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 Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so and needs to be available via your Investor Meet company dashboard. Before we begin, if I may, I would like to submit the following poll. And I would now like to hand you over to the Head of U.K. Real Estate, Nick Montgomery. Good afternoon, sir.

Good afternoon, and thank you, James, for the introduction. Welcome, everybody. It's fantastic to be presenting on this platform again. I just want to move the slides on. So Bradley and I are here today to present the full year results to March 2023. And for those of you that joined us when we presented our interim results, you'd have heard us say, I think, hopefully, quite clearly that we were experiencing a correction in the U.K. real estate market, driven principally by obviously the fallout from the mini budget, but also what's happening earlier last year in terms of rising interest rates. Now what that means is we're reporting an NAV today, which is -- I think is probably broadening on with expectations, perhaps slightly better than some analysts were expecting because of good performance in the underlying portfolio. But nonetheless, we are reporting a 19% decline in the net asset value, albeit set that in context, that compares to a 25% uplift for the period of the year prior. I think what's much more positive as a result of the activity across the portfolio is that we've had continued good progress with earnings. And our dividend over this financial year increased by 14% like-for-like with the prior year. And some of you that may have seen announcement this morning would have seen that we have, in fact, announced further quarterly dividend increase alongside the results. So that's the backdrop. I guess just to give a bit more color to the results, we've set out some highlights here. I think, despite that decline in NAV, we have seen continued relative outperformance of the underlying portfolio. So our portfolio value delivered a total return of minus 8 over the financial year, which compared to the benchmark of just under minus 14 more positively, because we never are reporting negative numbers, but more positively on a rolling 3-year basis, which obviously reflects the most recent period, the underlying portfolio return of 6%, which compares to the benchmark of 1.9%. So 400 basis points of outperformance, which is very healthy. It's also worth noting that, that puts some 5th percentile of our index -- the MSCI Index over the 3-year period. And in fact, looking at income as part of that total return, we're actually 1/3 out of 160 [ points ] within the benchmark over those 3 years. So that focus on income, focus on management, focus on exposure to the more high-growth parts of the market has led to that continued improvement in earnings. Again, just to make a point, we have today announced a further dividend increase, which reflects an annualized level of about 3.3 pence per share, which on today's share price still today reflects a discount of around 27% to NAV. That reflects a share price yield today of 7.5%, which we think reflects good value. As well as the top line performance, if you like, so the growth in income, the active management, which has helped us support that dividend, we have continued to benefit from having what we think is generally the best balance sheet in the peer group. We have very long-term low-cost debt at the year-end. Our average debt duration was about 11 years, with actually 3/4 of our debt fully fixed at 2.5% to 13 years. And it really is that visibility on future interest, which as much as the top line income growth has allowed us to continue increasing the dividend. Also looking forward, we talk about reversions in properties. So just to, I guess, recap the reversionary rent is a rent that the values think your portfolio would let for where it's all available today. And actually, as well as having a high initial income return, our reversionary yield is now 8%. So some way above the benchmark of 5.7% and lots of activity that Bradley will talk to a little bit later where we've got real visibility on that income coming through. From the market perspective, we did begin to see some signs of recovery, maybe a month or so ago. It is worth noting that, obviously, the stickier inflation that we're seeing, particularly core inflation, and therefore, the rise that we've seen ahead of expectations in terms of interest rates has meant that the market is feeling a little bit more cautious and a little bit more fragile. But nonetheless, having had a correction of about 25%, we do to the U.K. market, taking a sort of short, medium-term view, we'll offer good returns. But there is a lack of urgency in the investment market as buyers step back, waiting for more visibility on where rates are going before pushing values on. And the last point to note and I hope what will come through clearly throughout the case studies is we are evolving our approach to ensure that we are best-in-class in how we integrate sustainability considerations as part of our active management strategies. And that is driven by a financial motivation because we have real conviction, but if we can deliver the best space in terms of sustainability performance, we will get better tenants, longer leases at more attractive rents. Now moving on just a bit more color on the numbers. We're showing a breakdown of the net asset value over the year here. And you can see at the very top, the NAV decline of 19% with a total return once you allow for GBP 16 million of dividends that