system, which again, for those reasons, we think any correction -- as along the lines that I've outlined. Obviously, a bit of caveat. Now moving on to the industrial sector because we are 50% weighted. So it is something we wanted to focus on. Just in high-level terms, before Bradley gives you a bit more color on our assets, whilst we are expecting the industrial sector to see further value declines ahead of the wider market, it is very much yield driven. We have equal confidence but actually looking forward, once we are through that correction, the attractive demand and supply imbalance, particularly from multi-let industrial states will probably mean that the industrial sector enjoys higher-than-average rental growth. So we remain confident, and in fact, is what we're seeing on the ground still that there is good demand in industrial, there is a structuring supply. And if you can create the right space, increasing the space that is to a particular sort of sustainability standards than the leasing market is there. As I say, the reasons that will be clear on the right-hand side, we are more cautious about logistics. The reason we favor lots of industries have a very granular, diverse tenant base, lots of different businesses. where, as you can see, obviously, within e-commerce, there's a lot of demand from retail. And clearly, with a consumer slowdown as we go through the winter, is that market, we think that will be more adversely impacted to compound that below, you can see there's much more significant supply of distribution warehouses and anyone that drives up the MO or the M6 can see that very clearly, whereas there is very little new supply, as I said earlier on, of multi-let, which is what we own. So my last slide before I hand over to Bradley. So again, just as a recap. So we have effectively 5 columns to our strategy. The first is a diversified approach, and we think we will really benefit from that because of the way that the market has converged, and in fact, now, clearly, the industrial sector is likely to suffer greater capital value declines compared to it, as I say, [value be to] Warehousing, good quality offices in major cities, which is where the majority of our exposure is outside of industrial. The other point to note is we have a specialist team Bradley and I work with the team, about 100 people based both in London and in Manchester, where we have our second office, and we have boots on the ground that really turn our value across the different sectors of the market. So we have industrial specialists, retail specialist office specialty, so we can tack and change between sectors and do that ourselves. That talks to the point about operational excellence. Tenants are increasingly demanding in terms of what they want from their landlord data, ESG data service levels, and we're well placed to deliver that. I think you will see us undertake some further sales, small sales probably, but I think we will be trimming the portfolio as we see opportunities, both within our portfolio to invest in assets that we think we can improve. But also looking into next year, it would be nice to think we have some capacity possibly having sold assets to get back in to buy the sorts of assets, we've typically done well on where we can add value or we have our homes yield, particularly where we can value through repositioning through that sustainability lens. Balance sheet, Brad will talk to in a moment. And then finally, ESG, that is an absolute key focus. We are planning on coming back to shareholders early next year with a more clearly defined strategy that specifically talks to how we can capitalize on the green premium but also recognizing the need for decarbonizing our existing or state how there is an opportunity, we think, to buy mispriced band buildings, use our expertise to drive returns and be better known for delivering that performance with part of that coming from being best-in-class from a sustainability perspective. So with that, I'll hand over to Bradley.

