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

Good afternoon, ladies and gentlemen, and welcome to the Schroder Real Estate Investment Trust Limited Half Year Results Investor Presentation. Throughout this recorded presentation, questions are encouraged. [Operator Instructions] And I would now like to hand you over to Head of U.K. Real Estate, Nick Montgomery. Good afternoon, sir.

Good afternoon. Thank you very much, Jake, and welcome, everybody, to our interim results presentation for the 6 months ending 30 September. So it's a usual tag team, myself and Bradley. So thank you for attending, and thank you for your support for those of you who are already shareholders. So alongside the results today, we have also announced a strategic evolution and a set of proposals that we will put into our shareholder vote in mid-December and more on that in due course. But I think we want to just start by saying and hopefully, this has been consistent through various times we presented on this platform. But our overarching focus here is to deliver an attractive and sustainable dividend by improving portfolio quality, very much active asset management and operational excellence. And I have to say we do feel like we've made good progress, and we hope that is reflected in the results today. I guess just high level points on this first slide, we are well positioned, we believe, because we have high income yield, and we have a low debt cost, notwithstanding obviously a slight fall in rates or at least market rates, we remain in a high interest rate environment, and we have a very low debt cost. We have a very significant portfolio reversion. So the market rents exceed the rents we're currently receiving by a very significant margin, and more on that later on. We have a very robust balance sheet. So we have the lowest cost long duration debt pretty much in the peer group. And notwithstanding all those factors, our shares remain in today after these results at a discount in the region of 29%. So we're well placed, but the shares today, we believe, do look like very good value. The last point I'll make on this slide is we have made good progress in developing our strategy more focused on sustainability, and this is very much driven by enhancing further our approach to driving net income growth, and really ensuring sustainability is at the center of our proposition, partly in responding, as I say, to the decarbonization required across the built environment but also fundamentally because we think by doing so, we will have tenants that are prepared to pay more rent for better quality buildings and enhance shareholder returns. So just focusing a little bit on the highlights over the 6-month period. So again, we've been clear, I think, in giving you views on the market, and we were quite early, I think, in calling at the top and expecting from mid last year a correction off the back of principally rising interest rates given the high inflation environments. And that clearly has persisted. Having said that, we continue to outperform at a portfolio level. So our underlying portfolio produced a total return including income of 1.9% over the 6-month period, which compared with the benchmark of the MSCI benchmark index in which all of our peers generally speaking, are part of minus 0.6%. So good outperformance at a portfolio level. And in fact, very encouragingly, all of our portfolio by underlying sector outperformed. So our industrial portfolio outperformed by 2% our office portfolio outpeformed by 3.4% and our retail portfolio by 1.8%. So the performance really was driven by the industrials, particularly on multi-let industrials, where we saw very, very strong levels of rental growth. In fact, from the middle of last year up to the end of September, our industrial rents have gone up by about 8% in the same way and in context, during a period of time when average values not rent values for industrial fell about 25%. So in a very interesting market, and I'll elaborate on that later. Obviously, key projects that have driven out rental growth is Stanley Green Trading Estate in Manchester, and Brad will give you an update on that in terms of letting progress. And we've also made further progress creating new industrial stock, another operational net zero scheme that we completed in Milton Keynes. You can see there on the bottom right-hand image on this page, which is shortly complete. And we hopefully will deliver some good letting progress on that over the course of the next few months. Lots of progress across portfolio. So I actually can't remember a time where we've reported almost 60 lettings within a 6-month period. And an interesting statistic is, if we look at the terms agreed on those lettings, rent reviews and other activity, it represented about a 7% increase compared with the values assessment of rental value at the start of the period. So we are creating more value in rent than the valuers are receiving. And obviously that, in turn, is feeding through to the valuation performance. And importantly, although we have gone through the traditional summer lull, we have a really positive pipeline of letting activity, particularly on our multi-let industrial estates. We have a significant amount of the void that I just touched on, is actually under offer. So alongside the financial performance, we've also continued to deliver in terms of our existing sustainability objectives, most notably within the global real estate sustainability benchmark, the GRESB benchmark, which is now the sort of globally recognized benchmark for real estate sustainability. We scored 77 out of 100, which compares to 77 last year, and we retained a first position in our peer group of 6 diversified REITs and REITs, many of you will be familiar with. So good progress. A little bit more on the numbers. So what we've announced today is a net asset value. You can see at the bottom there of GBP 296 million or 64.5p share. That represented a decrease of 1.6%, albeit with the impact of dividends paid over the period that actually resulted in a positive net total return of 1.1%. So it is a negative number in headline NAV terms, and we're doing our best to mitigate that. But I would say that actually, that does compare quite favorably with the rest of the peer group, and particularly given obviously the current prevailing discount to NAV. The NAV, therefore, was principally driven by a fall in underlying property values. And over the 6-month period to September, our portfolio fell by 1.2% at property level, so preleverage which compared to the benchmark on a like-for-like basis of minus 2.9%. So again, as I've noted, relative outperformance. We continue to invest capital expenditure in our key projects. So Stanley Green Trading Estate being the main one. So you can see there the GBP 4.8 million of capital expenditure. And we have some other projects that have either completed over the period or ongoing notably an industrial refurbishment in Swindon and an office refurbishment in Edinburgh, which Bradley will touch on later on. There is also a slight interesting line there gain related to interest rate hedging. That is actually a realized gain we made where we tour up an old hedge to put in place a new one, which is linked to an extension of our revolving credit facilities. Now moving on to income. Ultimately, we all own this for income. And positively, if we compare dividends paid for the half year, last financial year to the end of September 2022, our dividends paid increased by 5%. And really importantly, those dividends