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

Good morning, and welcome to the Schroder Real Estate Investment Trust Limited Investor Presentation. The team will be providing a short update presentation today, followed by a Q&A relating to the results for the quarter ended 30th of June '23. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. And we'll review all questions submitted today and publish responses where appropriate to do so. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Nick Montgomery, Head of UK Investment. Good morning.

Good morning, and welcome, everybody, and thank you very much for joining us today. So this, as Paul has just mentioned, will be a slightly shorter presentation because we're presenting today on our interim NAV update for the quarter ending 30th of June 2023. So as just mentioned, we will hopefully keep this presentation to 20, 25 minutes and then leave time for questions. And we will -- I can see we've already received some, which is great. So I'm Nick Montgomery. So I'm one of the fund managers working very closely with Bradley, who you'll see in a moment. And so we've got a slightly shorter deck than normal, but hopefully this gives you a good flavor of the activity over the quarter and our views on the market. So I guess just to start with, and this is also partly aimed at people who perhaps know us less well than some of you. It's really just to illustrate how the portfolio is currently made up and with it being real estate, we love showing pictures. So the 6 images here are our 6 -- or amongst our 6 or amongst our 10 biggest assets, I should say. So about GBP 470 million of portfolio value as at the end of June, these 6 assets here represent about 50% of that value. As it happens, the top 15 assets now as we're investing in the portfolio and selling some of our smaller assets, our top 15 assets now represents almost 80% of portfolio value. And what I [ mean ] is for those who don't know us quite so well it's actually very straightforward to get a good feel for the quality of the loan portfolio, and that really is a key driver at the moment given the headwinds that we're facing in the market, but also the opportunities that we can see across the portfolio. Moving from the left-hand side, almost half of our portfolio now is comprised of multi-let industrial estates. This is our preferred part of the industrial market. We are beginning to see a supply risk coming through to the logistics sector, which obviously is growing very strongly off the back of Internet-related, but we are beginning to see a slowdown there because of the -- more development coming through and companies like Amazon taking their space. Conversely, for multi-let industrial estate, you've got a much more granular occupational base, and we're seeing very good levels of occupational demand and Bradley will give you a really great example later in the presentation. Our Office renting now continues to fall. Our office renting now is at around 25%. The majority of that value is in 2 key assets, but we also have other exposure, particularly focused on the big 6 regional office centers like these at Edinburgh, for example, and obviously, Manchester here. But our 2 biggest office assets they are offices in [ modern ] respect, but equally, at the same time, we have model office uses. So we have a university as a tenant in one of our biggest offices up in Bloomsbury in London. And also, as it happens, the university as a tenant [Technical Difficulty] a lot multi-let assets, apologies so there is an issue with the sound there, with our large multi-let assets up in Manchester. The balance of the portfolio largely comprises convenience retail. We've got 2 really good examples here. But in the retail market, it is polarized, and we -- but we are seeing continued healthy levels of demand, particularly for convenience, and particularly grocery as part of that convenience market and there's a lot of our activity at the moment which is focused on cap reversals and what it ties into our retail warehouse portfolio. So again, key messages here -- sorry, skip that one. Key message here, why do we think SREIT is actually a really interesting investment opportunity today? Well, first of all, from the top down and again, Bradley will build on some of these themes but we genuinely have a good quality, diversified, but importantly, weighted towards parts of the market that we think will deliver more attractive returns going forward. Diverse but also in terms of 40 assets, as I mentioned, but still with a heavy weighting towards our top 15, but also diversified by tenant base. And Brad will give you a good idea about the quality of that, particularly our larger tenants across the portfolio with almost 320 tenants now, which obviously diversify the income risk and it gives us confidence about future earnings. And finally, in relation to the portfolio, we have a very high reversion yield. So the reversion yield is a bit of property jargon, but that reflects the valuer's view of our portfolio rent today we're all the space available to let into the market. So effectively today's market rent as a percentage of our underlying portfolio value. And today, that reversion yield is about 8%. I actually can't remember everything higher, and equally, I can't remember having such a big spread compared with the average of the market, which today stands at about 5.8%. That higher income, but also a very robust balance sheet, and again I'll come back to that in a bit more detail, means that we have robust earnings. We announced a further dividend increase for the most -- sorry, we announced a dividend increase over the financial year to March. We held the dividend over the quarter 2, but that dividend is fully covered 103% of earnings. And that dividend yield today, on today's share price reflects a yield of about 7.7%. So a very attractive covered dividend yield of approaching 8%. Balance sheet, Bradley will talk to that in a moment. We've put in place some further hedging so 91% of our drawn debt is hedged. And we have a very long maturity, and we would argue the most attractive debt structure in the peer group, but I'll try to illustrate that clearly in a moment. Discount of 30% it's better than some of the peer group, and we have seen an improvement in that since shareholders have begun to see the impact of our efforts coming through to earnings. But we would argue today at that discount given the outlook for the market, notwithstanding the remaining uncertainty in the wider market, we just think it actually represents a really good value. And the final point to note and more on this, I think when we next present off the back of our interim results later in the year, we are continuing to evolve our strategy with increased focus on sustainability. And this is all about a conviction that there is now an increase in green premium that occupiers are prepared to pay and we think we can use our specialist expertise to drive value, exploit this pricing and deliver more sustainable income growth over the long term. Now I'm not going to go through all these numbers, but we've shown here the movements of the NAV over the course of June and as you know, the portfolio is independently valued every quarter and we changed our value up in line with best practice guidance from the [ ORCS ] at the year-end. So this is the second valuation that CBRE have carried out across the portfolio. The headlines of that were that partly because of the active management across the portfolio, and our values were basically flat on a like-for-like basis, minus 1.1%, which compared to the benchmark of minus 1.1%. So continued relative outperformance against