Thanks, Nick, and it's a pleasure to be here talking to you all about ESG today. So I'll dive straght in, in the table on the left-hand side, we show some important data points in our portfolio. And the first 2 roads you've highlighted illustrate the diverse and granular nature of our portfolio, which now view we think it makes it more resilient, which I think is a characteristic that will be important as we enter a recessionary environment over the next few months, potentially longer. The second set of rows we've highlighted show that our portfolio is higher yielding than the benchmark. And in addition to that, we have a higher reversionary yield. So there's potential for rental growth to come through there. We think that positions us well for an environment where interest rates are rising, so our properties yield higher than finance costs. So we think there may be more resilient value-wise as well compared to the average. Now looking on the right-hand side, what we've shown there is the breakdown of the sectors that we hold in the portfolio compared to the benchmark. As Nick says, around half of our portfolio is in the industrial sector. And our industrial assets are almost all multi industrial estates. And that's an area where we consider the supply and demand dynamics to be very favorable. So moving on to the next slide. We've got good quality assets with good fundamentals in higher-growth locations and to provide you with transparency of our portfolio. On the left-hand side, we show our 15 largest assets by value. These represent almost 80% of the value of the portfolio. And on the right-hand side, we're just going to spin through 3 mini case studies to give you a flavor of the source of assets we hold in our portfolio. other than most of the industrial estates, which we will talk to on a later slide in more detail. But at the top, we're showing you have any central in leads. This is a prominently located asset in a densely populated area, very popular with street students and young professionals. What's interesting about this asset is we've completed some key asset management initiatives already. So what you can see in the photo is a Premier Inn Hotel. That used to be an office block, but we converted it to a hotel, and we've let it's Premier Inn on a 25-year lease that links to inflation. Interestingly, the rent here will increase from GBP 420,000 per annum to almost GBP 0.5 million per annum from December, and there'll be 20 years left on that lease. There was a second office unit that we converted into a gym. So it's a really nice modern gym up in there. It's very impressive. And that gym is also on a long-term need. So that's on a lease of 20 years. and they're a fixed uplift. So every 10 years -- sorry, every 5 years, the rent will go up by 10%. So again, very attractive long-term leases there. And this is an example where we acquire assets and add value to them through active management. The asset in the center there is Store Street located in Bloomsbury in the West End of London, Tottenham Court Road. We own 2 freehold buildings there. They provide 85,000 square foot of educational space. And this is an area of Central London that benefits from significant infrastructure improvements such as the nearby Crossrail Station. And if you hadn't had a chance to go on to Crossrail, yes, it really is very impressive. It's really good. We think it's going to transform parts of London. It's also benefiting from the new developments surrounding Tottenham Court Road who have been attracted to the Crossrail Station. There have been public realm improvements as part of the West End project, such as they've taken undertake on an Alfred Pace as a small pocket park that's been opened just next store Street. And there's been increasing demand from life science, technology and education occupiers. So this site has a lot of potential. So there's potential for higher value and alternative uses. That's supported by the low site density that underpins the value for future redevelopment. So you can basically build more on the footprint of the site. This is currently let to the University of Law, who are very -- they've been a very successful business. They're opening new sites across the country. They are the largest provider of legal education in the U.K. So that lease is until December 26, and they have said that they would like to stay longer. The asset at the bottom is the Johns Retail Park in Bedford. This is our largest retail exposure by value. And this is the catchment dominant scheme in the area. This asset is fully let at sustainable rents and anchor tenants such as middle dry footfall. During the period, we completed a 15-year pre-let with Starbucks for a new drivethrough that they're going to construct on the site. And this 15 year lease would also be linked to inflation. At the same time as that, Starbucks are going to construct another driverthrough on another of our retail parks this time in Bletchley in Milton Keynes. So again, here's an example of us adding value to the portfolio. On to the next slide. So given the volatility in the industrial market, that Nick's described, we thought it might be helpful just to provide you with some data of our industrial portfolio. There is a lot of data on this slide as well as some very nice aerial photos. So please feel free to look at those afterwards. But what we want to draw out here is the average capital value per square foot of the portfolio is GBP 106. Now we know from