were paid minus 15%. So scrubbing it well against some of the peer group, and some of you may have seen this week, one of the industrial specialists announced an NAV decline of almost 30%. So again, negative, but actually because of the good performance at property level, better than most of our peers. I guess the other point to note are, over the year, we have continued to invest capital in the portfolio. You can see the capital expenditure line of about GBP 10 million, 3/4 of that relates to our net zero warehouse development we're doing in Manchester, more on that later. Limited number of transactions over the year, one, high-yielding, really interesting mixed-use assets in Manchester City Center where we're getting all of the business from, plus again, more information later on some really good sales actually slightly bucking the trend in terms of selling assets at premiums over the year with more small asset sales planned. Within the income statement, I think there are a few important points to note. The eagle eyed amongst you may note that the point-to-point rental income number in the accounts fell very slightly. That's principally because of various lease restructurings that we've done, where we've extended leases to some of our stronger tenants in return to growth in a limited rent-free period. In reality, when you stand back and look at the rental and related income growth over the year, that actually went up by 6%. And that's partly supported by rental growth of 9%. So I'll come on to how we return to break down in a moment. In terms of EPRA earnings, having half that rental growth, but also having had a rise in finance cost, where we've drawn on our revolving credit facilities to acquire the asset in Manchester, our EPRA earnings grew. But most importantly, if you look at the bottom of the line here, having paid out GBP 60 million of dividends, we are fully covered. And looking forward, with a further 2% increase, it's because of the activity within the portfolio that we remain confident about delivering that income growth. And that's, again, one of the key differentiators really alongside the strength of our balance sheet within the peer group is that we are the only company now to be paying a dividend, which is ahead of the pre-pandemic level. And in our case, we are now over 8% above that pre-pandemic level. Now that doesn't mean to say that we are going to be increasing our dividend quarter-on-quarter. We look at it every quarter with the board based on our expectations about the income from asset management activity, from transactions. But that is our aim to deliver a sustainable and progressive dividend policy over time. As I say, the shares today, once you take account of the 28% discount, but equally a 7.5% dividend yield, recently shares look at a very good value. Now the next slide is a little bit of information here. So we've given a breakdown of our total return over 1 year and 3 years at property level compared to our benchmark. And it's just worth focusing on the left-hand bars there. So the far left-hand bar is a breakdown of our total return. So just to explain briefly, we've got a total return for the 12 months to March with minus 7.9%, which is represented by that pink diamond. And we've got a total return for the benchmark of minus 13.5%. Now that total return is obviously made up of various component parts. The impact of rising foreign values and the contribution that rental value growth makes for that, plus, obviously, the income we receive from property. And very positively, although you can see in the middle, our yields rose more than the benchmark, so as the market cooled, as values fell, yields therefore rose. Although our yield increased more than the benchmark, actually, our capital value impact was reduced by the fact that we had a higher interest income return. So I guess we spoke about this when we last presented. As part of this correction because the correction was driven by rising yields, low-yielding assets were more adversely affected because of the multiplier effect. So we benefited by having a high-yielding portfolio. And you can see there in the blue bar, our income return of 6% compares with the benchmark of 4.1%. But probably what's most positive from this information is you may typically expect a high-yielding portfolio to have less rental growth because you're getting paid effectively upfront. Whereas in fact, partly because of the activity across the portfolio because of where the sectors are positioned, you can see in the orange bar there that actually rental growth was 9.2% across our portfolio over the year. We compared with the benchmark of just over 3%, almost 3x the rate of rental growth that we saw in the market. And actually just making sort of even simpler, it's driven by our industrial assets and particularly Stanley Green Trading Estate [indiscernible]. But if you look at the industrial transactions that we did compared with rent at the start of the year, the average increase was around 25%. So although I'll come on to it in a moment and explain markets have obviously been challenging, it's been all about yields. Rents actually over the same period have, in many cases, continued to rise, and I'll come on to that now. So the correction we've seen has all been about yields so far. So on the left-hand side of this chart, you can see the dark blue bar, which represents 10-year bonds, and 10-year bonds today are yielding around 4.25%. And what we're showing in the orange bar is the impact that's having on the average cost of borrowing on a prime office