benchmark, together with a higher income return, I think I'll illustrate that in a bit more detail shortly. We continue to invest capital expenditure into the portfolio. Key projects like Stanley Green, which I'll come on to later on, but also with a really interesting pipeline of future project building through the portfolio. I mentioned earlier on that we paid a dividend of 0.836p per share and that is the dividend that reflects a 7.7% yield of today's share price and the numbers are there that are clear to see. Now all of that, in summary, represented a NAV increase of 0.2%, NAV total return for the quarter of about 1.5%. And we think that will compare favorably with others across the peer group. Moving on to the income statement, again, briefly because there are a lot of numbers here, but we've shown what we think is a clear illustration of successful implementation of our strategy, focused on the asset management. And really, the headline number here is that increase in EPRA earnings, the 27% quarter-on-quarter increase. And if you just look at the table, I'll draw out a few key points. I think the first point to note is positively recurring income increased by 5% over the quarter. We saw a reduction in property operating expenses. That was for different reasons. That number does move around a little bit because, of course, if we are carrying out positive leasing activity, then that clearly does have an impact in some of the fees. At the same time, obviously, in terms of boosting income. So I would expect that probably to trend back up particularly over the rest of the year given the pipeline of activity that we've got. We did see, obviously, the finance costs increase over the quarter, and that's because of a part of our debt, which is currently on hedge and again, Bradley will talk about in a moment. But very, very positively. And again, I think in line with guidance that we gave you when we last presented, fully cover dividends with an attractive yield of 7.7%. Just to illustrate the dividend profile in a little bit more detail, I think we remain the only company in our sort of recognized peer group. And again, I'll walk you through that in a bit more detail shortly, where we are paying a dividend that is above the pre-pandemic level, we're the only company that is in that position. We're very clear. Our Board are very clear. When we meet on a quarterly basis, if we can see that there is visibility for us to continue increasing the dividend where it's sustainable, we will pass that on to shareholders. We are shareholders. We know people own this principally for income and that is our objective to have a progressive policy over the long term. Obviously, the capital value side is important as well. And so what we're showing here are the latest performance numbers, so this shows you the performance of our underlying portfolio. So this is not NAV level, this is underlying property level. And this allows us -- and importantly to holding shareholders, to compare the performance of our underlying portfolio against our institutional and REIT peers. And you can see -- I won't go through all of these numbers, but you can see on the right-hand side, the relative performance over the different periods. And very positively, we have our performance literally over all time periods now, and we would attribute that to both the higher income return really driven by the active management, but also the diversified strategy allowing us to tuck and chain through the sectors. We've been increasing our industrial renting, particularly to multi-let. We've been reducing office renting but those are occasions alongside the active management that have driven that return. I guess the point to note here is that the total return outperformance of 6.2% over 12 months is obviously positive, but they clearly are negative numbers. Now I think what probably was more interesting and I think a good indication of where future performance will come from is if you look over 12 months, income return over the 12 months to the end of June was 6.1% compared with the benchmark 4.3% and that's cash rent collected. And again, having the head start on income, we think will really support our returns as we go through the rest of the year and obviously into next. Now this next slide, obviously, includes the details on risk considerations, but it also includes information on the share price performance, NAV returns as well alongside the MSCI data that I just provided you. Clearly, the last one was due with the correction in the market, those are negative returns. But on a rolling 3-year basis now, we are running somewhat ahead of our peer group. As you -- some of you will know because we made the point previously, if you look at the 12 months to June 2020, you can see that the negative impact there and that was largely because of the refinancing that we did in relation to our long-term debt, which has been -- with hindsight, a really significantly and positive thing to that have done but there was that one-off hit, which we provide information on here, which dilutes our NAV return when you look at it over a longer period of 3 years. But really importantly, the bet into that refinancing, and Bradley will talk a bit more about it in a moment, is now coming through positively in terms of our visibility on earnings and having the best and most -- I guess, the strongest peer -- benchmark, and balance sheet in the group. So just to bring that to life a little bit more, this is what most people, I think, and the analysts that write about us would consider to be our most directly comparable companies in our peer group. And we wanted here to draw out 3 reasons why we think our company is very well positioned. But if I just start from the top, I think the first point to note and I have mentioned the yield of 7.7% that is obviously amongst the highest in the peer group. But I think what's really important is if you look at the number in the columns, our dividend at 7.7% is more than covered. The companies that are currently paying a dividend yield slightly ahead of us, you can see there are not covered. And we would argue that with our reversion of yield with the activity in the [ hopper ] so to speak, across the asset management projects that we've got more opportunity to drive that forward than our peers. Notwithstanding that, you can see at discount, we would argue is compelling given our visibility on what's happening in the portfolio, but also because where we see the outlook for the U.K. market, and you can see that compares with some wider discounts in the sector, but there are some different reasons for those. So for example, moving to the far left-hand side, balanced commercial property. One of the key reasons for that discount is because then all of that debt comes up for refinancing at the end of this year. So investors are rightly beginning to be more discerning, looking at our refinancing risk given the outlook for interest rates particularly over the course of the next 12 to 24 months. I guess relating to that, we're showing here the cost of debt, but also the duration, so how long is your debt locked in for at an average because different companies have slight different structures. So we try to come up with an average duration for each of the companies based on their most recent disclosure. And you can see that amongst the lowest cost of debt in the peer group, we've got really significantly by some distance and longest duration. So I gave the example there of some of the companies that are left in particular, balanced commercial property where as I say, the discount is reflective of the fact that all of that debt, which is currently at [ 3.2 ] comes up for refinancing next year. So moving on, I'm going to talk briefly about market because, again, it's not that long since we've last presented. But the big issue for all us who been assessing pricing across all markets is the outlook for inflation. And as you all know, CPI has been the highest 40 years, but we are now beginning to see that full impact. Now whilst clearly, that is positive, the worry has been that core inflation, so excluding the more volatile energy and food prices, has been more persistently stubborn. And that is a risk, and we've clearly seen that reflected in market's expectations of interest rates and [indiscernible] Bank of England. But there is an expectation here, but we will see that gradually trend downwards. So although inflation remains a risk, there is an expectation that we are moving towards the top of the interest rate cycle. But nonetheless, we do expect interest rates to continue to drift up before they start coming down again and you'll see huge volatility in the gilt market and also in the swap market reflected in cap prices, for example, being as volatile as we can remember. And of course, real estate as a hybrid asset, so it has qualities and equity in terms of growth, but obviously, has qualities of working to a bond. So that part of the valuation is susceptible to what's happening with interest rates. And what we've shown in the left hand side of this chart is in the blue line, of course, being 10-year bonds. And then also what that implies in terms of debt costs, and a typical borrower today of an average office building, for example, will be paying a total interest rate of 7% plus, so above where average yields are for the sector. So for that reason, our expectation is and this is more than reflective, we think, in the share price discount, that we will see a further leg downwards in property values and prices. Our view at the moment is that average values from June might fall another 5%, possibly 10%, but averages, as always, will be misleading. Now we expect next phase for the correction to be more focused on secondary assets, particularly secondary offices, particularly secondary out-of-town offices, where they are being most adversely affected by changing working pattern, but also obviously less risk largely because of their increased cost of delivering space for tenants that has high sustainability standards. So we are expecting the further move in the market to be more differentiated between the sectors. And we are expecting the industrial sector, in particular, and multi-let estates to actually deliver relatively attractive return from here driven by rental growth, and I'll illustrate those points in a little more detail in a moment. The chart on the right, I guess, just gives a bit more of illustration of -- about long-term relationship between the 10-year gilt rate and property yields. And so that's shown by the green line you can see here is the all property initial yield. And you can see there the 10-year bond yield. And a long run, you can see illustrated by the bars, over the last 10 to 15 years, the spread between the 2 has been about 200 basis points. If you look back over the longer period, so if you go back pre-GFC to a more normal real estate market of the late 90s and 2000s before we have the impact of [ QE ] sort of artificially pushing gilt rates down, the longer-term relationship is more like 150 basis points. And that's why, again, we think going forward and particularly as we move into next year, as interest rates come down in a lot of the consensus proper yields will start to look relatively good value or fairly priced versus our historic average. And the last point I'll note, and we haven't got too much information in this deck because we're trying to keep this shorter. But unlike our cycles, we don't have the supply risk coming through. There isn't huge amount of development in the market as we have [ reserve ] coming into and then after the financial crash of the GFC in the '07 to '09 period. So that's what this means in terms of capital values. You can see here on the left-hand side, the correction that we have seen with average values down now about 22% and that's represented by the dotted line. But with the industrial sector having fallen more mainly because of the lower yields being more adversely impacted by that rerenting that we've seen across all asset classes, as I say, going forward, we think that average line will continue to trend down a bit, but with the industrial sector because of rental growth holding up better now compared with those other sectors. Again, and I've touched on this, but in contrast with previous cycles, this is a fairly significant correction that we've seen to put it in context. Average values do end up falling between sort of 25% and 30%. That compares with 44% during the GFC, so this is a significant correction. But it is worth noting and this is partly about the supply side point I've mentioned, rents are still rising. Now literally these are nominal. The numbers would look very different if they're real, but rents in normal terms are still rising. And I guess just to illustrate that point further, the data here shows the trajectory of rental growth from the point of the market, [ the dear ] effectively. So we're looking at months after the market bottoming out following a correction. So on the left-hand side, you can see the downturns or the recovery, I should say, following the downturns of 1989, '07, 2022. And you can see there the red line for the most recent period with average rental growth for all sectors, broadly speaking, tracking what happened post 2007. Now when we can present to you in 6 months' time, I would expect to see that red line moving ahead of that equivalent period post GFC because, as I say, [ it ] happened at the same degree of speculative developments, particularly in the office sector that we saw in the run-up to the GFC. What's much more striking and why we have been having 50% allocation for industrial if it will put us in a good place is comparing how the industrial sector has recovered in terms of rental growth compared with those past periods. And so you can see that period from 2007 where industrial rents were pretty much flat for 12 months after that market bottoming out. You can see in contrast, nominal rental growth in the industrial sector way ahead of those -- that past most recent correction and in properties in average. So that reason, again, we think the [ tenant's ] assets that we own in the industrial sector put us in a relatively good position. I think finally, just to I guess wrap up on the market, you can see on the left-hand side our forecasts, and we are expecting a correction. As I say, over the next few months with the market then recovering towards the back end of next year when the market will generally has better visibility on where rates are going to top out and as I was saying when we are hopefully through what we see as being a assessment period over the end of this year and into next. Across the main sectors, again, this is why we've got conviction about how we're positioned. You can see on the right hand side, we are expecting the sectors to be more converged than they have been, the polarization we've seen over the last 5 years, we think will converge. But we are expecting most of the industrials, retail warehouse in particular the value of the retail warehousing market and within the office sector, more polarized within the office sector, but we do expect the big 6 locations like Bloomsbury in London to deliver relative outperformance. So we may have more questions on the market. But with that wrap up, I will hand over to Bradley.

