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 Full Year Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and will publish those responses where it's appropriate to do so on the Investor Meet Company platform. And before we begin, as usual, I would just like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to Head of U.K. Real Estate, Nick Montgomery. Nick, good afternoon, sir.

Good afternoon, and welcome, everybody, to the year results presentation for Schroder Real Estate Investment Trust. Thank you again for joining us. And I hope we've got existing shareholders and prospective shareholders here to hear about the results. I guess just by way of introduction, I think they are a solid set of results. We've had a good feedback to the analyst presentation this morning and some helpful analyst commentary in response to what we're reporting. I guess for those that have heard Bradley and me present this recently, I say we're on track. We're delivering what we said we were going to do. As you know, on this Slide 2, we have a portfolio that is focused on the high-growth parts of the U.K. real estate market but notably, obviously, multi-let industrial estates, which are half the portfolio now but also value retail warehousing. The growth that we've seen from those assets has allowed us to continue driving earnings growth, and one of the things we announced today was a further 2% uplift in our quarterly dividend. That reflects on last night's closing share price, a dividend yield of just under 8%. That is fully covered by earnings, and I'll come on to the earnings analysis in a bit more detail shortly. Robust balance sheet and Bradley will give you an update on where we are in relation to our debt. I guess the other important point to note is because of relatively weak sentiment towards real estate in the U.K. as well as offering almost an 8% cover dividend yield, our share price today represents a discount of about 26% to the NAV that we're reporting as at 31 September. So we think it genuinely offers compelling value. The final point to note is we, as you know, at the back end of last year, issued a shareholder circular essentially seeking approval to an evolution in the strategy. It was a revolution. It was a way of articulating our strategy and what we're already doing to a point in terms of how sustainability-related considerations are an increasingly integral part of how we are asset managing our portfolio and obviously how occupiers are looking to use space. And so we have now formally adopted our brown-to-green strategy, which is sort of a working title, and that draws very heavily on the experience that Bradley and I have but more importantly, the wider expertise that we have across Schroder's, both within the real estate business with subject matter specialists but also the wider ESG resource across the group. So just moving forward. So in terms of the key highlights, I guess the first point to note importantly is we did deliver a positive total return for the calendar year of 1.1%. That is ahead of many, if not, all of our peers. And I guess if you compare that to the equivalent period last year where the NAV total return was about minus 15%, it does demonstrate that we are arguably at a turning point for the U.K. real estate market. Interestingly, if you look at the unaudited NAV movements over the quarter, the NAV actually was flat over that period pretty much or a NAV total return of positive 1.6% when we allow for the quarterly dividend. So you can see how, through the year, values appear to be bottoming out, and we're looking forward to a more positive market environment. Over the year, we paid 4% by way of dividend increase. As I noted earlier on, on the most recent quarter, we announced a 2% increase to 3.41p per share on an annualized basis, and that will be paid later on this month. One of the key drivers of our relative outperformance is the underlying portfolio, clearly, and our underlying total return portfolio of 3.2% for the calendar year compared to the MSCI benchmark, which includes all of our peers of minus 1.3%. So that's relative performance supported by both the high income returns and a 6% plus income return from the portfolio versus the benchmark of 4.7%, and very encouragingly, more on this later, positive rental value growth, at least in nominal terms, of 4.6% compared to the benchmark at 3.3%. And that outperformance over 12 months is actually fully reflected over all time periods now. The margin of outperformance, in fact, over 3 years, which is obviously an arguable relevant measure, is actually 4.7% of outperformance compared to the benchmark on a rolling 3-year basis. Now as well as obviously having the overweight position to multi-let industrial and high-growth locations. A large part of that performance has been driven by activity and we'll give you a sense of activity as we go through the deck. Loads of lettings, renewals, lease re-gears and the stats, you can see here. The average uplift over the opening rental value at the start of the period was 7%. Also very encouragingly and again, this is part of hopefully driving future earnings growth. We have about GBP 600,000 per annum of rent, which is currently with lawyers in the process of being documented across various parts of the portfolio. Final points I touched earlier on, we've got strong support and unanimous support for the overall strategy change that we implemented towards the end of last year. And alongside those very positive shareholder discussions, we continued [ work to the ] company very widely and obviously speaking, very much with our existing shareholders but also new shareholders. Very positively, in fact, through platforms such as this, the proportion of our investors coming through retail platforms has increased quite significantly though. So whether that's about 15% coming through platforms such as Hargreaves Lansdown, AJ Bell for example -- AJ, just to give you an