experience that it costs around GBP 110 to build high-quality multi-industrial estates. So we think our portfolio represents excellent value. In addition, within our portfolio, the most expensive asset we hold by captive value is Stacy Bushes in Milton Keynes, so that's a photo on the top left-hand corner. So that's GBP 150 per square foot. And bear in mind that just a few months ago, at the peak of industrial values, industrial estates in London were trading for GBP 500 per square foot. In addition, in our portfolio, we've got excellent opportunities. There's some development land available for us to add value, and we'll come on to an example at Langley New Park shortly. But overall, we think our industrial portfolio represents excellent value is high-yielding and should be more resilient in the face of rising interest rates. On to the next slide. Here, we list our 15 largest tenants by annual rent as at the 30th of September. Just from scanning down the list, you'll see well-known names, household names. We think this is a result of the quality of our portfolio and our approach to operational excellence. We think this means our income is more resilient, and it's pleasing to report our rent collection for the September quarter was 99%. We're not currently seeing any signs of this changing, but we are monitoring it closely, given the recessionary environment we're about to enter. So just bidding down and highlighting a few names on the list. I mentioned University of Law, and Grand business, been very successful, taking up new space included within our portfolio. Siemens are a very strongly performing business. and we regave with them during the period. Buckingham China University another successful business. So at [hawksury] they train nurses and very popular course. One of this, we also got Lidl, Premier Inn, Balfour Beatty, FTSE 250 International Group and Balfour Beatty are also taking more space in our portfolio. Moving on to the next slide, Slide 18. Our void did increase marginally for the period, but actually at 8.8%. It's right in the middle of our 10-year range of 5% to 13%. There's a lot of activity that we're undertaking to reduce this void, and we summarized that in the table here. So 1.4% of the void space is under refurbishment and 2.5% is under offer. On to the next slide. So with returns -- as Nick explained at the start, returns within real estate sectors are converging. And actually, it was a complete reversal in October, where Industrial was the worst performer and retail was at the top end. So the purpose of this slide is to give you a flavor of the activity we have underway or on the drawing board to drive asset level performance because we think future outperformance will be asset-led. So the first asset you see there on the left-hand column is our office in Hawk's Bridge, now that's not actually a photo of Hawk's Bridge be from there. This is a CGI of a planning concern that we have, and that will be relevant in a second because during the year, with the tenant at this asset who are at the Buckinghamshire University, we completed a lease variation to keep them at the site until November 28 and increase our rent by 13% per annum. But positively, we currently in talk to them to execute a longer-term regear in return for us, enhancing our site, particularly with respect to sustainability performance, which is an important characteristic for them for their own goals. In the second column, we show our development site at standing green trade in the state. We expect to complete the works here in January, and we have 28% of the new floor space currently under offer. We have estimated conservatively the value of this estate to be GBP 20 million once it's complete, and that's assuming around a 6% yield. The valuation within our portfolio value as of the 30th of September was just GBP 10 million. Now we need to spend GBP 2.9 million to get this site finished. So in a sense, we're spending GBP 2.9 million to make GBP 10 million gain on our valuation. Similarly, in the third column, this is a project we have underway with Starbucks, as I briefly mentioned before. We're in a position now where we need to spend GBP 1.7 million in order to generate an additional GBP 2.2 million of value. The reason the jump isn't quite as large as Danny Green trade in estate is because we are getting the benefit in our valuation of the rents that we expect to get from Starbucks. So the way of looking at that is basically some of the juice has been taken out of the project already, but there's still more to come. Then the final column, just a bit of background, we acquired this asset, which is Lanny Ark in Chippenham, in December 2020, GBP 19.25 million. This is a 28-acre site in Chippenham. It's next to the train station in the town center, and there's excellent long-term opportunities for development and alternative uses. The first phase of the business plan, once we acquired the asset was to crystallize the reversion potential. That is our tenants paying low rents with outstanding reviews and upcoming lease expiries where we could push the rents on. So we completed the rent review with Siemens, increasing rent by 26%, and we executed a lease renewal with Ixis and we increased the rent by 31%. In addition, with Ixis, we secured a 10-year linked lease with RPI-linked rent review. So again, another long-term longer-term inflation-linked lease. And then as a result of just those 2 deals, the yield on the acquisition costs that I mentioned