that we have just paid and in fact, we've announced a further dividend payable in December were 103% covered by earnings over the period. So the 7.7% or whatever it is on the share price yield today is a fully covered share price yield. There's a little bit of noise in these numbers, so I will spend a little bit of time just explaining some of the details. So rent and related income, you can see there in the gray bar, that was up 1%. The noise I mentioned is we actually benefited from what we call other income, which relates to payments from tenants or dilapidations. So payments in lieu of tenants reinstating their premises at lease expiry and that money we have recycled into the refurbishes, we'll touch on a little bit later. We did see a reduction in our joint venture income. So that relates to 2 assets, 1 in Bloomsbury, London, another in Manchester. That was principally due to the fact that in 2022, we were still receiving arrears being paid following the pandemic. Going forward, because we'd also incurred some leasing fees for this most recent period, we think the steady-state income for joint ventures is somewhere between GBP 1.6 million and GBP 1.7 million on a half year period. So hopefully, that's clear. And then rental income from a direct portfolio was flat, as Bradley will explain shortly, we are expecting some growth there off the back of a very encouraging pipeline of lettings under offer relating to new developments, but also leasing up our void rates. Moving down the income statement. Property operating expenses were up a little bit, largely down to letting fees, legal fees associated with that positive income earning activity. Fund expenses were down. That's largely because our fees, in particular, are linked to NAV. So whereas we have seen now fall the underlying fees paid by the company fall. Bad debt provisions, write-offs. We're in a very good position as it relates to rent collection. The rental rate for the 6-month period was actually 99%. So we are trending ahead of the pre-pandemic levels largely actually because of the pandemic, we're so much closer to our tenants and our systems and processes mean that we are very effective of getting the rent in. Obviously, with rising rates and notwithstanding the fact that 91% of our debt is hedged or fixed, we did see an increase in finance cost because of that unhedged piece that we have in relation to our revolving credit facilities. And the intention, and we have some active disposals in the process is that we've -- through the sale of some smaller assets, we will use those processes to repay the unhedged component of our revolving credit facility. That will actually to be accretive because the cost of [indiscernible] probably higher than the assets selling. And that will also serve to bring the net loan to value back in line with our long-run target group of the Board of 25% to 35%. We have just outside of that at the moment because we've been investing capital into some of the projects that will come on to talk about as we go through. But overall, from an earnings perspective, in line with expectations and I think positive versus peers. That, in turn, has allowed us to continue paying what we believe to be attractive level of dividend. We've been very clear in the past, and I'll reiterate that the perspective from the management and the Board is as and when we believe we can pay a high dividend on a sustainable basis, we will increase it. Our aim here is to deliver a progressive dividend policy and strategic evolution we've announced today, we hope will allow us to continue doing that on an even more sustainable basis. Drawing some comparisons with the peer group. So what we've done here is provide a snapshot based on the most recently published information for the companies that investors generally considered to be our peers. We've anonymized them, but we have actually given the actual underlying funds details in the notes at the bottom there. But I think the key point here is -- versus our peers, we have a higher income return supported by a lower cost longer-duration debt. And what we are seeing here because actually, it's quite hard to get behind the data with some of our peers is alongside these characteristics, we have a significantly higher reversion than the average. So that reversion or the rental potential in the portfolio, we believe, is greater than our peers. Even before that, you can see already along the top there, we have the highest dividend that is fully covered in our peer group. So a 7.7% dividend yield today give or take is 103% covered. There are others in our peer group. The 1 or 2 smaller companies who are paying high dividend yields, but those are uncovered, and we would argue that they don't have the inbuilt reversion potential that we do that gives us feasibility on future earnings. Likewise, not because of those factors, we think our share price discounts are now is generally compelling to around 30% today. There are companies that have more significantly wide discount. But in most cases, that's because there is something quite significantly a risk. So for example, it might be a near-term refinancing, it might be much high cost of debt. So we think we sit very nicely in relation to risk versus discounts. And really, that's sort of the main point on the bottom line there, you can see pretty much the lowest cost of debt. There's 1 a bit lower than us. But most importantly, from a risk perspective, our average duration of debt is over 10 years. So very, we would argue, compelling in the context of the peer group and the way that the market is currently pricing that risk. Now I'm not going to spend too long on this because the main purpose of today was to obviously communicate the results. But what we have done today, and we will potentially do a separate session walking shareholders through this in a little bit more detail is how we are proposing to formalize sustainability of a center of our investment proposition. So this is very much evolution, not revolution as it relates to the strategy. And what we're trying to do is use the specialist resources we have within the real estate team and the [indiscernible] business to essentially make our portfolio even more resilient when it comes to our ability to lease space on the best terms in a more sustainable way. So how we're going to do that? So 2 key things you can see set out there. The first thing is that we are proposing to update our investment policy, and this is what the circular sets out ahead of the EGM on the 15th of December, to incorporate alongside the existing financial objectives, sustainability objectives and KPIs have bind us and the team, which oblige us to set out how sustainability is part of the strategy and then measure and report on delivery of those sustainability-related objectives. We're going to have alongside that an enhanced governance structure. So this is something that we will be formalizing detail with the Board in terms of setting out how we will be using our own proprietary ESG scorecard at asset level to have a quantitative approach to looking at the individual asset risk and then setting out how we're going to improve or mitigate asset risk again, with the overarching objective of driving high levels of net income growth. And for some of our shareholders, increasing some specialist wealth managers, having the ability to report those improvements will be very important to them achieving their own sustainability-related objectives. So why do we think this is the right thing to do? Well, I think