Thanks, Nick. So whilst we all have probably been watching inflation and interest rates, we've still been continuing our day job of delivering activity in the portfolio and there's been some really interesting activity through the quarter. But first, in terms of strategy, it hasn't changed for the quarter. We've been investing in our industrial portfolio, which is mainly multi-let industrial estates. And Nick has articulated why we favor that sector. As Nick said, we've got the strongest balance sheet in the peer group. Our net loan to value is 35.7%. And in order to ensure we're going to keep that strong, we're looking at some smaller sales of assets where we completed the business plan but we think that the sector is sort of more and more challenged than multi-let industrials, for example. And finally, we are looking to evolve our strategy to focus on sustainability where we see a real green premium emerging and where we think we can add value and differentiate based on the huge resource we have in that area. So moving on. Here we show some important stats on the portfolio. On the left-hand side, we have a table of some key metrics. At the portfolio level, the top 2 rows represent the granular nature of the portfolio. So you can see we've got 40 properties and more than 300 tenants. And we think that makes the portfolio more resilient, particularly in this sort of recessionary environment where there's a cost of living crisis and consumers and businesses have less to spend. We think risk is lower in our granular portfolio and we've also highlighted 2 further [ worries ] as we speak to the higher-yielding nature of our portfolio. As Nick says, our reversion yield is 8%, which is high, [ wateringly ] high and that compares to our current net initial yield of 5.7%, and that difference is around GBP 8 million. So the difference between our current passing rent and our estimated rental value is about GBP 8 million which is half of our current dividend, which is around GBP 16 million. So it just shows the size of the opportunity we have to go after within the portfolio to grow our rent. And on the right-hand side, we set out the structure of the portfolio in terms of sector allocations. As we have said, around 50% allocation to industrial, and that's almost entirely multi-let industrial estates. And then you would also see we're very overweight in retail warehouses, another area where we see sort of stronger occupational demand and more resilient values. With regard to our offices, we expect these into 3 sort of sections for you. So we've got offices in London. We've got offices in the big 6 cities and we've got offices elsewhere. So our London offices, which includes Greater London, so all 36 or so [ buyers ] these are let to 2 universities. University of Law in Buckinghamshire and Leeds university, who are both growing, and we're delighted to have them as tenants. And in the big 6, our offices are in city center locations such as Edinburgh, Leeds and Manchester, where despite the kind of structural challenges that offices are currently facing with more working from home post pandemic, these areas have strong fundamentals and there will always be demand for these sort of higher quality, well-located offices. Moving on. So here in this slide, we set out our 15 largest assets by valuation and this is really just to provide some granularity to you on the portfolio. You'll see the majority of our larger assets are in industrial, we're letting universities. And we've got a large retail warehouse at St. John's Retail Park in Bedford. And on the right-hand side, we've shown a couple of photos. So on the top, you can see Stanley Green Trading Estate, which we'll speak to a bit shortly. And this has been a key project for the fund over the last 18 months or so. And then underneath that, you can see a photo of 19 Hollin Lane which is an element of Stacey Bushes Industrial Estate, which is our largest asset by value. And you can see that this is under construction. And when it's finished, it will look like the photo above. So you'll see PV on the roof. It will be shiny. We've used recycled materials. There'll be EV charging. We're targeting [indiscernible] with an [ EPCA + ] . So this kind of speaks to that sustainability theme where we think if you can deliver the most sustainable space, you'll be able to demand higher rents and the valuation will be at a keener yield. So justifies the actual CapEx spend. On this slide, on the left-hand side, we list our 15 largest tenants as at the 30th of June. Some positive points to note. There's only 2 tenants that represent more than 2.5% of the portfolio rent, and they are Siemens Mobility, who are a subsidiary of Siemens, the global conglomerate, and the University of Law, who I mentioned before, they occupy our London office space. They use it for teaching, for lectures, that sort of thing. And they are a growing business. And in fact, they're taking more space with us in Manchester, which is fantastic. The other tenants as you look down the list, we see household names, strong names. We're really happy with the exposure here. A point to note, Buckinghamshire New University are currently on half rent because we regeared them. So we agreed a new lease ahead of the expiry of their existing lease. We regeared them in October. And this was because there's clearly the structural sort of trends that are adversely impacting offices. So what we wanted to do was lock the university in to our office building for a longer period of time. So we locked them in now until 2028. And we increased their rent by 13% in return for some rent free, which is currently on half rent. So when their half rent is over, they'll be paying us about GBP 1.3 million per annum, and they will be our second largest tenant. On this slide [ we see ] analysis, so where we have vacant space in the portfolio. It's 11.5%, which is slightly higher than it has been over the last prior quarters. And the reason for that is the Stanley Green asset I mentioned, so the new development that recently completed. And whilst we've let around 40% or have let around under of 40%, still going to take some time just to fully lease that asset because being a multi-let industrial estate often you let to smaller businesses and they like to see the space and walk around and understand what it'd be like for them occupying. But if we adjust for that, then the void is 9.2%, which is bang in the middle of about 5% to 13% range over 10 years. And then what you can see in the table on the right-hand side is an analysis where we've shown you what we have let or under offer. And of that 11.5%, 2%, is that under offer. So we're already trending down to 9.5% even before we adjust for Stanley Green. We thought it would be interesting to show you an example of how we work, how we look to add value to assets, particularly we have a particular focus on sustainability as well. And Stanley Green, as I said, this is where we've spent the most money over the last 18 months. We spent more than GBP 8 million. We developed 80,000 square feet of warehouse and trade units on an existing site. But just to put some context on this, we bought this asset in December 2020 and it had a 3 acre empty sort of site next to it. There was planning for around 40,000 square feet of new accommodation. We immediately increased our planning to 80,000 square feet and we also decided to make it leading from a sustainability perspective. That development completed in the quarter. As I said, around 40% is either let or in legals. And when it's fully let, will bring in GBP 1.3 million of rent. Now bear in mind, we paid around GBP 17 million for this asset. We spent GBP 7 million. It's now valued at GBP 39 million. So really, really accretive to the fund. And you can see in the bottom table, the performance stats. So over 1 year, we've returned 17% compared to the all industrial benchmark of minus 22%. So it shows what we can do with our strategy focused on sustainability. Now that was a backward-looking project. One that's essentially complete. We've got a couple of kind of live projects that we'd like to speak to, well, one live project and one that we're trying to make live. So on the left-hand side, we have -- you can see in the photo an image of St. John's Retail Park in Bedford, which is our largest retail exposure. It's a really sort of vibrant retail warehouse. It's the predominant scheme in the area. And we have anchor tenant there being Little. So what we're doing here is -- and also it's a second retail park in Watling Street in Bletchley as we've agreed with Starbucks that they'll build 2 pots. So 1 at each site on the car park that will cost around GBP 1.8 million for both. We're paying for that, but Starbucks are building it because they have plenty of experience doing that. And if the cost goes above GBP 1.8 million, then that will be for their accounts, so we're protected on the cost front. And when complete, the rent for both schemes will be around GBP 250,000, so a really high return on our investment. So that is now on site at Bedford. At Bletchley, we're going to be on site shortly. We've got the full GBP 1.8 million net spend, and we think the value will end at GBP 4.2 million and it is currently GBP 1.8 million. So that's an uptick of GBP 2.4 million. So accretive CapEx there. And again, there's a focus on sustainability. Starbucks are required to meet certain standards in EPC and BREEAM and also have EV charging there for customers. On the right-hand side, we have another scheme we're trying to develop. But again, maybe just briefly step back on this asset. So this was another asset we acquired in December 2020. We paid GBP 19 million for this asset and it's now generating GBP 2.2 million per annum of rent. So that's a yield of around 11%, a yield on cost of around 11%. And we are able to achieve that by identifying during DD that they were kind of under-rented units there, mainly with the largest tenant, Siemens. So we increased their rent through a rent review by around 30%. And also we have a second tenant called IXYS or Littlefuse, who manufacture semiconductors. So we increased their rent also by around 30% as part of a 10-year regear. So they're there for 10 years straight we have inflation in rent reviews. So that was the first stage of the business partner Chippenham, was to increase our income and really increase our yield on cost. But in addition, the Chippenham, the site at Langley Park is right in the center of the town, it's right by the train station, there's lots of residential around it. And Siemens employ hundreds of people there. The site is 28 acres, and there's plenty of unused space. So what we're trying to do is work with Siemens to develop a new headquarters for them for their Mobility business. And you can see a CGI in the top right-hand corner of what that might look like. We're in negotiations at the moment. The plan would be to use the empty land on the 28-acre site to develop the new HQ whilst they are still occupied in the existing units, which you can see the yellow units in the photo. So it would be really efficient sort of scheme for them. And then once that new accommodation is developed, we would then refurb the existing. So in terms of cost to build, we think that will cost around GBP 69 million, including the value of the land that the units will go on. And at the end, we conservatively estimate that would be valued at around GBP 75 million. So again, another accretive scheme. On Slide 24, we spoke about rental growth and we wanted to provide some color on where that will come from. So the first bar -- the first blue bar on the left-hand side shows our current rent. So that's GBP 28.5 million. It's worth passing at the moment. And then the final bar on the right-hand side shows our ERV, which as Nick described, is what the valuers think we could rent our portfolio units at today's rent. And then we're showing some steps on how we can get there. So first off, in the next 24 months, we've got fixed uplifts worth GBP 2.3 million. And a huge amount of that GBP 2.3 million is related to just 2 leases. One being LittleFuse and the other being Buckinghamshire New University. So around GBP 600,000 from the University and around GBP 400,000 from Littlefuse. So that's GBP 1 million coming through on just those 2 leases in the next few months. Second, we've got Stanley Green. As I mentioned, that completed during the quarter and the rent that we expect to get from the unit once let will be GBP 1.3 million. Third, you've got Starbucks ERV has come through. So Starbucks are currently on site at Bedford and we're going to start on site Bletchley too. And as I said, when complete, that's GBP 250,000 of rent. And that's shown in the chart here. And then the final 2 bars show where our ERV is currently ahead of the rent that we're currently getting in the units. So as rent reviews come around and as leases expire, we would expect to kind of achieve our ERV and then finally, there's vacant space at the moment, which we're working very hard to let. So that describes where the GBP 8 million will come from. On our balance sheet. So we set out here -- we try to set up clearly the structure of our debt. We've got 2 facilities, a term loan in Canada Life of GBP 129.6 million. That's fully drawn. It's had a fixed interest cost on average of 2.5% and the average maturity is 12.8 years. So really strong facility there. And as at 30 of June that has a valuation that's not reflected in the NAV of around GBP 20 million. Then we have our revolving credit facility with RBS. So their facility size is GBP 75 million. We currently have GBP 46 million drawn. Of that GBP 46 million drawn, GBP 30.5 million is hedged. So there's a cap of 4.25% and GBP 15.5 million is unhedged. So that is subject to the [ Floating interest cost of Sonia ]. Now the result of that debt is an average interest cost on drawn debt of 3.4% and an average maturity of 10.5 years, which is a really strong position to be in. Finally, sustainability is central to our strategy. We think there's really compelling structural trends supporting enhanced returns if we follow this strategy. This slide just sets out some of the work we've been doing over a number of years to get into the position where we are today. That allows us to execute this strategy. And I hope that as we've been speaking through the deck, it really comes through that this is a focus on everything that we do to the portfolio. With that, I'll pause and hand back to Nick for some closing comments before we move on to questions.