example, over the last 2 or 3 years, the proportion of investors coming through that platform has tripled. So we're really keen we do have a very diverse shareholder base, both within the traditional wealth managing community but also coming through, as I say, those retail platforms. Now in terms of numbers, this is the standard analysis we show you with the movement to the NAV over the financial year. So you can see here, moving from 61.5p at the start of the year through to 58.8p now. That compares to the share price today of about 44p. No surprises, as I said, the key move was obviously the valuation, and we saw a 2.8% decline, outperforming the benchmark at a 5.7% decline. Some of you may know from about a year ago, we actually changed independent value ahead of actual best practice, which has recently been made mandatory, to have mandatory independent valuer rotation, so we got ahead of that curve, achieved a significant saving in the process. GBP 9 million of capital expenditure, the majority of which has gone into our industrial assets, particularly where we're delivering those ESG improvements, which Bradley will talk about later. We are continuing to sell where we don't believe we can add the value, particularly looking at these assets through the lens of our new strategy. And then we have several sales that we're working on at the moment. The main objective being, initially at least, to repay our revolving credit facilities. But then, once we have a bit more visibility on market direction, then look to potentially redraw and deploy into the portfolio, possibly even make new acquisitions. A little bit of noise in relation to some of the other movements. We're showing here the interest rate derivatives. We took a profit where we canceled our previous hedging as part of the refinancing, but that obviously went into cap arrangements where we took in a realized loss on that interest rate cap and collar of about GBP 0.5 million, which is the movement there. Final point to note on this movement, of course, is it doesn't reflect any of the positive fair value associated with our long-term loan with Canada Life. Were we to fair value that, our accounts, although we're not required to do so, the fair value of that loan, because the interest rate is so low, is about GBP 18.5 million. So that's, if you like, in for free. Now I guess more importantly, just in relation to the income statement, ultimately, we [ own ] this collectively for income. And if I draw your attention to the rental and related income line, so you can see between '23 and '24, we saw an uptick in rental and related income of about 5%. EPRA earnings, you can see, once allowing for property expenses, obviously not [ taking ] finance costs because of the unhedged component of our revolving credit facility. EPRA earnings went up by 2%, but you can see overall that for that full '24 year, we were fully covered based on the dividend paid of GBP 16.4 million. Now what we've also done here and in the same way that I commented on what the final quarter meant for capital values, because of all the activity that we've been talking about over the course of the last 12, 18 months, that towards the back end of the year, we saw a lot of that activity starting to come through in terms of income. And so actually, if you look at the quarter ended 31 March '24 to the final quarter financial year, the metrics look slightly better as those rents have come through with that dividend cover of 105%. And that, as I said, is one of the reasons alongside visibility of future activity that allowed us to have the confidence to recommend to the Board that we increase the dividend. And that's what's shown on the next slide. So this show the dividend progression obviously in -- right through the pandemic, where we paused, but then how we have subsequently continued to tick the dividend up when we feel it is sustainable to do so. I think it's important to note actually that we are the only one in our peer group up until very recently to have announced any dividend uplift over -- or since that pre-pandemic period. I think 1 or 2 now may have announced it, but we are still very much the highest in terms of moving dividend on. So we're 10% above the pre-pandemic level. And actually, if you see to the left-hand side here, the term loan refinancing, again, we've spoken about that in the past. That was where we tore up an old loan, put in place that new loan at 2.5%. And actually, that saving have allowed us to pass on a 30% uplift. That's if you go all the way back to Q4 2019, and obviously, our #1 focus alongside obviously ensuring that we deliver on our new strategy is to drive that continued growth in earnings in order that we can pass that on to shareholders in the form of high dividends. Now the next slide, again, we've touched on this before. This is just showing you how we feel we compare to our nearest peer group. Now many of you, I'm sure, will be reading announcements of our corporate activity, but that has led to volatility in share prices, therefore, discounts within the peer group. But stepping back from it, we still believe very strongly that our company represents really good value compared to that wider peer group. I guess most importantly, on the top, you can see compared with those peers, and we don't attribute the names to the numbers, but we have shown at the bottom there on the notes who was within this peer group, and we have the highest covered dividend in the peer group. You can see they're 105% covered with that yield of 7.7%. We've used the dividend as at 31 March rather than the recently increased dividend just so while looking at things on a like-for-like basis with the peers. But you can see dividend, dividend cover, the discount to NAV still at 26%. And really importantly, although there are companies in the peer group who are paying a little bit less interest, because we have that very low long-term interest, we would