first and very much most importantly is we think we will make more money for our shareholders. We think tenants will pay us more rent. We think we'll have more resilient assets and therefore, the long term, both income and total returns should be more attractive. The second thing we think it will deliver in a relatively crowded peer group is it will begin to differentiate us from some of those other peers who we would argue don't actively manage our assets as well as we do. I've touched on it, but we also believe this could attract new investors to the company who may have their own specific sustainability objectives and to give ourselves the best chance of that when the FCA -- and we hope it will be this year, possibly next, when the FCA released its final sustainable disclosure regulations, we will be looking to align actually with what we believe will be called a sustainable improve category, which is essentially what we're already doing, which is improving transitioning assets. But in doing so and getting that category, we hope we can drive more demand for the shares. And that's really the last point. And it's not a cynical point, we do believe that by differentiating ourselves in this way, alongside continued outperformance, we will hopefully able to drive more demand for the shares and do something to address that rating in order the long term, if there are accretive growth opportunities out there, and there is 1 or 2 examples in the portfolio whereas we were bigger, we would have much more potential to exploit them is potentially facilitate that growth. Now the last point I'll just flag is, we've had a few questions saying, well, okay, what does that mean for returns other than simply saying it shouldn't answer them. And we're using this as a sort of a case study on this slide. So what this shows you the performance of our underlying portfolio on a rolling 3-year basis to the most recent quarter end, 30 September. On the left-hand side, we can use data, and this is independently calculated by MSCI showing the expenditure that we have made in the underlying portfolio. So over the 30th of September, 20% of our total value today has effectively been new investments. That comprises 16% acquisitions, notably Stanley Green and Chippenham, which both of which we'll come on to later, but also how much money has gone in through developments and improvement. And I think the key point we're making here is this strategy will probably mean we're investing more in our existing assets. We will be delivering more by way of that improvement. And the reason we're doing that, and this is really illustrated on the right-hand side is because we believe that will drive higher levels of rental growth, higher income and more attractive total returns. And again, on sort of [indiscernible] but actually, if you look at the performance in the last 3 years because of all activity our total return of almost 7% compared to the benchmark of just over 2%. So that active management approach is working. What we're saying is we will evolve that approach, more explicit focus on sustainability because we think it will deliver us more by way of sustainable rental and income growth. So moving on to the market. I've only got a couple of slides on the market and then I'll hand over to Bradley to go through a bit more detail on portfolio. I guess the first point to note is we are, I guess, described it as cautiously optimistic about the outlook, and this is talking very much from the perspective of our portfolio. We obviously had a favorable or more favorable CPI print last week at 4.6%. And the markets have reacted relatively positively to that, obviously, with notably the 10-year gilt yield, what we would call the risk-free rate falling from that 4.5% pre that announcement down to about 4% today. The reason I say we remain cautious is, of course, we are a very long way still from the Bank of England's 2% target and as 1 analyst put it, it could be a long last mile to that 2% number. Notably, with wage growth still up or about 8%. But nonetheless, real estate values are closely linked to what's happening, particularly in relation to interest rates. And the fact that we have seen that with lower inflation prints, the fact we have seen a positive reaction in money markets, means that we are moving towards, we believe, real estate looking fairly priced. So just to put it in context on to the next slide, on the left-hand side here, we're showing the capital value movement from the top of the market in mid '22 and you can see average values have a dotted line are down already about 22.5% at a property level. Our value is, as it happens, are down about 15%. So we've done a bit better than that, but it's still been pretty painful. And industrial values, interestingly, we think they are still the favored sector in terms of rental growth, but because they have such low yields to start with, they were more adversely impacted by the rising rate environment, which is why they saw a 27% decline up to now from the peak, albeit as you can see with that dark blue line there, which is the industrial sector average, we are beginning to start to see monthly positive upticks in the main industrial index. Now to put it in context, the GFC, we saw a peak to trough valuation decline of around 44%. So if we're down about 22% now, we think with the fact that the long run gap between property yields and gilt is about 1.5%, we're talking about 1%, we think there is a potential to still see 1/3 of declining values, but we are a long way through the correction. And if you do, as we do own majority industrial assets, you're going to do better than the average. But as I said, we are expecting a further reduction valuations, but not material and certainly not in the context of our current share price discount. The other key difference with what we saw during the global financial crisis is on the right-hand side, which is in contrast with sharp value declines, rents at least in nominal terms, are still going up. So for example, since June '22, average values falling 22%, average rents have actually gone up by 4%. And in our case, because of that higher industrial weighting and notably because the Stanley Green Estates, our rents have actually gone up by 8%, double the market against the backdrop of that quite sharp correction in capital values. The other point to note, which I think is why we are more cautiously optimistic is in contrast with previous downturns, there is nothing like the same leverage in the market. So going into a GFC, average loan to values in the real estate market were around 60%. Today, they are about 35%. So there isn't that same leverage effect. And again, as a related point -- and again, those of you that travel across the U.K. in the major cities outside of residential towers, very little stuff is being built. No one's building multi-let industrial estates. No one has really built retail for the last 10 years, and city center offices, there is now a shortage of the best quality space. And interestingly, in the strongest in cities and looking across the city of London now, but also in the regions, prime office rents are getting to levels we've just not seen before in the long term. So I think there are reasons to be -- still be cautious, but I think there are also reasons to be cautiously optimistic given the relative health of the occupational market, particularly as office tenants are increasingly requiring their employees to spend at least 3 days a week in the office. So with that, I will hand over to Bradley.