Great. Thanks, Bradley. I also gather from Paul my cameraman down in [indiscernible], so that must be a welcome relief for you. So I'm back on from what I understand [indiscernible] apologies for that. Look, just to wrap up, again, this is an interim update. I think the headlines are that we're pleased with the progress that we're making across the portfolio, delivering the continued growth in net income as shown by the EPRA earnings statistic. I think going forward, whilst there is clearly continued uncertainty in relation to the outlook, particularly driven by inflation and interest rates, and I'm sure you'll ask some questions on that. We are very encouraged by having, firstly, significant lettings under offer, but also a really quite exciting portfolio of future activity that we hope will deliver further growth in earnings going into the future. I guess the final couple of points to note is we are differentiated by the strength of our balance sheet. On any measure, if you look at our balance sheet, duration, interest rate, hedging, we're in a very good position. And finally, I think we have a really clear strategy for where we want to take the company with this increased emphasis on sustainability, real conviction that, that will drive high levels of net income growth using the specialist expertise that Bradley and I have alongside our teams based both here in London but also in Manchester. So thank you for your time. And with that, I'll hand back briefly to Paul.

Fantastic. Thank you very much indeed for your presentation both, Nick and Bradley. [Operator Instructions] But just while the team take a few moments to review those questions submitted today, I'd like to remind you that recording of the presentation along with the copy of the slides and the Q&A can be accessed by your Investor dashboard. Nick, just to say you are back on the screen now. So thank you for that. As you can see, we've had a number of questions that have come through during the presentation. We had several pre-submitted as well. If I may just ask to hand over to you, just to click on that Q&A tab Nick and just go through those and read them out where appropriate and I'll pick up from you at the end.