argue, I think, very strongly that we have the strongest and the most valuable balance sheet in the peer group. And that's because whilst we are beginning to see rental growth across the market quite broadly now, actually, many people who are enjoying that growth equally are stagnant [ about ] refinancing. And we're in a very good position that we don't have that risk. And so all that top line growth that we're generating, we can pass that on, hopefully, in the form of high dividends. Now go briefly, I won't go to too much detail here, but this just gives a bit more color on how our 3-year performance numbers look and just a couple of points to highlight. On the right-hand side, we're showing both SREITs, [ 2 ] bars on the left or the right-hand side of the chart, and we're showing the benchmark, MSCI benchmark with the other 2 there. And you can see that our total return on a rolling 3-year basis at property level of around 5.5% compared to the benchmark at 0.8%, so very, very significant, probably the most significant outperformance we had in the company's history actually potentially. But where does that come from? Well, it's come from 2 things: income, and you can see there the income of 6.2% per annum over that period compared to the benchmark of 4.3%; but really importantly, it's come with higher rental value growth because we have that overweight exposure to the multi-let industrial sector where rents have been growing more than the other sectors. And it really is -- it's that sort of sector allocation, the active management, the income that is driving the outperformance. And we believe we can enhance that further through the new strategy and more on that later. Now of the market -- so got a few slides on the market, but I think it is really important that we do think we're at a turning point. I think our views on the market have been right in terms of direction of travel and the approach that we've taken as a result of that. I guess what the chart on the left is showing you, and we're all experiencing this in our day-to-day lives, the fact that inflation has been persistent, albeit now it is moderating. We're seeing the energy price obviously coming out, that number. But I think our view is, here, the combination of the expected wage inflation and obviously continued services inflation, which in and of themselves clearly is not a bad thing, may lead the bank to fail to meet that 2% target on a sustainable basis looking forward. Our economists just released some research today that they are expecting that 2% number to remain slightly elevated, perhaps somewhere between 2.5% and 3%. But a key part of that is because they are adjusting their growth forecast. So they are more positive about the outlook for the U.K. in terms of GDP growth for various different reasons. Nonetheless, that is encouraging. What it does mean, though, is there has been a lack of visibility on at what point we will begin to see the bank reduce SONIA, the bank rate. And I think, obviously, the election being called means it's unlikely to happen between now and the 5th of July. But the expectation is that amongst our economists is that we will probably see the first interest rate cut in August, and our current forecasts are that we will see perhaps 3 cuts, maybe 4 between now and the end of 2025. So that would be the bank rate trending down towards sort of somewhere around [ 4 -- 4, 4.25 ]. And I think what you can see actually, that's already priced in, to a certain extent, with what we're seeing in the interest rate swap market. So the 5-year interest rate swap, which is a reference point that all the real estate investors use because they will typically fix their interest customer debt to bind the real estate, that 5-year fixed rate is about 4.1% today, give or take. Now that means, therefore, and we've been consistent about this, that we will obviously not see a return to the interest rates of the recent past. But I think we will, I think in there, see that as a catalyst for recovery sentiment in the market. I think the key reason why we are still seeing relatively limited levels of liquidity in the direct real estate market is just because of that uncertainty at what point we will begin to see that looser monetary policy come in. And I think that's why we're slightly on pause in the market at the moment. What we're showing on the left-hand side of this chart -- of this slide is obviously the relatively steep capital value decline, so the 25% decline in the market we've seen on average since the mini budget towards the middle end of 2022, but you can equally see particularly the industrial sector, the retail sector, those values are beginning to bottom out. And in fact, over the recent MSCI print in April, we actually did see average values tick up. So what does that mean? I think our view is that we don't need to see a significant fall in interest rates to see a recovery in capital values, but we do need to see directionally the rates change. So our expectation is, as we move towards the end of 2024 and into 2025, we will see a pickup in sentiment to the U.K. real estate market, but we will begin to see more capital flowing in. I think the other key point and this is, I think, a really important point that we've talked about previously, is we're seeing a decoupling between what capital values are doing, so that 25% decline I've mentioned, which is a significant decline from a historical perspective, it's broadly comparable with what we saw in the recession of the early '90s, when on the other hand, what we're seeing in the occupational markets. And so what this slide is showing you, if you look to the right-hand side, is looking at what's happened at nominal rents from the point at which the market turned. So the blue line, the highlight you can see going up left to right, that's showing what rents have done in terms of growth from the most recent turning points in the middle of '22 over the subsequent 