Thanks very much, Nick, and good afternoon, everybody. Thank you for joining. Clearly, with the end of the ultra-low interest rate environment and no sign of that returning anytime soon, it's our view that future returns in real estate will be led by income and rental growth. And we believe that is best generated for active asset management. And we're going to touch on some examples of that in our portfolio as we spin through the deck. First, we thought we'd show you some portfolio level metrics. So in the table on the left-hand side, you can see we've highlighted some rows. But the first rows we've highlighted speak to the diverse and granular nature of our portfolio, 40 properties, more than 300 tenants. We think that spread risk on -- particularly as we're in this tough environment where interest rates are beginning to buy it for consumers and businesses. We think this makes our tenant base, our portfolio overall resilient. And the second set of rate rows we've highlighted speaks to the high-yielding nature of our portfolio. So our net initial yield is 5.8%, which compares favorably to the benchmark of 4.9%, but also we have this staggeringly high reversion, which is 8.1% compared to the benchmark of around 5.9%. Now to put that reversion, to put some numbers around it, that's an additional GBP 9 million of rent that we have to aim for. And to put that GBP 9 million into context, our annualized dividend is around GBP 16 million per annum. So clearly, if we can capture some of that reversion, there may be the potential for us to continue to push that dividend on. Looking at the right-hand side of the chart, this sets out the structure of our portfolio in terms of sector weightings and the key point to know here are the overweight allocations to industrial, which is almost highly multi-let industrial estates where we see really favorable supply-demand dynamics, as Nick mentioned earlier, but also retail warehouses, which is another area where we see rental growth coming through. So those 2 sectors account for around 60% of the portfolio weighting. Other sectors, we have -- and our offices are good quality. They've got good fundamentals. They're in good locations, city centers where we see opportunities to push the rents on. And then our retail was mainly part of multi-sector schemes with really good footfall, good catchment. Finally, in the other segment, we've got 2 hotels, a car park and a single small leisure scheme. Next, I thought I'd touch on briefly our tenant base. Our 15 largest tenants are listed here. We believe these are household names, really strong names, and we're really happy with this list. Only 2 tenants in our book represent more than 2.5% of the annualized rent. Probably 1 name that we've mentioned here on the list that may raise eyebrows is Cineworld. We have just agreed a deal with Cineworld to slightly reduce their rent in return to avoid any CVAs in the future. But otherwise, the list is very strong. Those 2 names I mentioned at the start that are above 2.5%. And our University of Law, which is the largest external provider of legal education in the U.K. It's a growing business and actually taking more space with us in Manchester. And secondly, we've got Siemens Mobility Limited. Now these are part of the global conglomerate Siemens. So clearly, a very strong business overall. Now onto void and Nick did mention our void is 11.2%. This is within the 10-year range of 5% to 13%. But that 11.2% is kind of artificially boosted because we've just recently completed the development of Stanley Green Trading Estate in Manchester, which added a big chunk called ERV to our portfolio. Now if we adjust for those vacant units, then the vacancy is 8.9%, which compares I guess, more consistently with our past void. So that 8.9% is right in the middle of our 10-year range of 5% to 13%. Not only that, we do have lots of activity underway since the period end. For example, we have 4.2% of the 11.2% even let or under offer or in advanced negotiations and 1.2% is under refurbishment at Swindon and we'll touch on that shortly but we hope to let that at a higher rental time when complete. I thought I'd touch on briefly Stanley Green. So taking a step back. We acquired this asset in December 2020 were around GBP 17 million. And of that GBP 17 million, GBP 3 million related to a 3-acre development site. So it's just a brownfield piece of land, no real estate on it. Since we acquired the asset, we spent GBP 9 million in CapEx to build 11 new units of really sustainable warehouse accommodation. So that's over 80,000 square feet. So build cost was around GBP 110 per square foot. These have been built on BREEAM Excellent and EPC A+, that's the first A+ EPCs we have in the portfolio and is a sign of the direction we're heading. So we made a conscious decision here in spending that GBP 9 million to pay 10% to 20% higher to get those certifications such as BREEAM Excellent and EPC A+. And as a result of producing this really excellent accommodation, we've been able to attract good tenants on really good terms ahead of our underwrite and ahead of time. So for example, the unit in this estate, the rents are 21% ahead of the units on the existing state just next door. Clearly, some of that 21% is because units are newer, but we believe a large element of that is because they are more sustainable. The energy bills for our tenants are lower, and it's a much better place for their staff to work. Now what does the GBP 17 million and the GBP 9 million mean? Well, the valuation is GBP 39.5 million at the period end. That's more than what we paid for it. And the returns in the bottom table on the slide show we've strongly outperformed benchmark. So since we acquired the asset, we've made 21% per annum, and that compares to 7% per annum benchmark. So while Stanley Green is largely complete, subject to fully letting, we have highlighted here the 3 initiatives that we have in the pipeline and underway. So the first column shows our Starbucks initiative, and we spoke about this before. But in summary, we've got GBP 1.7 million to spend and Starbucks are building the pods. And when they're complete, that's where we pay the money, which will be early 2024. And we believe that will increase the value of the assets by around GBP 2.5 million, roughly, give or take, and we'll get another GBP 0.25 million in rent. Now that rent is linked to inflation. It's on 15-year leases. So it's a good example of us generating these long-term leases with inflation kickers, which would be very expensive to buy the yield to buy