Yes. Look, fantastic. Thanks, Paul. And again, it's great actually looking. We have some great questions. So thank you, really good engagement. So we'll go through them, and I will -- we'll do a tag team on these as we go through. So first of all, a question, what is the sustainability of distributions going forward? . Key question, clearly, we are all in this for income. I hope what we've given you today is, obviously, clarity in relation to the most recent period, where our dividends were 103% covered by earnings. Again, we are the only company in our peer group as I say, to be paying a dividend level that's above pre pandemic level. Going forward, we believe they are sustainable. I think it's the most important point to note. And that's partly because of the visibility we have all activity across the portfolio, but also really critically because of the visibility we have on our future interest payments. So in that respect, we're comfortable that they should be sustainable. Clearly, there's always risk. We can lose a tenant. But I think, again, hopefully, what's come across is the granularity in the portfolio means that, that income exposure mitigated by both the quality of but also the number of occupiers that we have across the portfolio. So hopefully that answers that question. The next question is where and when do we think interest rates will peak and at what level? I think we gave the answer of that. We would probably be interest rate traders and [indiscernible]. But look, I think I'll express it to you and then hand over to Bradley back on this one. I mean, look, we can see what the markets are implying. And it has been increasing but also quite volatile. And our expectation is that rates might peak at or around 6%. But I think probably more significantly, we and consensus expects that obviously will trend down as we go into 2024 and into 2025. So that's, I think, consensus. That's also why we obviously flagged that long-term relationship between property yields and interest rates. And in particular, flagging how we have a head start on that, it's as far as our portfolio is much higher yielding. So we would argue that arguably, we're less susceptible to the impact the rising rates could have on values. But also, again, while we illustrate that every cycle is different, although rates clearly are impacting values. On the rental side, we think we are in a better position compared with previous corrections largely because we don't as I was saying oversupply risk that we have, for example, coming out of the GFC. So I don't know, Bradley, if you want to add to that?