asset. So this isn't us. This is an illustration of what you have paid in the market. And so the cost of borrowing on real estate because of the rising interest rate environment have risen sharply. So in the mid-2s going back to 2021, up to now over 6%. So that is inevitably going to have an impact on pricing even though -- and I think this is -- I think an important point to note, the market compared with, for example, the global financial crisis period has significantly low level of debt. What you may have seen in the present environment is there are lots of press articles that try to almost conflate the situation in the U.S. real estate market, particularly in the office market with what is happening in the U.K., and we are in a very different position. The best data we have access to at the moment tells us that the average loan to value across the real estate market where there is borrowings around 33%. So that represents 33% of the asset value. That compares with approaching 60% prior to the global financial crisis. Now that's also having had valuation declines on average of the market of 25%. So we are not expecting lending or higher loan to values to lead to significant for sales, which will then lead to a further step down in value. The market does feel much better than it did going back to the GFC period. Now on the right-hand side, we're looking at the relationship between those bond yields and property yields. With the orange line, you can see that representing the average initial yield property. So you can see where a lot of the dotted line is that's telling us average yields today are just over -- just under 5%. Our yield is actually just under 6%, which is why we've got that additional income pushing. And we're showing a 10-year bond yield there of about 4.25%. Now a month ago, the pricing of real estate was moving towards fair value. Historically, looking over the last 25 years or so, the relationship between bonds and real estate yields means that when you had a cushion of about 2%, so when you have a difference of 2% between bond yields and property yields, you're approaching fair value. You can see here that our expectations are, we're probably moving towards the middle of next year where rates will be -- where real estate yields rather will get a premium of about 1.5%, which actually is less in the last 25 years. But the last 10 years, particularly, there's been a period, [indiscernible] and have normal periods, where quantitative easing has driven gilt yields much lower than they would otherwise have been. And if you go back to a more normal period, so for example, the late '90s to the early 2000s, that relationship was closer to 1.5%. So what this is telling us? I think it's telling us essentially the market remains relatively cautious that -- but the -- looking into 2024, we can see values bottoming out, and we can potentially see a recovery. Now the other point to note, if we move to the next slide, is that recovery will be polarized. And we think we are well positioned for that. So the left-hand chart, you can see is an index of capital values to what was the top of the market in June 2022. So you can see there that the low-yielding sectors and particularly industrial, the hardest hit, as I say, [indiscernible] effect, with average industrial values down about 29% compared with the average real estate about 25%, but you can see on that chart there that actually we are beginning to see a recovery in industrial values. And it certainly across our portfolio, we're seeing the same. And part of the reason for that, if you look to the right-hand side, is because we are still seeing rental growth. So this is an unusual situation [indiscernible] type of capital value movements, but at the same time, to still have positive rental value growth at least in nominal terms. So between the sectors, what do we think about the performance of sectors and how are we positioned for it? So again, you'll hear shortly about our industrial portfolio. But in headlines, half of our assets are really good quality, multi-let industrial estates. Within the wider industrial sector, we are still seeing tailwinds coming from the shift to online. Obviously, we saw that rise sharply during the pandemic. It is slowing in terms of the growth in online retail, but we do expect that to continue rising to approaching 28% over the course of the next 2 or 3 years. We are also seeing although the lights of Amazon are taking far less space, I believe they've got too much space now. We are also seeing third-party logistics operators, manufacturers taking space to build their supply chain resilience. Interestingly, we are also seeing some growth space of what we would call growth space, which is where tenants are releasing space into the market, but that's principally focused on distribution warehousing. And therefore, our expectation is across the industrial sector, the best performing of the market -- best part of the market will be multi-let estates, where the void rates are low, which you can see on the top left-hand side there. But really importantly, the bottom left-hand chart, you can see the quantum of new development of multi-let estates is a fraction of what we're seeing in distribution warehouses. So our view is that as the supply pipeline comes through distribution warehouses and particularly as tenants start to release space, the prospects of rental growth will be weaker compared with the multi-let estates, which just are being built. And that's what you can see on the right-hand side here with the dark blue line there