that would be very low, and its activity like this enables us to pay the high dividend and push it on over time. In the center, we show the time in Edinburgh. So this is a recently refurbished office unit in the asset. This is a well-located city center office with -- we saw the opportunity to improve the sustainability performance of the asset and push the rents on. We've spent as part of our project, we've got a budget to spend GBP 2 million. It's almost complete. We've got about GBP 200,000 left to spend. And once that's spent and once we let the units, and they're all let except for one, which is under offer, that we believe we can push the value on here by around GBP 2 million. And the unit that is under offer is actually the unit you can see in the photo. The ERV of the asset overall is around GBP 23 per square foot but we've been able to push terms to GBP 27 and beyond on this unit, obviously subject to completion. On the right-hand side, is an example of one of our multi-industrial assets. This one is in Swindon, on a well-established industrial estate. So this is comprised of 3 units. In the last 12 months, all 3 have come back to us. One of them we were able to let almost immediately at an attractive rent of GBP 7 per square foot -- just over GBP 7 per square foot. And the other 2 we've been refurbishing. And in undertaking the refurbishment, we have again focused on sustainability. We've pushed the specification on. We were aiming for a minimum [indiscernible]. We're going to put PVs on there and make it a really attractive space for an occupier. And we believe we can let these at around GBP 7.50 per square foot. And to put that into perspective, the previous tenants were paying around GBP 6. So that's a 25% increase. And we believe spending an extra bit of cash to get the better spec is going to pay off here. Moving on. So I'll briefly touch on Langley Park in Chippenham. So just to step back again briefly, we acquired this asset in December 2020. We paid GBP 19.3 million. Post acquisition, we've been really active on the site. We've completed a regear with one of the major tenants for a 10 years trade lease. The rent is almost 30% higher than the previous passing. And we also agreed and completed a rent review. We have another major tenant, Siemens for again a rental increase of around 30%. So that means that the passing rent is now -- the contracted rent is now GBP 2.2 million per annum, which represents a yield on cost of around 11%, so clearly very attractive. Now this asset is 28 acres. It's right in Chippenham Town Center next to the train station. So it's a really interesting location and interesting site. And there is scope to increase the mass in that site. So we have been speaking with a major tenant. I won't go into too much detail, but if we do pull this deal off, it will be accretive to the fund. And if we don't do this deal, which would be to, again, with the theme on sustainability will be to produce operating net zero carbon new headquarters for the Chippenham with BREEAM Excellent EPC A+, et cetera. But if we don't pull that off, we have the opportunity to put resi on the scheme. So there's some good optionality there at this site. We've discussed reversion throughout this presentation and talked through some examples of where we've already achieved higher rental tones and where we have opportunities to push the rents on post activity. But before we set out on a slide the steps to get us from our current passing rent as at 30th of September, so that's the GBP 28.8 million, net insured of 5.8% through to our ERV. Now the first step we think about our fixed uplift in the next 24 months. So this is where the lease contracts stipulate that rents will increase. We see GBP 2.3 million there coming through in the next 2 years. But actually, almost half of that relates to just 2 tenants, which will come through much sooner. So we have Littelfuse who are at Langley Park in Chippenham. Their rent is going to come in at almost GBP 0.5 million. And we also have New Buckinghamshire University who occupy our office in Uxbridge. Their rents going to increase by around another GBP 0.5 million as well. So almost half of this figure is from 2 leases and it's going to come through imminently. The second step, so we mentioned Stanley Green. It was completed during the period. There's GBP 1.3 million ERV to go for. We've left GBP 300,000 of that. There's GBP 1 million left to go, of which 60% is either under offer or in advanced negotiations. And once that comes through, that will bring in another GBP 1 million to our rent, which would be great for the fund. The second 2 bars summarize where there are units and assets where the current passing rent is below the market value. So as we get those units back and as we execute rent reviews, we expect that to push the rents on there. And finally, we've got the vacant space, GBP 3.3 million. And as you can see on the void slide, there's lots of activity there to bring the void percentage down and bring the rent up. And then the final point to note, there's a couple of developments that we've touched on for this portfolio. So I spoke for you Starbucks GBP 0.25 million of rent and Nick mentioned [indiscernible], which is another initiative at one of our multi-let industrial states, and that will bring in another GBP 0.25 million of rent when complete. So that GBP 0.5 million of rent is not actually within our ERV. So that's a sort of bonus once it comes through and is left beyond that 8.1% ERV. So lots to go after in terms of capturing that reversion and lots of activity to do so. The final point I'd like to make in the slides is just to really emphasize the strength of our balance sheet. So the key kind of stats on the right-hand side there, the average interest rate on our drawn debt is 3.5%, and the maturity across all of our drawn debt is 10.2 years. And what underpins that strong balance sheet is the long-term loan we have with Canada Life, which is our fixed average interest cost of 2.5%, extremely attractive in the current environment. And the maturity of that loan is more than 12 years, and that loan represents about 75% of the drawn debt. So as we execute the strategy to bring down the net loan to value, which is currently 36.6%, we will pay down the unhedged RCF and expect that interest cost to come down. So a really strong balance sheet there, and it really underpins our earnings. Moving on to the summary, and I'll hand back to Nick here for some closing comments, and hopefully, we'll have some questions to address at the end.