of GBP 19.25 million is over 10%. So it just shows how attractive an acquisition that was and how we target these higher-yielding assets to drive income. And as Nick described, our income return is significantly higher than almost all peers. Now the next phase of the business plan, Phase 2, is to take advantage of the development space that we have. This is on the drawing board at the moment. It's not a firm plan just yet. But we've had encouraging talks with the council to build a further 130,000 square feet on land that currently has no proportion value. So if we assume we spend GBP 110 per square foot. It would cost us GBP 40 million to build that new accommodation. And we, again, conservatively estimate that will be valued at GBP 80 million on completion. However, there is a larger scheme possible and this would involve us engaging with our tenants who may wish to move into the new accommodation, which would then enable us to redevelop their former accommodation, so what you end up doing is developing 350,000 square feet of new space at a cost of GBP 60 million and GBP 20 million of that is the existing value of the land. So part of it is the construction cost, part of it is to recognize that there's value on that land already. But then you'll have a site worth GBP 74 million. So these are the options we're considering at the moment. On to the next slide. Nick mentioned that we have a very strong balance sheet, and we can't really emphasize that enough. It's a competitive advantage versus our peers. And in fact, almost all real estate companies. So on the left-hand side, you see we've got 2 debt facilities at Canada Life of GBP 130 million and an RCF of RBS, GBP 75 million. The term loan is fully drawn. The RCF is partially drawn, so we've drawn GBP 46.3 million of the available GBP 75 million. Now the key stat here is 91% of our drawn debt is at a fixed interest cost at the moment or capped, but actually, with regard to the cap, the reference interest rate is above our cap. So our cap is currently in the money. So in effect, our interest cost is fixed, 91% of it. Not only is it fixed, it is also a very low rate. So our all-in average cost of debt is 2.7%. And only is at a low rate and fixed. It's also a very long duration at 11.2 years. So very attractive and strong position to be in, particularly as we enter an uncertain period. On to the next slide. Now there is sensitivity around loan to values at the moment. And the first point we'll make here is we have material headroom on all of our loan covenants. So it's highly unlikely we'll ever have to be a force seller, but at the same time, we have our own strategic loan-to-value range that we like to operate within over the long term, and that's 25% to 35%. So what you can see in the table in the top right-hand corner is how far portfolio values would have to decline before we exceed our strategic loan-to-value range, and that will be more than 10%. And then at the bottom, what we're showing here is the -- is really the impact of our strong balance sheet. So -- we've shown what our interest cost would be for the current full year to March '23 and for the following full year to March '24, so that will be GBP 5 million and GBP 6 million, respectively, based on the current forward interest curve, SONIA curve. Now if that increases by 0.5% or 1%, as you can see, our current year interest cost will barely move. And it's also at a very low sensitivity in the following year. So what this means is our earnings are protected. And that's why we're confident to say that the current dividend will remain fully -- the current year dividend will remain fully covered, and it puts us in a strong position for the future. On to the next slide. So our research and the evidence across our portfolio demonstrates that there is a material rental and value premium for buildings with Green certifications. And actually, we expect this premium to grow as extreme weather events become more common as additional regulation with respect to the leasing of buildings with core energy performance becomes effective. And also, there may be forms of carbon taxation introduced as it becomes clear that the NetZero carbon pathway isn't being achieved. These sort of structural trends support our direction of travel to make sustainability a defining attribute of our strategy. And this isn't an evolution we started kind of right now, but it's been a journey that we've been on over the last 7 or 8 years, where we've been continually improving our approach to sustainability in real estate. But the focus for us today is on decarbonization, and this has to be led by energy, demand and efficiency first. So that means reducing the use of resources. Therefore, we need a deep understanding of individual asset performance from a sustainability perspective and also the potential performance that an asset could achieve across the whole portfolio, and we're currently undertaking a comprehensive review of the sustainability characteristics of our portfolio, and this covers the building fabric energy systems, services and utilities, climate risk, water consumption, waste management, by diversing green infrastructure. So it's a very comprehensive review that we're undertaking. And the result of that review will be that we can have a very well-informed model, looking at our portfolio, what it will cost to upgrade assets and whether where the improvements are required and where we should sell. So with that I'll hand back to Nick.