representing more of what we own versus some of the more specialist logistics funds where they tend to own assets that will perform more in line with the orange. Now within the retail sector, we have been and continue to be cautious about retail centers. Although we will be reading obviously about headline growth in retail sales, actually, in volume terms, and particularly in real term, sales are declining. And that's partly -- well, obviously, the impact on consumer of rising interest rates, but retailers are also being impacted by rising energy costs, paying living wage and sort of rising wages just more generally. Where we do see real opportunity in the retail sector, and we're benefiting from this is in retail warehousing and particularly where you've got more pandemic resilience, grocery retailing, value retailing to the [indiscernible] those types of operators that you will see now on the estates out of town, but also where you get restaurant uses, Starbucks, Costa's, that you can put on a car parks and that's something that we've been doing, probably I'll talk to you later on. So you can see on the right-hand side, as a result of that, we are seeing retail park vacancy full. And therefore, we're expecting retail park rent to grow steadily from 2024 onwards. So again, that's where we have our exposure. Now within the office sector, this is probably where there isn't still lease consensus amongst property investors, any of these very polarized. Just to set the scene, the average void rates in the U.K. for offices [indiscernible] about 11%. That compares to about 8% pre-pandemic, but is still below the void rate post GFC of about 13%. The other point to make big picture, and this is partly a legacy of the GFC, but there's been far less speculative development of offices anywhere. A lot of the cranes that you see across regional cities in the U.K. are in fact offices, they're residential buildings, residential private rental sector. And therefore, what we are seeing across most markets is actually a reduction in overall office stock reduction in what we would call net additions. So what does that mean? It means actually where you've got either Central London, particularly the West End or what we would call the big 6 regional cities, there is actually reasonable levels of demand as people come back to work. And there is a shortage of really good quality space that is delivered to a high sustainability standard, in particular, properties where they're incorporating wellness amenities that are attracting the best talent. And so in some cases now, rents are approaching all-time highs. So the best builders in the city, for example, are attracting the best friends. And across our portfolio, levels of demand in cities like Manchester, Edinburgh, Leeds remain healthy. Where we are more cautious and we don't really own this is the out-of-town market and particularly in smaller regional cities, where there's a high dependency on the public sector because, so far, at least, public sector employees have been far less willing or required to come back into the office and that's affecting demand for offices in those towns. That is also affecting retail, restaurants, cafes, et cetera, who would have otherwise been relying on those rent office occupiers being there. So I guess that's our view on the market. We are very positive about our own portfolio and the activity within it. We are a little bit more cautious about the broader outlook, but we are happy that we have our allocation to the right parts of the market. And through the active management, we will see those values will cover. So with that, I'll hand it over to Bradley.

Thanks, Nick. It's great to be presenting to you again on this platform. And whilst it has been a challenging year for real estate values, we've got some really interesting activity to talk about with you in the portfolio. We'll start with our strategy, which hasn't changed for the financial year. We've been working to increase our allocation to industrial, particularly the high-growth multi-let industrial estates by investing significant CapEx into our existing estates. We've been undertaking defensive asset management at our offices and retail units across the portfolio. We've got a really strong balance sheet, sector leading balance sheet, low-cost, long-term debt, 90% fixed or hedged. And in order to keep our balance sheet healthy, we are selling down some of our smaller assets where we see valuation risk or where we've completed business plans. And those proceeds will initially be used to pay down the RCF before we then require the cash flow of CapEx. Finally, we are looking to position ourselves as a leader in ESG. We see really interesting value-add opportunities on our ESG across our portfolio and in the market, and we're working on our strategic change there. But importantly, our financial objectives will remain the same. On to some portfolio level analysis. On the table, on the left-hand side, we show some important stats in the portfolio. We've highlighted some rows. In the first row, we've highlighted -- speak to the granular and diversified nature of our portfolio. We've got 41 assets and more than 300 tenants. We think this means our portfolio is resilient. And Nick spoke to the higher-yielding nature and characteristics of our portfolio. You can see here in the table, our net initial yield, which is our income as a percentage of our value additions is 5.8% compared to the benchmark of only 4.8%. And then not only do we currently have a higher yield but our reversion is extremely high at 