Thanks, Bradley. That's very clear. So just to summarize, I think, again, we're pleased with the progress that we've made over the period. Our returns continue to be supported by having a higher income return and a sector-leading debt profile, that is underpinning current earnings with the portfolio reversion that Bradley has articulated hopefully giving us the potential to deliver a further progressive dividend in the future. We have a fully covered dividend. We had a $0.05 uplift year-on-year or half year on half year, and we have conviction that by evolving our strategy, still with the same income focus, but with an even more rigorous focus on sustainability consideration will allow us to be the 4 things I will just recap at the bottom. We've got real conviction that this will allow us to enhance our long-term returns to shareholders. It will allow us to differentiate ourselves more from our peers. There are certain wealth management groups who are keen to find investments to achieve a certain sustainability standard and that's our aim once SDR is made clear. But also importantly, hopefully, this approach and all the other engagement that we're doing content on the website, getting out there and seeing more shareholders will drive demand for the shares, more liquidity and ultimately an improvement in the share price rating. So I'll pause there, Jake, and hand back to you.

Perfect. Nick, Bradley. Thank you very much indeed for your presentation this afternoon. [Operator Instructions] Bradley, Nick, we have received a number of questions from investors. And if I may, I'll just hand back to you just to read out those questions and give your responses where it's appropriate to do so? And then I'll pick up from you at the end.