Thanks, Bradley. That's great. So just very briefly because we've got some great questions. As I said, I think we are well placed. We've got a very granular good quality tenant base. We've got a very good quality portfolio that importantly has got some really interesting long-term asset management opportunities, which should allow us to continue to see growth in our net income. On the other side, of course, we've got some fantastic long-term debt, which means that in an environment where we are seeing interest rates rise, we should be less adversely impacted versus a lot of our peers. And the final point, of course, is, as I said earlier, the shares do represent, we believe, very, very strong value at the moment and particularly given that 7% dividend yield that as reported today, is 110% covered from recurring earnings. So I will pause there before [indiscernilbe]. .

[Operator Instructions] Bradley, Nick, we obviously received a number of pre-submitted questions ahead of today's event as well as you can see in the Q&A tab, there are a number of questions that have made their way through during your presentation itself. So firstly, thank you to everyone on the call for taking the time to submit their questions. And Nick, Bradley, if I could just hand back to you to respond to those where it's appropriate to do so, and then I'll pick up from you at the end.

Yes. Thanks, Jake. That's great. And thank you, everyone, for submitting questions. That's great. So if I start, and I'll hand this over to Bradley go through. So to the first question, is good one. They have immediate reports of 4 sellers in the U.K. market, including U.K. pension funds, selling down property to meet collateral demands in a volatile market. How do you see an evidence of this? And is this something that we can take advantage of? So the first answer is, yes, we have seen that. There was an acceleration of redemptions in the open-ended fund world obviously, immediately after the me budgets. Interestingly, I think as well, those have slowed significantly. And we are beginning to see, obviously, NAVs in those funds adjust. So probably you've noted, there was an 8% decline or 7% or 8% decline in values, which would affect through to NAVs in those vehicles. And we understand that there is a second [you're not protected] activity in some of those funds where we've got investors who are looking to buy those shares in those unlisted vehicles discounts between 15% and 20%, denominate the same levels we are, but nonetheless, illustrations here of demand. We have seen deals in the market that are -- have repriced quite significantly. Interestingly, even today, one of the major pension funds has withdrawn 2 portfolios totaling about GBP 600 million, which they were selling principally, we understand for redemptions. But obviously, the sort of stability that we're now seeing in markets means that they no longer have to sell. So we are seeing assets we reprice. But at the moment, at least, there are signs of stability, and I don't think we're going to see a situation which was comparable with the GFC where, of course, around the GFC time. There are a lot of retail funds, which were daily priced and daily dealt, so a much smaller part of our market now. Most of the funds that are experienced from redemptions are quarterly dealt. So if you redeem on the 1st of January, you get your money at the end of June, at the end of June value. So I don't think we're going to see such volatility coming out of those open-ended funds. Of course, the caveat to that is that's based on where we are today with markets being more stable. Clearly, if we see a shock in markets and we see a spike in gilt yields again, things early, you may see a repeat of that. As to how we can capitalize on it, and there's another question I see further down about our ability to fund some of our projects. we have limited new firepower at the moment because, as Bradley has outlined, the capital that we do have is allocated in some really interesting CapEx projects. And although there are some interesting and I think quite attractively priced deals out there, and the deal we did in Manchester early on in the period, I think is a good illustration of that. I think we will still have more conviction that we will get a better return as investing in our existing assets, so the Stanley Green Warehouse element was done all the [indiscernible] touched on, we're -- there's potentially another GBP 7 million or GBP 8 million of profit to have out of that. And so we'll generate, I think, a better return, putting our money into those initiatives just at the moment given the more limited capacity that we have at the moment. So that's answer that question. So just going through the next question, please, can you cover the feel of demand that's out there for potential tenants on taking up space since the new budget. So I'll give an initial response and Bradley you add to it if you want to. I think what I'd say is the investment side of the market is moving at a very different pace from the occupational market. And actually, interestingly, if you look at the return from the industrial market over the 3 months, for example, to October, so the latest data. So over 3 months to end of October average industrial value was on 15%, over that same period, rents went up by 2% according to the index. So we're in this interesting situation where we're seeing values reprice because of the risk-free rates not at the moment because that we're seeing a significant tail-off in occupational demand. As I said earlier, the supply-demand dynamic, particularly the multi-let industrial remains favorable for our loans. Now so -- and interestingly, I'm sat in the city, and we've heard today, for example, that GP has done the biggest ever pre-let to the U.S. chance moving from just down the road here. And I can give you other examples where, for example, whether it's Starbucks, Lidl and bargains, there are pockets of the retail market, where we also are seeing retailers with quite significant new store requirements. So overall, the operational market is actually better than I think you might see here. I guess the reason why we're taking a slightly cautious sustainable. And I think the reason why it's right to be prudent at the moment is, obviously, we're going into a more difficult economic period particularly for the consumer. And so we might see that feed through particularly for example in the hospitality sector, but some of the more highly levered retail tenants and as Bradley has outlined, we don't have a significant exposure to those of tiers. So we're expecting a slowdown. The rental action rates don't tell us that at the moment, but it's something that we're monitoring very closely. Bradley, Is there anything you want to add to that?