Yes. I mean I [ think ] agree to the 6%. Our economist last forecast, 6.5%, but that was before some more favorable data came through. And I think as more time passes, more people have to remortgage it is well known now that there are fewer mortgages that have been subject to rate rises than in past cycles. And also, I think we're starting to see the impacts of higher interest rates sort of indirectly on rented accommodation. So people who are renting are suffering higher rents so I agree, I think maybe around 6% if I had to call it today.

Yes, I think that's right. And likewise, the next question asks what impact do we think rates will have on our profits? I guess hopefully, again, we've made the point clearly that whilst property value is clearly [ resolute ] by rates for the reasons we've given, but also in fact, we have a higher-yielding portfolio insulates us more than peers. I guess the other point in relation to rates that Bradley, you may want to talk to again just to draw the point around the hedging that we have in place.

Yes. So I mean, the best hedge we have is the fixed rate debt being the term loan, which accounts for around 75% of our drawn debt. So that's fixed at 2.5%. Whereas if you were paying a floating RCF at the moment, you're probably paying close to 7% with the margin on top of that Sonia so that just shows how attractive that long-term loan is. And you know the duration of that is around 13 years. So really, that's the best hedge we have. And in terms of the RCF, we have interest rate cap at 4.25%. And Sonia now yes is ahead of that. I mean it's around 5% somewhere. So we are getting payoff from that cap. But overall, 91% of our debt is either fixed or capped. So that really protects our earnings going forward by keeping our finance costs limited or keeping the increase in finance costs limited.

Yes. Very clear. The next question again a slight segue relating to this as to our opportunities to buy and sell or recycle. At the moment, the available capacity that we have is allocated to asset management and actually at the moment, given the uncertainty, I think we see more value investing into our portfolio than we do necessarily in going out and buying assets given the limited capacity that we have. I think we are looking to do more sales. We provided in the year end results presentation details of the assets that we have sold during the financial year and in fact, also since the financial year-end, selling office roughly, for example, to our tenants. Going forward, we do see an opportunity for further sales. We are working on sales for early September. We have a couple of [indiscernible] situations where we think there might be particularly reasons why we may have people who want to buy, but they would be around the edges, it's fair to say, I don't really see any significant sales. I think our priority at the moment is to crystallize value, particularly from asset management on some of our smaller assets. And it's more likely that rather than immediately recycling any proceeds that we use to repay the unhedged portion of the debt, we would expect that to be accretive comparing the yield that we're giving up selling versus a yield that we're currently paying effectively on that last year. With the flexibility then, and that's the beauty of a revolving credit facility, where we have more visibility on where the market will stabilize is to use those proceeds again even to go buy new assets or to invest further into some of the key asset management projects that Bradley, I think, clearly articulated. It's a question about what opportunity exists for office convergence other uses and should this be part of the strategy? I see, Blackstone still buying industrial portfolios, and what implications does this have for our portfolio? Good question. So I guess we are already -- if you like, exploit the opportunities to convert office use. As Bradley said, again, clearly, there are 2 of our big offices in fact, are let to universities. And at City Tower Manchester, we've let a couple of floors recently to universities, and that's obviously a huge [ education in ] the U.K. and one of [indiscernible] exports. And so we see that as a huge opportunity, particularly in the stronger regional centers where we are invested. I wouldn't rule out selling offices for other uses. In the past, we've taken advantage of committing development rights where a local authorities will give the ability to expedite change of use from office to residential. And I think we may do more of that. So hopefully, that gives the questioner reassurance that, that is part of the strategy. In terms of the question about private equity buying industrial portfolios, I think that's really good for us. I think that what we are seeing is more demand for bigger multi-lets, sustainably let to regional industrial assets. And that's because those investors like us can see that there is a chronic under supply that there is, therefore, likely to be rental growth coming through. That's in contrast to less appetite for the logistics sector where, as I said earlier, there are still tailwinds in the occupational market, but there is equally more of a supply risk compared with [indiscernible]. So look, if we see portfolios trade and that proves and moves our valuation off that's fantastic. We're very [ confident ] about that. A question about valuation. How is property valued? Is it valued on the yield multiple? Or do we use a [ VCF ]? So first of all, as to our formal valuation that we use calculating the NAV, and obviously, the full year [indiscernible] March interim September, but also the interim NAV announcement such as what we've just been discussing, the whole portfolio is valued by CBRE as the independent value were in line with [ RIX ] guidance. Alongside the guidance from [ RIX ] what we chose to choose there is on valuer rotation, which we've adopted best practice and hence the move from [indiscernible] to CBRE, the ICS are also consulting on a greater use of [ VCF ], [ just have cash flow ] within regulated valuations. It is something we do as a team. So when Bradley and I are analyzing capital expenditure projects across our portfolio, we're working -- we're using [ VCF ], to calculate, forecasting total rates of return on the various projects that we are looking at. On our portfolio valuations and the valuations that we're using for the NAV, the key driver for all that is comparable evidence that's available in the market. So it is double the yield on multiple basis having reference to that comparable evidence and the values will then use [ VCF ] as more of a check, particularly where there is less evidence in the market sort of resolving shopping centers, which obviously we don't owe. Right. So -- and there is a like -- well, a similar valuation question about why low-yielding asset is sold off relatively more than high-yielding assets? Well, that's simply the multiplier effect. So for example, some London industrial estate, not any owned by us. So [indiscernible] who had at the peak of the market last year the value yields during the 3s because the market was expecting to see high levels of rental growth and therefore, buyers were willing to accept a much lower additional return, expecting to have that come through rent reviews or lettings. But of course, if you see a general rising interest rates, then the multiplier effect when you're at such low yield is much more significant than it is if you're owning an asset yielding 6%. So it really is as simple as that. Again, I'm just conscious of time. And some of these, we can follow up on after the meeting. Let me just go through to see that we [ only cover ] that we haven't covered. So there's a question about void rates. So I think -- again, I think this is important. So Bradley, I'll pass this over to you.