Right. Okay. Thanks, Jake. So -- and thank you for the questions. So the first one, which we've touched on, but it's worth going back to is if interest rates have nearly peaked, but will remain roughly at these rates for the foreseeable future, what are the implications for the medium to long term. So I guess just to add a bit of color to that. So as it relates to the bank rate at 5.25% today, I think probably with the question, there's an expectation here that the bank rate will remain at this current level, at least until the second half of next year. As I mentioned earlier on, the risk of higher core inflation driven by the employment market means that 2% target is still some way off. And for that reason, we will be cautious about expecting a further step down in the actual bank rate ahead of time. Having said that, and this is relevant to real estate specifically, investors are borrowing to buy real estate will typically use interest rate swaps and the typical duration might be 5 years for those interest rate swaps. And the expectation that rates will fall is already being felt in the swap market. So for example, over the course of the last 4 weeks or so, the cost of fixing effectively on a 5-year basis, has gone from a swap rate of about 4.5%, down to about 4%. So if you overlay the margin on top of that, that will mean a fixed rate effectively for the 5-year period of around 5.5%, 4% fixed rate, 1.5% margin. So that has already come down from the very high levels that we saw sort of earlier this year, and again, obviously, having peaked after the mini budget last September. So I think what I said earlier on holds true in that ultimately as a hybrid asset class, real estate has a characteristic of a bond, but also an equity in terms of the rental growth that you can extract particularly through active management and investing in the assets. If we look at the long run relationship between property yields and gilts, the 10-year risk-free rate, you'd expect that over the last 20 years to average at about 1.5%, and the gap is currently 1%. So really simplistically to get to fair value, either real estate yields have to move up another 0.5% or gilt yields have to fall another 0.5%. And the answer is probably they will both move a little bit. So that's why I think we're guiding to expect a further smaller step down in values before the average values bottom out, and we see a recovery. But that's also why we made the point about rental growth, if you like, the equity part of the hybrid asset class because whilst we have seen this capital market volatility, rents are still going up and it may mean therefore, that long-term relationship means that investors are prepared to accept a slightly smaller premium because in the expectation that they will get rental growth. And in fact, that's what we're already seeing in the industrial market, where we are seeing industrial transactions trade in the low 5s, high 4s in some cases because investors are expecting that with growth they will see that yield increase to 5% or 6% over the short to medium term. So I hope that answers that question. Now the next question if you put yourself in the shoes of a typical institute real estate -- institutional real estate investor, why would you not be buying SREI on such an attractive discount revenue. That is a very good question. And that's what we're trying to remedy, because we do think the company represents great value. And we're trying to demonstrate that quarter-on-quarter, but also the strategic evolution is there to hopefully have more focus on us. I think sort of outside of that, I think partly at scale. I think for a lot of the wealth management group, as they get bigger and referenced, obviously, the Investec [indiscernible] merger. They typically want B companies as they themselves get bigger. And so I think if we were twice the size, we probably would have more demand for our shares. That's also back to what we are trying to do in terms of strategic evolution because if we can make ourselves more attractive, more differentiated, then we will hopefully create those growth opportunities. I also think there is nervousness in the market. I think, amongst institute investors, we are in the middle of a paradigm shift really of BB investors, try and benefit investors, derisking because of the interest rate environment, moving into fixed income effectively. A number of those BB investors own real estate funds. And so there are more sellers of real estate funds at the moment in both institutional also retail as well as a number of you will have read the headlines about St. James's Place, for example, where property from. And I would say in response to that, yes, that is a sort of a structural change but actually, at the same time, trust like this were a really efficient way to own real estate. So as part of that transition, we would hope that we may see investors who perhaps previously would have invested within open-ended property funds coming in to closed-ended funds where you don't have those same liquidity pressures. Yes, you have to discount, but we would argue at this point in the cycle, that discount looks good value. So again, I hope that answers the question. I will -- just the next question, Bradley, you may want to take it, just -- if you can read it from there, just in relation to Chippenham.