I completely agree with what you say, Nick. Occupational market has been very strong up till today. We see it in the rents coming through. I outlined some examples during the presentation where there's some significant uplifts, but we think that businesses may come under more pressure next year as costs increase, both interest as they have the combined effect of higher interest, higher energy costs and general inflation, it's going to become challenging, particularly as consumer spends less. So we're monitoring it closely. And we're also looking to improve the defensive qualities of the portfolio. So you'd have heard us saying a lot about sand tenant base, given examples like strong businesses such as University of Norway, where we've taken or providing them more space, executing mergers with companies like Buckingham University, who are performing very well in Siemens and Balfour Beatty , sort of businesses we're trying to see how it is in Phase 2.

Absolutely, absolutely. I guess, carrying on that theme a little bit. So one -- the next question is what would you say actually different to trust in your peer group. And I think it was a very fair question because it's certainly a face value it might look quite a crowded space. I guess there are probably 3 things that really differentiates us. I think the quality and granular nature of our income and in particular, as I said, the level of cover that we have particularly given the attractive income return. And the ability that we have now to be setting come further from the active management. The second key point is the specialist expertise that we have. That's important to deliver the active management. We have boots on the ground. We are doing direct development. We're not paying a developer profit. We're doing it ourselves with our specialist teams. And I think increasingly, as the market becomes more operational and we talk about the hospitality approach, as the market becomes from operational, having their boots on the ground, in our case, in Manchester as well as down here in London is our real competitive advantage. And the last point to note what differentiates us. I don't think we're necessarily shouting about it enough, but I think our approach to sustainability in ESG. We are hiring people into that business. We're investing in natural capital research. We know we have a big renewables platform. And I think we've got a real opportunity to capitalize on that more than perhaps we have done. So moving on, strategy execution on track [indiscernible] were apart from the Foxes in the back garden. I think it's principally, as Bradley has said, I think just monitoring very carefully how the next few months is going to impact our occupiers, rising utility costs, rising interest costs, refinancings. As I say, we are cautious, but I think we are cautiously optimistic given the granularity of our portfolio. But I think it is just that income side, just making sure that we're on top of our tenants. We're on top of getting the rent in, but also equally that we are there to communicate with them so we can understand where there are issues, and we can help test with them. Next question Bradley, one for you. Is there a scope to accrue additional income by installing PV on industrial sites. Tenants might also benefit, sort of building on what I just mentioned, tenants might also benefit from having less volatile energy pricing.

So yes, that's a very good question, and it's one that we're looking to proactively right now. So we're currently undertaking a tender to find a partner, so someone who can install PV across our portfolio. And actually, this is an exclusive to SREIT as a fund. This is for SREIT's real estate, so hoping to get some economies of scale there. And as part of that, we'll be undertaking the feasibility study to kind of model the cost benefit analysis at an asset by asset level to then make the decision as to whether it is worthwhile investing in PV. And I would be advocate of PV, and I hope to that we can report over the next couple of years, some interesting projects where we have done that. And I would also add that at Stanley Green, we're adding PV and our new part of Stacy Bushes, we're redeveloping an old unit into a brand-new operation at carbon one that would also incorporate PV. Now we think PV is a good way potentially to make higher returns, both financially, but also it helps for NetZero carbon pathway enormously as well.