8%. It's probably as high as it's ever been for the portfolio. It's eye-wateringly high and 8% is, as you can see, far higher than the 5.7% for the benchmark. To put that number -- well those numbers into context and hopefully give you a sense of what they represent, if we achieve that reversion, that's an additional GBP 8 million of rent on top of our current passing rent of GBP 29 million. So that is half of the full year dividend of GBP 16 million. So just gives you a sense as to the kind of opportunity we're pursuing there. On the right-hand side, we show the sector breakdowns of the portfolio in comparison to the benchmark. You'll see that we're overweighed industrial and we're overweighed retail warehouses. Almost all of our industrial assets are multi-let industrial estates. And Nick has articulated why we are overweighed here and the structural trends supporting valuations and rents there. Our offices, we've split them into 3 sort of buckets for you to give you a better understanding of our office portfolio. More than 1/3 of our offices or 10% of the portfolio are in London. We have an asset in Store Street in Bloomsbury, which is the West End of London, where despite all the negative headlines, on offices through the year, the West End has done very well. Our second London asset is actually winning greater London. So a bit further out in Uxbridge, that's led to a university, Buckinghamshire New University. It's a growing university, and it trains nurses on the site. So our 2 offices in London are letting to universities. Our other office exposure is within the center of the big 6 cities like Leeds, Manchester, Edinburgh or where they're not within that big 6 set of cities, they're in good locations where we've seen some really positive lighting activity for the year, such as Cheltenham and Fareham. Our retail exposure is mainly retail warehouses, which are a sustainable rents, so rebates post-pandemic. And our retail exposure is in densely populated locations, and it's -- we've got good exposure to those convenience stores that Nick mentioned, the groceries, et cetera. Our other allocation, we've got 2 hotels, a car park and a small leisure scheme. On this slide, we show our 15 largest tenants to give you transparency on the portfolio. These represent 1/3 of our passing rent. And encouragingly, only 2 of the tenants represent more than 2.5% of the rent. So again, speaks to this diversified and granular nature of the portfolio, which we think brings the risk down. And those 2 tenants are more than 2% of the portfolio rent. The University of Law is an education provider. It's been growing. They're actually taking more space with us in Manchester to accommodate growth. And Siemens Mobility is a part of Siemens global conglomerate. And the rest of the names there, you'll note household names. So we're happy with the top 15 tenants. On to void analysis. Void did tick up in the quarter to 11.1%, but the main driver of that is the fact that the new development of Stanley Green completed. So we have the new ERV being recognized within our ERV that the independent value is determined. If you adjust for that, so take out those new units from the metric, then rent -- the void actually decreased to 7.9% for the quarter. Looking at the 11.1% though. And what you can see in the table on the right-hand column in the bottom right-hand corner, 2.5% is either left already or under offer. So that 11.1% is already trending down to 8.5%. We've mentioned Stanley Green a couple of times, and we spoke about the value-add initiatives that we have in our portfolio and the sort of track record we have in delivering them. This is a really good example. So this year, we completed this development. There are 11 new units. They are cutting edge in terms of sustainability, so EPC Plus and we're targeting BREEAM Excellent. We bought this asset back in December 2020. We saw an opportunity to develop some empty land there. There's 3 acres of empty land. Our relationship with the tenants such as Screwfix, men that we could understand the kind of really strong trading on the estate. So we went ahead, made the purchase, spent over GBP 8 million in CapEx on the new site, and the valuation has more than doubled in that time. And in the bottom table, you can see the total returns for this asset compared to the All Industrial Benchmark 1 year and since the acquisition, both very strong. Over 1 year, it's made plus 14% compared to the benchmark, which is down 21%, so a huge outperformance from this initiative. And now I'm going to move on to talk about some further initiatives where we hope to generate more value for shareholders. To keep an understanding green theme, on the right-hand side, we show the Phase 2 and Phase 3 initiatives that we have for the site. So we've completed Phase 1. We're looking to spend another GBP 3 million to refurb the existing estate, bring up that sustainability performance to the new units as close as possible. We think we can spend GBP 3 million to generate around GBP 4 million plus in value and bringing almost GBP 300,000 of additional rent. On the left-hand side, there's a photo of Stacey Bushes, which is in Milton Keynes. This is our largest asset in the portfolio. It's another multi-let industrial estate. It's performing really well for us. It's fully let, and we have an opportunity whole in line where we have a 5,000 square foot unit currently. We can drop that and then develop a new 18,000 square foot unit. Again, it will be leading in terms of sustainability performance. We think we can attract a strong tenant