Yes. So the question says, I think as mentioned that last -- the figures we mentioned last time seems to have a very low increase in value considering the amount needed to be invested. So this is at Chippenham. Could you go over these again, please and clarify the expected valuation creation? So as I mentioned in the presentation, we're not going to go into detail on the numbers today, but it is a very accretive initiative for the fund. And because it's such a large initiative we really move the needle as well for the overall fund performance and the appraisal stacks up from our perspective.

Yes, I think the only thing I'd add to that, Bradley, and you did touch on it, but I think it's worth reiterating as we did last time, is Chippenham has been a great deal for us. We're running on a property level cash-on-cash return over 10% because of the asset management. The initiative that Bradley has talked to could be very accretive but at the moment, it is arguably too big for us. And so we are considering if that transaction looks like it could proceed, we are looking at ways that we could potentially fund it, and it may be through disposals, could be through joint venture arrangements. But equally, it may still not happen, Bradley has said. So I think we're giving a real example of the type of opportunities that we can create in these states. And the great thing about Chippenham asset, because it's so well located in retail center is even if the transaction we guided doesn't happen, we're clipping 10% and actually down the line, there could be alternative pieces like residential that we choose to proceed with as an alternative. Bradley, do you want to just take that last question before we come back to Jake?

How has our performance been compared to our peers?

Actually, I'm just seeing that pop up, you can take both. Why don't you take the Stanley Green question and then the performance question?

Stanley Green as a question. Can we talk about the incentives for new rentals, Stanley Green on the new estate? And are there significant rent-free periods? So looking at Stanley Green specifically, we've actually -- the team has done a good job and where we have done deals for longer term. So we've actually got a 10-year leases straight and where the rent-free period is commensurate with that length of lease. So for example, there's a 10-year lease with a 9-month frame-free period. We've got some leases of 10 years of a 5-year break with sort of 3 months rent-free period. So -- and these are with good tenants. And also often, we've got some inflation kickers in these leases as well, which is really interesting and some deposits as well. So I think overall, it sounds very strong. And the incentive that we're having to provide is fairly limited for the quality of the lease that we're agreeing. Anything you'd add Nick?

Only as a related point, actually, there's another question that's coming in just -- when you say that 60% of Stanley Green is under offer all advanced negotiations, is that on top of the 40% less? It is on top of what is let, what is let is actually 30%. So we've completed 30% of lettings and there are an additional 60% of lettings, which Bradley has said already the under offer or are in advanced negotiations. So that is a key focus for us over the rest of this calendar year and into the first quarter -- last quarter of this current financial year. So just a couple more points here. So how has performance been compared to peers? So I guess just firstly, the MSCI benchmark data I gave you. So within our MSCI benchmark are all of the immediate peer group, so the other investment companies, but also the internally managed REITs [indiscernible] securities and also a plethora of other property funds. And on any period at property level, we've outperformed and actually, if you draw down and look at the immediate peer companies, and we've named some of them in the chart, the likes of AW, Picton, Standard Life, et cetera, et cetera. Our performance crops up well, particularly over the course of the last 12 months as we started to see a benefit of positioning more towards states like Stanley Green and other examples. At share price level, recently and particularly since we have done the refinancing, our rating relative to peers has improved. So we're rating now high 20 discounts compared favorably but 1 or 2 now we're trading at as wide as minus 40% where those companies have more refinancing risk. But really, our objective is to do much more to close that discount. And again, going back to the strategic evolution, that's a key part of it, trying to be more differentiated, trying to drive a wide range of shareholder demand to try and improve the rating and that, in turn, potentially creating growth opportunities. And I guess that's a neat segue into the question here, you mentioned a few times that you're too small for particular deals. Would you look at remerger to get bigger? Look, it's a great question. The answer is yes, we would. But we are unable to issue equity at a discount. So any source of M&A activity would need to be probably on a NAV to NAV basis. That is not completely out of the question. But we are in a position of strength. And therefore, if we were to look at M&A activity in that way, then it could mean that dividend per share will be diluted. Now that might be something that is in the long-term interest of shareholders. If we can do bigger transactions, create more money over the medium term. But there are those issues around growth, which mean that we've been much more focused on, if you like, Plan A, which is growing net income, improving the rating and now, of course, the strategic evolution. And if we get those bits right, then at least in theory, our rating should improve, and that puts us in a stronger position if there are those M&A opportunities down the line. But we are trying hard not to get distracted and to ensure that we focus on the priorities of growing net income. So Jake, I think that's -- we've covered all of the questions I think, Jake. So just in we got 5 minutes to go, should we hand back to you before we wrap up?

Absolutely Nick, Bradley. Thank you very much indeed for addressing all of those questions that came in from investors this afternoon. [Operator Instructions] But Nick, perhaps before really just looking to redirect those on the call to provide you their feedback, which I know is particularly important to yourselves and the company. If I could please just ask you for a few closing comments just to wrap up with, that would be great.

Thanks, Jake. Well, first of all, most importantly, thank you, everybody, for joining and for engaging so much with those questions. It is appreciated. And as we did previously -- we have done previously, if we get questions in that we haven't answered, we will answer those post meeting. Just very briefly, we believe we are well positioned. We do have a high income yield. We have a very significant reversal potential, and we have a very low cost of debt. We are pulling all the levers we can do to deliver high levels of income for you as our shareholders. The strategic announcement today in relation to evolution -- the evolution of the strategy is not a revolution. Don't worry that things are going to change fundamentally. It is the same investment objective, but we believe it being much more upfront about how sustainability is a critical part of our asset management process, we will be able to drive again, medium, long term, higher income, higher total returns for our shareholders. So for those at our holders, thank you for your support, and we hope to give you further updates on activity in the not-too-distant future.

That's great. Nick, Bradley. 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 and all the management team can really better understand your views and expectations. This will only take a few moments to complete, but I'm sure it'll 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.