22 months to where we are today and comparing that to how nominal rents behaved over the previous downturn of the late '80s, into early '90s and obviously the global financial crisis. And what you see is property is sort of doing what it says it would here in terms of offering that inflation protection. People often talk about real estate as being a good hedge for inflation. It's typically not a very good hedge on the capital side because obviously, in inflationary times, rates go up whether it's hybrid asset class, whether it's an element of bonds as well as equity, that bond component obviously is impacted by rising rates. But the equity component, the growth component, what you can see here is it is providing a hedge against inflation. Companies are making more profits. Particularly where there's a supply squeeze on real estate, which is what we're seeing at the moment, in large parts of the market, tenants are prepared to pay those higher rents. And if we do see a pickup in terms of sentiment and our economists' view about the U.K. economy, perhaps growing ahead of where we thought it might do earlier this year, you can see how that rental growth trend could easily continue. Sorry, let's skip that one. And so that's why, if you look at this slide, these are our forecasts for U.K. real estate, so these average U.K. real estate. The only certainty about these forecasts is that they are wrong. But I would draw your attention to the right-hand side here and sort of step back and say, well, as a sector, we're delivering an income return of between 5% and 6%, depending on which index, and our yield is about 6.2%. So we've already got a head start. If we are expecting rental growth of 2% to 3% per annum on average and of course, large parts of the market, particularly industrial is growing at rates significantly ahead of that already, then you can, without seeing a significant reduction in yields, construct a case for real estate delivery return ahead of its [ longer ] average. If you combine that with improving sentiment towards the U.K. because we do see strong levels of growth, we do see some yield reduction or interest rate reduction, which would obviously support capital values. And we also see some political stability and therefore, see more capital flowing into the sector. You can see why the outlook for U.K. real estate is perhaps more positive than it has been for some time. So I guess if you go back to where I started before I hand over to Bradley, that's why we feel today fully covered yield of almost 8% discount to net asset value of 26%. In an environment where we expect more flows to the sector, we think the shares today look very attractive. So with that, I will pass over to Bradley.

Thanks, Nick, and good afternoon, everyone. It's great to be here today talking to you about the activity in our portfolio and how we're applying our new strategy to that. In honor of the recent prime ministerial debate, I'm going to aim to spend no more than 45 seconds on each slide. And with that, I'll start here. So in December, we received strong shareholder support for the change in our strategy. Part of that was putting a sustainability improvement element into our investment objective. And to help us measure that in our investment policy, we now have 2 sustainability KPIs, and a key tool we'll be using is our proprietary ESG scorecard. But taking a step back, the key reason for this slight change in strategy is because we believe that a focus on the sustainability credentials of our real estate assets will enable us to deliver enhanced total returns over the long term for our shareholders. Now how are we going to do that? How does it work? Well, what we're seeing is that the new laws and regulations that are being brought in by government to reach net 0 carbon by 2050 is changing the way that investors and tenants are approaching real estate. And that, in turn, is having an impact on the valuation of real estate and the level of which rents are being agreed. And this has given to a rise to what is known in the industry as the green premium. Now this is well understood, particularly in the office space, but what we're seeing across our U.K. portfolio is that it's also applying to the multi-let industrial space and the retail warehouse space for example. And that's where more than 60% of SREIT's portfolio is invested. Now rather than talk about this in an abstract way, what we've got are some interesting case studies coming up where we show examples of the strategy in action and where we think that we're achieving the green premium to generate great returns for our shareholders. On this slide, what we set out is a time line of the implementation of the new strategy. And the gray box in the center represents the EGM that was held in December where we did get the positive vote from shareholders. And what I'd like to focus on briefly now is the work we've done since and that we intend to do going forwards. So we set baseline scores using our proprietary ESG scorecard for the majority of the portfolio assets by value. We've also got a rebased net 0 carbon pathway for the whole portfolio. And what we're working on right now is assessing the opportunities that, that work has drawn out and decided which asset management initiatives will be most accretive to our portfolio and for our shareholders. We've already started some of those initiatives. And as I said, there are some case studies coming. And when we come back to talk to you at the interims, we'll provide further updates on how those initiatives are going and what new ones we think we are going to execute going forwards. And then over time, we expect to build a body of work that really proves that the strategy is the right one for this fund. We've mentioned our ESG scorecard a few times now. And what we've shown here is a visual representation of that scorecard. And what I'd like you to take away is that this is very detailed. There are 