there and push the rents on by nearly GBP 250,000. So we think we've got another GBP 2.8 million, GBP 2.9 million to spend in order to generate GBP 3.5 million in additional value. And that's shown in the table on the left-hand side. Another couple of opportunities we'd like to talk about today. On the left-hand side, you can see a photo of St. John's Retail Park in Bedford. This is our largest retail exposure. It's the dominant retail scheme in the area. It's anchored by Lidl, who we brought into the site a couple of years ago. And here, we've been working with Starbucks at St. John's but also Watling Street, which is in Bletchley. So Starbucks is going to build a drive thru on each side, and we're going to spend GBP 1.8 million to do that. And if the cost goes beyond GBP 1.8 million, then Starbucks have to pay, so we're protected from the cost side. And then once it's complete, we'll bring in another GBP 250,000 of rent. And actually, in terms of value, we estimate we've got around GBP 1.8 million to spend, and we think the value for these sites will increase by more than GBP 2 million. In addition, the leases with Starbucks are long leases, 15 years, no breaks and they're linked to inflation. So this is an example of us creating long inflation income that's expensive to buy. So we're creating value. On the right-hand side, I just spoke about the Phase 1 initiative at Stanley Green, where we made some fantastic returns and have developed a really fantastic asset in the area. The next asset we've set our sights on is Langley Park in Chippenham. This is a huge site. It's 28 acres. It's right next to Chippenham Town Center and the train station. And one of the major tenants there is Siemens. Actually, in the last couple of years, we completed a rent review with them to increase their rent by more than 30%. But we actually want to -- we want to keep them on the site. We're in active negotiations with them to develop new accommodation for them. Again, leading accommodation, strong from a sustainability perspective. And then we'll have a long lease with a really strong tenant. We estimate that will cost us almost GBP 70 million to build. But on a conservative estimate, it could be worth GBP [ 75 ] million when done, and we'll be bringing in another GBP 4.5 million of rent. So again, another example of us working to create this long income with strong tenants. We've mentioned that we've been making some sales of smaller assets. And Nick mentioned that we've been able to secure some really attractive pricing, despite the market headwinds. So in the top left-hand side, you can see Southlink in Portsmouth. We sold that in June 2022, which was the very top of the market, which explains the net initial yield we've got of 3.2%. We sold it at GBP 6.5 million that was a 33% premium to the book value at the beginning of the financial year. Beech Housing fleet was a small office exposure. We completed the business plan. We just saw risk to the valuation. So we decided to sell. We achieved a 17% premium to be open in book value. And the proceeds from these sales that will be reinvested into future CapEx projects. In the pipeline, we've got Morgan Sindall House in Rugby, which has been sold. It will complete in June. We sold that for GBP 4 million, and that money will initially be used to pay down our RCF. And then the RCF in the future can be used to fund those CapEx initiatives that we have to create value and more rental income. On the bottom right-hand corner, we've mentioned 67 and 68 High Street in Chelmsford. So we own 67 High Street. In March, we acquired 68. And the rationale for acquiring that, which is the next door unit and is currently occupied by Clinton, which you can see in the photo, is we were talking to Co-op Bank about a longer-term lease. So what we did at the same time is buying 68 High Street was agreed a new 10-year straight lease with a Co-op Bank, a really strong covenant to bring them into both units. So therefore, we're creating value and also creating an asset that will be more liquid in the market and we'll achieve a higher price together than they would individually. Both Nick and I have mentioned the reversion in the portfolio. That 8% reversion yield is very high. It can seem a bit abstract. So it's just kind of set out some steps as to how we see ourselves kind of achieving that over time. So the first thing we have in the next 24 months are contractual uplifts in existing leases. So there's GBP 2 million of that to come through. And the majority of it relates to New Buckinghamshire University, who I referred to earlier. They're currently on a rent free and their rent will increase to GBP 1.3 million in due course. Similarly, we have a company called Littelfuse, who manufacture microchips and things like that. So they're on a rent free and their rent will come in, in due course at GBP 0.5 million almost. So GBP 1.8 million of that GBP 2 million is with these 2 really strong tenants. So we're confident that's going to come through. I spoke about the Phase I development of Stanley Green, which is completed. The rent on that new development will be GBP 1.3 million. And that was void at year-end. But since the year-end, we either have left or have in legal negotiations, 40% of the GBP 1.3 million and we have a target to have all of it let, so GBP 1.3 million by the end of the year. We spoke about Starbucks, where we've got over GBP 200,000 revenues come through. That's currently under construction, so that will come through soon. And then the other 2 bars referred to where we currently have rents