Great, Bradley. That's really clear. So the last, I've got 2 remaining questions in a given time. They're linked, and Bradley maybe the I'll take the first, you take the second leg of this. So first leg is given asset management and development opportunities, do you see a need to increase RCF as well as extended duration? What is the estimate of the premium overtone that might be available to you? So that's linked into the second question, which is what is likely to go the new interest rate for the RCF interest cap in 2023. So I'll give that to [indiscernible] that because that's difficult. The first one, I think, is really about the RCF. I think at the moment, we have enough capacity to deal with the near-term project bags mentioned. So once the completion of Stanley Green, the Starbucks that we mentioned, if another significant project, for example, the Luxbridge comes along to do the refurbs on with the tenant there, then again, we may have capacity. Looking beyond that, so for example, the Chippenham Project, we don't currently have that capacity, but that's a nice problem to have. If we've got more opportunities than we have capital, that's the right way around. I think we may consider extending RCF, but only if we have visibility that we can get back to that strategic range of 25% to 35% net LTV down the road. As I say, our forecast suggests that we are going to bump up against the upper end, perhaps a bit over the upper end. And so we will look very carefully at any further borrowings before being absolutely comfortable with that range. So I think at the moment, no immediate plans. What I would say is we have a number of smaller sales that are in the pipeline. We may, for example, consider selling a couple of further assets if we think we can redeploy those proceeds into projects like chipping and where certainly on our current underwriting we think the potential there at the opportunity there is really, really significant.

So Bradley just a final point from you before we wrap up, just a question in relation to the interest rates.

Yes. So currently, the 5-year SONIA swap rate is 3.8%. So if we swapped we'd lock in that 3.8% plus our margin at 1.65%. So it would be obviously higher than what we're paying now because we have a cap. So the cap is 1.5%. So in effect, you go from 1.5% to 3.8%. And that's a reflection of where interest rates have moved. We are choosing not to swap right now because we think that with the autumn statement coming out and with the kind of the panic around the mini budget, hopefully passing maybe the forward curve will come down slightly. So that's what rate may decline. In addition, we have an option to buy a cap again. The reason we haven't yet is because the last few months have been at historically the highest sort of prices. So again, we felt that we could we have time to wait and see if that improves. And if we buy a cap, we can capture whatever broadly speaking, a reasonable interest rate, so it could be lower than 3.8%, but you just pay more for you upfront. So this is something that we're monitoring closely, and we make a decision on it in the new year.

Yes, I think that's absolutely right, but I think very fortunate position in the -- as we've said, 75% of our drawn debt is locked in for further 14 years at 2.5% which is why I think we can afford to be a bit more relaxed on the basis that we do feel that the curve probably will work in our favor, but we are monitoring very closely. So firstly, before we wrap up, and I'll hand it back to Jake. Thank you very much for those questions. And there are a couple of unanswered, and we will endeavor given time well in [indiscernible] to respond to those after events.

Nick, that's great, and Bradley as well. Thank you very much indeed for addressing all of those questions that came in from investors this afternoon. And of course, as you kindly just said, we'll give you back all of the questions that were submitted today as well as any further ones that do come through for you to review and then add any additional responses where it's a to do so. Nick, perhaps before redirecting those on the call to provide you their feedback, which I know is particularly important to yourself and the company. If I could please just ask you for a few closing comments to wrap up with, that would be great.

Thank you, Jake. Well, first of all, as I said, we're really delighted with the engagement we're getting on this platform. I think it's great. I think the questions are really insightful, and we will continue doing this. I think, hopefully, for those of you that heard us the 6, 9 months ago, we're on track. We're doing what we said we're going to do, and we're absolutely moving in the right direction. Clearly, we're in a cyclical market, and we are expecting to see a correction in values but we think that's more than in price. And really the focus is on that very attractive dividend yield that is fully covered and the pipeline of activity that we've got coming through which we'll hope to hear about through future news flow, which should allow us, we hope, over time, to continue to adopt that progressive dividend. So Jake, I'll leave it there.

Nick, that's great, and Bradley as well. Thank you, once again for updating investors this afternoon. Could I please ask investors not to close this session and shall now be automatically redirected for the opportunity to provide your feedback in or that the management team can better understand your views and expectations. It's going to take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team, I've showed a Real Estate Investment Trust Limited, we would like to thank you for attending this presentation. That now concludes today's session. So good afternoon. See you all.