44 topics. Some of them are quantitative. Some of them are qualitative, and the underlying spreadsheet has more than 100 lines. Each topic is scored out of 5, and each topic is weighted based on our assessment of the materiality of the element of sustainability to our real estate portfolio. The topics and the weightings have been reviewed by an external consultant and validated, but overall, the goal of the scorecard is to provide an objective assessment of the ESG risks and opportunities for each individual asset in our portfolio. I won't go into any more detail now on this because I think it kind of comes to life a bit more with the case studies. On the left-hand side of this slide, we show a summary of the ESG scorecard scores for 15 of our assets. These were carried out by external consultants and are very detailed. And not only have we shown the baseline score, but we've also shown the score that we think we can achieve where we carry out the recommended works that we have identified along with our consultants. And as I said, what we're going through now is selecting the most accretive projects from an economic perspective that we think we should execute on. And when we're looking at which projects to execute, what we're looking for are areas where, if we undertake the works, we'll be able to achieve a meaningful uplift in rental growth and also the potential for some yield compression. So the idea is we're looking to achieve the green premium by undertaking these works, but also we can't just go around kind of improving assets. We need to also be really cognizant of the underlying real estate fundamentals. And we think that our portfolio offers many opportunities for this strategy. Now let's move on to some case studies to really bring it to life. The first case study is Churchill Way, which is a retail park in Salisbury. If you look at the image, we own the 3 units on the left, which are currently Sports Direct, Homesense and Smyths Toys. We've undertaken a scorecard assessment for each -- for this asset, and we've also undertaken a net 0 carbon audit. This work has identified some initiatives we can undertake to improve the sustainability performance of the asset. There are some listed on this slide, but they include rooftop PVs and a transition to a fully electric M&E system. Off the back of that work, we've been able to negotiate a new deal with an international discount supermarket. They'll be taking the 2 units on the left, so the Homesense and the Smyths Toys, and the sustainability improvements are really important to both sides. We've exchanged an agreement for lease, and the headline terms are summarized in the slide, but the rent will be around GBP 20 per square foot, and this compares to the ERV at the year-end of GBP 15 per square foot. So that's an uplift of 1/3, and that ERV in the comparison of GBP 15 is the ERV you'll see in our year-end accounts as part of that reversion. So Nick spoke to the GBP 9 million of reversion we have, and this is an example of us not just meeting the reversion but exceeding it materially. Not only have we agreed to a great rent, but we've also got a really long term of 25 years, with 20 years term certain, and there are inflation kickers throughout the lifetime of the lease. So this is a really attractive deal for the fund. But that's just one side of the equation. There are costs we have to incur to complete this lease and those costs are GBP 1.2 million, and it includes many of the initiatives we've listed there plus more. And then the question then is, is it worthwhile spending GBP 1.2 million to secure this lease and this tenant, and the answer is absolutely yes. So our analysis shows that this deal will bring profit to the fund of GBP 1.7 million, and that reflects a profit on cost of 17% and an income return on cost of 12%. Now the reality is there is no way we can go into the market today and acquire a retail warehouse in a location like this, secure a lease like this one with such a strong tenant at a yield of 12%. So this is a really good example of our active management approach and applying the new strategy to our existing portfolio. The second example is Stanley Green Trading Estate. This is a really powerful proofing concept of the new strategy as well. Now we have been through this in the past, but because it was a really key driver of our relative outperformance at a portfolio level during the year before we briefly touched on it again, so during the year, we actually completed the development of the 11 new units. And the photo at the top shows those new units. An important point to note here is that, at the time of deciding on what to do with the 3 acres development site, we decided to spend around 20% more on the CapEx to get a really strong asset from a sustainability performance perspective. So these units are operating at 0 carbon, at EPC A+ and BREEAM Excellent. And again, the question is, well, was it worthwhile spending that extra money to get such a sort of high-spec set of units from a sustainability perspective. And again, in our view, the answer is absolutely yes. And the evidence there is the really strong performance that the asset has delivered for the fund over the more than 3 years that we've held it. So over that time, the assets generated a total return of around 19% per annum, and that compares to the MSCI All Industrial benchmark of around 7% per annum, so really strong outperformance there. Now the next phase for this asset is to bring the existing estate. So this asset consists of an existing estate and now the newly developed estate, which is part of that larger estate. So we want to bring that existing estate as far towards the standard of the new estate as possible. And there's a CGI at the bottom that shows what that existing estate could look like in a couple of years' time. Now again, the question is, is it worthwhile upgrading those units. And our appraisal shows that it is and something