at our assets that are below the current market value where it's a longer-term lease. So when that lease expires or when the rent lease come around, we'll gradually edge up the rents. And then finally, we've got a vacant space that we're working hard to let. We set out some information here on our balance sheet. Very, very strong, really positive story. So at the year-end, the average interest cost on our drawn debt was 2.9%, and the maturity of that debt was more than 10 years. Now that has changed since the year-end because we had a cap at 1.5%, which was expiring in July, and we replaced that with an interest rate collar. So there's cap of 4.25% and a floor of 3.25% last week. That means that the average interest cost based on today's [indiscernible] rate will be 3.4%. Now 3.4% is still extremely attractive in the current environment. And we'd also stress, and you can see this in the bars on the left-hand side, the majority of our debt is a long-term loan with Canada Life. That's a 2.5% fixed, and it's got a maturity of more than 13 years on average. Finally, you will have heard Nick and I speak a lot about sustainability through the presentation. It's really fundamental to our approach to adding value to assets. We -- as I said, we're looking to evolve our strategy to take advantage of that further, but our return objectives will remain the same. And our view is that by undertaking this strategic evolution, our income and our returns will be more sustainable in the future. With that, I'll hand back to Nick before we address any questions you might have.

Fantastic. Thanks, Bradley. So just to provide a summary, I guess, the key message really is that we do have a higher income return, and we have a sector-leading debt profile, which we believe will underpin our earnings going forward. So we will be able to continue delivering a sustainable and progressive dividend policy. I think that's really highlighted by the 4 numbers on the right. So first of all, we've got the long-term outperformance at the property level. Bradley and I are working with a team of 40-odd specialist investors and asset managers and they're helping us really drive forward the asset management plans across the portfolio. We have, even with the recent hedging we put in place, a very low cost of debt of 3.4% versus current rate and a very long duration. We have a very significant reversion at GBP 8 million just to bring it to life that is driven by that 8% yield. And finally, based on today's share price, what we think is a really attractive dividend yield of 7.5%. So I'll pause there and hand back.

Nick, Bradley, that's great. Thank you very much indeed for your presentation this afternoon. [Operator Instructions] But just while the team take a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via your investor dashboard. Bradley, Nick, as you can see there in the Q&A tab, we have received a number of questions throughout your presentation this afternoon. Thank you to all of those on the call for taking the time to submit their questions. But Nick, Bradley, if I could just hand back to you to respond to those questions what's appropriate do so, and then I'll pick up from you at the end. Thank you.

Yes. Thank you. So we've got a couple of questions here, I can see at the moment. The first is, are we seeing opportunities to acquire the more aggressively geared asset owners [indiscernible]? And with the long-term fixed rates we have, if you were able to make further acquisitions, what blended interest rate would you be happy to run with? So yes, good question. So we are seeing opportunities. We are seeing early signs of owners needing to sell not so much about loan-to-value bridges, but where the refinancings are too expensive, where today's rates mean that there isn't enough cash flow of where they will, therefore, look to sell. There are also some sales out of open-ended property funds where partly as a result of the mini budget and some of the DB pension scheme derisking, we're seeing accelerated redemptions across some funds run by other managers. So there are opportunities. Our challenge at the moment is that we don't have the firepower, the dry powder, if you like, to go and make acquisitions. And so although we have balance sheet capacity, we're currently allocating that capital to asset management projects where we are really controlled of adding the value. And we are also -- although our balance sheet is extremely strong, we do have an internal guidance of our loan to value of 25% to 35%. Although we've got tons of cover on our covenants with banks, we have strategically given ourselves that range that we are towards the upper limit of that range or just took over it. So I think the sales that we talked about, the Rugby asset, for example, the expectation would be that we would use those proceeds to repay the bond credit facility and then redraw that probably to fund the asset management activity. So I think, yes, lots of opportunities, we think, that will emerge in the market. But at the moment, our focus is on really driving those business plans where we are very confident about the income and the value that we can generate. On the second question, again when it comes to slightly easier question to answer as it relates to our own portfolio. So Bradley has explained that some of the activity that we're doing at the moment. We are able to generate cash-on-cash returns when you look at the additional income we're generating well over 10%. So the cost of our revolving credit facility at the moment, the marginal cost of the unhedged