Yes. So it says the void rate is 11.5%. And they think that seems high. And they're asking if we -- if the company, i.e., we as the manager has enough resource to actively promote the space. And the answer is yes, we -- taking a step back to Schroder is investment manager and real estate in the U.K., we manage around what, GBP 15 billion, roughly GBP 15 billion. So we have an enormous team of -- and the way we manage our teams, we have sector specialism. So we have industrial team. We have a retail team, hotels team, office team. And each of those teams has really great contacts in the market. And given that how much we manage, we have really good visibility on what's going on in the market. So with that large team of around 130-odd people, we do have resources to be marketing the space. And we do have the contacts with the agents that are required to kind of get in touch with the right occupiers where we don't have the direct relationships, we do have that, too. So yes, there's plenty of resource going into letting the void and it's not lost on us. We don't have to sort of spend money to get that rental income in, so we are pushing it hard. And in terms of the 11.5it is a bit higher, but as explained it is a large part due to Stanley Green, where the new development came online during the quarter and it just take a few months to be fully let because we want to make sure we get the best tenants on really strong terms. And the rents we have got so far at Stanley Green have been really good, more -- 20% ahead of the existing estate, which is just next door and with really strong terms. So we don't want to rush it. So yes, I think there is an opportunity we have on void and we are pushing it hard.

Thanks, Bradley. That was really clear. Just as the final question, and we will separately address the others after the meeting is related to the Siemens development. Now the obvious question is how we're going to fund it because we haven't got the money, assuming we get to a point where we're able to contract on that. It is early days. And as Bradley has said, we're running off a yield of 11% on cost, so the asset is everything we wanted it to and more. We didn't underwrite doing a deal with any of the tenants there to deliver new space, but so this is upside. We've done it before where we have been able to line up prelet agreements, subject to planning and then sell them. I mean, do so crystallize the majority of the value that comes through that activity. What we are not going to do is put us in a position where any of our activity moves our net loan to value anywhere above ideally that long-term strategic range on a sustained basis. So our long-term strategic net loan to value range, and this is guidance agreed with the Board with 25% to 35%. We're very slightly above the upper range at the moment. So all the activity we're focused on has that in mind. So as I say, it's early days. If we make progress over the course of the next few months, if there's an opportunity to sell another asset and recycle into something like a deal with Siemens where there's a higher return to generate, then we'll look at that. But we acknowledge the money is not there at the moment. And therefore, we need to look at alternative ways to extract value, all of which we've done before. I guess the last point to note is it does illustrate that if we were twice the size, we would have no hesitation doing that transaction. So all of the activity we've all spoken about today is clearly driving maximizing shareholder return, but also ideally addressing the discounts so that we do at some point in the [ more distant ] future creates opportunities to grow. So given time, we really appreciate all those questions and apologies to people who have not answered but we will follow up with responses [ as usual ].

That's fantastic. Thanks for addressing all those questions, and thank you to all the investors for submitting them. As Nick said, we will get those reviewed and we will publish those questions when appropriate to do so on the platform. Nick, just perhaps a final few comments just before redirecting investors to provide their feedback, which now is particularly important to you and the team.

Yes, look, thank you. Again, Paul, I guess, first and foremost, thank you very much for everybody for your interest and [ where you ] our shareholders for your support. Again, I -- we really enjoy engagement on this platform, the interaction we get through the questions. And interestingly, we are seeing a change in our registers with more platform investors, which I think also will be helpful to potentially for our rating going forward. We genuinely think we're in a really good place, notwithstanding the market headwinds. We're delivering everything that we said we're going to do and hopefully, what's come across is that alongside a very strong balance sheet that we have is we do have great visibility on future activity, particularly with that increased emphasis on sustainability. So we will continue updating with activity and we hopefully will be releasing notes on activity before we announce our results, our regional results, which will be at some point in late October, early November. So with that, Paul, I'll back to you to close.

That's fantastic. Nick, Bradley, thanks indeed for updating investors today. Can I please ask investors not to close the session, you should be automatically redirected to provide your feedback in order the team can better understand your views and expectations. This will only take a few moments to complete and then is greatly valued by the company. On behalf of the management team of Schroder Real Estate Investment Trust, we'd like to thank you for attending today's presentation, and good morning to you all.