to sort of support that, and I mentioned the rental growth story before, is that we've recently done, within the last year or so, 2 lettings at the -- at Stanley Green of units of around 4,000 square feet, so a unit in the new estate and a unit in the existing estate, so very similar from a size perspective. And the rental premium for the new estate is 39%, so it's a really compelling uplift. So it kind of shows that if we spend the money correctly, you can really push the rents some. And not only are the rents higher, but we're getting really strong quality tenants on the new estates such as Siemens. Here, we summarize a re-gear we completed during the year with the University of Law, so the University of Law are our largest tenant. The deal was extremely accretive to the fund and was the leading performer for the fund alongside Stanley Green Trading Estate from a relative return perspective versus the benchmark. We've really benefited from the location of the asset, which is in the West End. And the West End of London, there's obviously lots of negative stories around offices, but the West End of London really has enjoyed strong rental growth over the last few years. In terms of the deal, we extended the existing lease by 3 years, so it's due to expire in December 2026. It's now going to expire in December '29. And with -- as part of that deal, we've agreed a series of rental uplifts over the life of the lease such that when we get to December '28, the rent will be GBP 60 per square foot. That compares to GBP 43 per square foot today. And that uplift is 39%. So over the next 4 years, we're going to increase rent by 39% at this asset. That's not the end of the story for the asset. It really is an interesting project. So just to give you some background, the asset's located in the heart of London's Knowledge Quarter. And it's really close to the new Crossrail line and the tube station, specifically Tottenham Court Road, and Crossrail really has transformed the geography of London. This site is on an 0.8-acre freehold site, which is very rare in the area. It's also got very low site massing, which provides an opportunity for redevelopment. We're working with a team of best-in-class consultants to ensure any redevelopment takes into consideration the Camden local policy and also the London plan. We'll be looking to retain parts of the existing infrastructure so that we're not unnecessarily increasing embodied carbon. The CGI on the left shows potential for the asset and what could be achieved over the next -- or after the end of the University of Law lease. But in conclusion, watch this space. Now briefly on the portfolio, many of you may be familiar with us already. We've presented them here a few times. But on the left-hand side, we show some important metrics of the fund. We've highlighted the number of properties and number of tenants. Clearly, this is very granular and diversified, which we think makes the portfolio more resilient. And also, we've highlighted the rows that show the relatively higher-yielding nature of the portfolio compared to the benchmark. On the right-hand side, we show the breakdown of the sector makeup of the portfolio versus benchmark. And the key points to take away here are our overweight allocation to industrial and retail warehouses. And now industrial is almost entire multi-let industrial estates where we still see really favorable supply-demand dynamics. And actually, of the leases we agreed and our multi-let sites during the year, the rents increased by an average of 29% versus the previous passing rent. So that should really set us up nicely for rents looking forwards. Here, we set out an analysis of our void space. Void did come down during the year to 10.9%. That sits within the 10-year range of 5% to 13%, but we do feel that this will reduce over the next sort of 6 months or so. And we'd hope to come back to you in the next quarter and the quarter after that with a lower void figure. That's because much of our void is already refurbished or developed and is ready to be let. And as you can see in the table, quite a lot of the space, 1.7% to be specific, is already let or under offer. We've mentioned our reversion. So that's GBP 9 million going from GBP 29.8 million to GBP 38.8 million of annualized rent. To put that GBP 9 million into context, our annualized dividend is just over GBP 16 million. So clearly, if we're able to capture some of this reversion, it should give us the opportunity to move the dividend on in the future. We've shown some steps as to how we might get there, so we've got fixed uplifts in our existing leases of GBP 2.9 million to come through in the next 24 months. So theoretically, if we do nothing, our rent will still increase by GBP 2.9 million from those fixed uplifts. We also have some space at Stanley Green to be let, and one of those units is currently under offer. There are also some units where our ERV is ahead of our current passing rent. So when we come around to the rent review or the lease expiry, we should be able to move on the rent at those events. And as we just looked at before, there is some vacant space, and we're working hard to let that. Finally, we've mentioned a really strong balance sheet. Now the balance sheet strength is really underpinned by the long-term fixed rate loan that we have. So around 3/4 of our drawn debt is a fixed rate loan of 2.5%, and the maturity of that loan is 12 years, so really attractive foundation for the company. As Nick says, we do have an element of RCF that is drawn but not capped, and that's GBP 16.5 million at the moment. And we have some disposals in the works to get that undrawn element down -- to get the uncut element down. And what we'll see is that will have a pretty material effect on the average interest cost, which is already low at 3.5%. So in summary, we've got a really strong balance sheet. I'll pause there and hand back to Nick and look forward to any questions.