piece is obviously around 6%. And so we can justify that. It is accretive, both in terms of income, but also we already own the asset. There isn't a frictional cost of buying, and therefore, we're confident about adding the value. So as it relates to going off buying in the market, we would not today use our revolving credit facility to go and make a significant acquisition, partly because average property yields are still about 5. But also, as I say, because we have an internal very disciplined approach to maintaining a sensible [indiscernible] value. And at the moment, [indiscernible] degree of caution and focusing on the these existing portfolio. So hopefully, that answers the question. Now there is another -- the next couple of questions are related, which relate to some of the M&A activity that's being seen in the market. And there's one in particular that asks a question about [indiscernible] I don't know, is a specialist investment trust that owns retail parks, where the Board, because of different reasons, I think, has made a decision to do a strategic review and that could well result in some form of M&A. We did look at the portfolio. We would look at everything in that type of situation. And we've got a big team. We see a lot of deals. And so that did cross our desk. The retail parks are okay. I would say I wouldn't mind that they're not as good as those that were in Beford that we own. The market intelligence at the moment is that it may be, given the level of the current share price discount, but -- and also because there are other people like us who like to read the warehouse sector, that those assets could well just be bought with cash and shareholder will receive now rather than any sort of a paper deal where that paper may still be the discount. So that's our view on that one. Don't expect an announcement anytime soon. On the broader question, I think we are frustrated by the prevailing share price discount. We think it undervalues the shares. We hope that these results will resonate well, notwithstanding the NAV decline. We have just [indiscernible] of the results today. So we are hoping that all the stuff we're doing in terms of shareholder engagement into this platform is excellent. It's great to have contact with people like sales. Obviously, [indiscernible] market. But most importantly, continuing to deliver what we say we're going to do. If you step up [indiscernible] notwithstanding the wider market volatility is we've done everything we said we're going to do. Delivered Stanley Green, delivered lease restructuring, delivered higher income, delivered a further increase in the level of dividend. Combining that with, we hope, evolving our strategy, so there's greater emphasis on sustainability without giving up turn, importantly, adding to the return, we believe, we hope we will mean that, that discount narrows and we hope in time that will create M&A opportunities that we could then access with a better share price rating. So I think that hopefully answers both of those questions relating to sort of corporate landscape. I think, James, those are, I think, the questions that we have, and we have used up 50 minutes. So hopefully -- that's hopefully given the people a clear response.

Nick, Bradley, absolutely thank you very much indeed for being so generous of your time and addressing all of those questions that came in. And of course, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended, just for you to review to then add any additional responses, of course, where it's appropriate to do so, and we'll publish all those responses out on the Investor Meet Company platform. But Nick, perhaps before just really looking to redirect those on the call, to provide you with 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.

Yes, of course, we've added a slide, which gets what we think of the 5 most important points as to why we think SREIT is well positioned and an interesting investment for you today. We have a good quality diversified portfolio that's importantly high-yielding bar. So we believe allocated to the high-growth part of the market. We've announced today a fully covered dividend, which on today's increased level reflects a yield of 7.5%. Bradley has articulated hopefully really clearly why we think we are differentiated part of the strength of our balance sheet, both in terms of duration of debt, but also really importantly, a very low cost with no refinancing risk. We have, not withstanding all of those points, still a discount to 28%, give or take, a bit less today, hopefully, which we think offers compelling value and offers protection if we do see a bit more volatility in the market. And importantly, we have a really clear evolving focus on sustainability, which is going to be fully integrated in our strategy, which fundamentally is a right thing to do, but will allow us to make more money and deliver more sustainable returns to shareholders. So certainly speaking [indiscernible] I think we would love to say thank you very much for those that have bought shares with this platform. Thank you for your support. And I'm very happy to take any further questions off-line if people have any.

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 as you'll now be automatically redirected for the opportunity to provide your feedback in order of the management team can better understand your views and expectations. It's going to take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of Schroder Real Estate Investment Trust Limited, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.