Great. Thanks very much, Bradley. Very clear. So I guess just in summary, I hope those of you that have been with us over the course of the last year or so, you can see that we are delivering everything that we set out to deliver, really from the point of undertaking that refinancing, we've implemented a number of measures, increasing our allocation to industrial, really strong focus on active management, disciplined approach to increasing earnings and then passing those on by way of high dividends when sustainable. And the final and I guess, most interesting phase now is a strategic evolution, which we believe firstly addresses the climate crisis but actually, more importantly, for us as shareholders, should allow us to drive even higher sustainable levels of earnings growth in -- again, in the hope that we can pass it on by way of high dividends. The U.K. market does appear to be at a turning point. I think it's obviously the most interesting point in the cycle over the last 10 years. There is an expectation now that we will begin to see rates come down, albeit perhaps more slowly than we expected. But on the other side, as I said, we do have that strong rental growth coming through. So I will leave it there and hand back and hope we will have some questions to answer. So thank you very much.

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

Thank you. I actually can't see the question summaries on my screen, Bradley. You may have to go through them. Sorry.

Just, say, on the right-hand side, there should be a small blue button that says Chat. And if you click on that, that will bring up the Q&A for you.

Sorry. Got it. Thank you. Right. There you go. Okay. Right. So if we just canter through, there do appear to be some on a similar theme. So there's a couple of questions in relation to new rent, rent collection and also what rent has been sacrificed by way of incentives. I guess it's difficult to give a simple answer to that one because obviously every negotiation is different. What I would say is the vast majority of those deals by number are across our multi-let industrial estates. The supply-and-demand dynamics are very much in our favor. So market standard would normally be that are they -- on the 3- or 5-year lease on 1 of those estates, we'd be getting rent free of anywhere between sort of 3 and 6 months. So those incentives, when those leases are completed, are smooth in our accounts under IFRS. But of course, as well as the income, what we're very focused on when we do those sorts of transactions is the impact of capital value as well. And so obviously, those lettings, while they have been granted rent free in some cases, have also clearly had a positive impact in terms of the asset value. So I hope that answers it. The next question, can you talk to your approach in balancing core value-add and opportunistic investments? Yes. Good question. I guess probably the best way to answer that is we won't take blend of assets in terms of income quality, lease length. But what we won't compromise on is top good fundamentals. So whether it's our multi-let industrial estates, the Bloomsbury office Bradley has been giving an overview of or [indiscernible] warehouse, our main focus is on ensuring we're getting assets with strong fundamentals in good locations that have the ability to generate attractive long-term income and particularly now with our ability to deliver those sustainability improvements. So because our company tends to focus on a higher yield, that's reflected partly in having a slightly lower average earnings by lease term, by having a slightly higher void rate. So I would say, overall, our assets typically fall within the value-add bucket but with an element of core income. Once we've added the value for asset management and if we choose to hold the asset holding for those more defensive qualities. Bradley, would you add anything to that?

No, I thought that was very clear. And we undertake pretty forensic modeling of the portfolio looking forwards to make sure we can continue to pay that dividend that -- so attractive to investors.

Yes. The next question on that theme, outlook for the dividend, obviously, having further increased it by 2% today paid in June. So the question is what's the outlook for dividends and how do we balance that allocation. I guess how do we balance the cash and the dividend versus activity in the portfolio? So I guess, most importantly, the dividend is approved by the Board based on our recommendation, and we have a clear and consistent way of assessing what is sustainable by running cash flow forecasts for the portfolio. And we only make a positive recommendation where we believe that is sustainable. Now of course, things can go from left field. We had COVID. But when you look at the granularity of the portfolio, we're comfortable that, where they can write assumptions to ensure that, that is sustainable. We don't provide shareholders with forecast for dividends. And what we are able to do, as we hope to have done today, is give a sense of where that potential income and earnings growth could come from. So in simple terms as Bradley has said, we have a GBP 10 million reversion between the current revenue we're receiving on the current market rent, and about half of that relates to where we have portfolio vacancy. And as Bradley said, the vast majority of that has been refurbished. So in the context of a GBP 16.5 million dividend, give or take, even crystallizing part of that GBP 10 million reversion could have a meaningful positive impact. And that's why we also made the point that unlike many of our peers, we're very much focused only on that top line growth because we have great visibility on that forward interest. That 75% of our debt book at 2.5% fixed means we have much less to worry about in terms of future refinancing risk with many owners of real estate at the moment are -- notwithstanding the outlook for rates drifting down slightly are having to contemplate quite expensive refinancings. So hopefully, that's clear. Bradley, the next one, we had before, just asking about why not revalue the fixed rate loan on the balance sheet. The main answer is not allowed to, is it? But after you.

Yes. Yes, going to say just that. The accounting standards basically prevents us from doing that, possibly because the loan isn't tradable unlike a swap, for example, which is revalued. But as Nick said, the fair value of that loan as at the year-end was GBP 18.5 million, and that's not reflected in our NAV. So it's upside to the NAV. And also, as Nick clearly articulated, it gives real good visibility on material costs for the company looking forwards. So that means if we do focus on growing our rents, then that growth is more likely to fall to the bottom line of earning and become earnings growth, which can then be paid out as higher dividends.

Yes. Yes, it's also floating asset that under the accounting reporting, we do enclose various EPRA measures. One of those measures actually does include that benefit. But we realize a lot of shareholders don't get to look at that level of detail, which is why, when we're making these presentations, we do highlight there is that potential value there. Right. So there was a question in relation to the disposal. So -- as to why we would make disposals if these assets are generating higher yields of the debt rate. So a good question. So as Bradley said, we have a -- GBP 16.5 million of our debt is currently unhedged. So you can see the SONIA rate 5.25% plus the margin of 1.65%. That's the cost of debt and approaching 7%. So actually, where we are selling assets, if we're selling assets at below 7%, then that is accretive to earnings. So that's a good position to be in. And so where we are selling assets, we're targeting all the assets that are below that, but also we are looking to sell assets, not many, but we are ideally going to look to repay that floating component before the end of the year, partly because of earnings, partly because we want to get that LTV back in line with that strategic range of 25% to 35%, which is an internal range [ that we pointed out ] and as Bradley has said, we have loads of cover on our [ own ] interest covenants with the bank. Bradley, a question. Just comment on, I guess, the context of some of the activity. How long do you think it will take for you to execute the various initiatives designed to boost reversionary income?

Yes, good question. And sometimes it can take time to execute these initiatives, and that's simply the nature to real estate. So we have tenants in place, many of them on protected leases, and we also can't sort of just spend all of the cash at the same time because, as we've discussed, we also need to keep on generating rental income to pay that dividend that we all are really attracted to. So in our investment policy, we've said that we'd look to sort of turn around the sustainability performance of assets within 5 years but only where leases allow. And the examples, we went through. So looking at Stanley Green, the Phase 1 part of that strategy is essentially complete. The Phase 2 will start soon. And looking at Salisbury, that initiative where we've signed the agreement for lease and we're now doing the works, et cetera, carried out to complete that lease, so that's a kind of in-progress initiative. And when we come back to talk to you in the interims, once we've spent more time assessing the various initiatives that we could potentially undertake, then we would have progressed a bit more on those ones we just spoke about and have the next ones to talk about. So we kind of need to stagger these initiatives for the reasons we've discussed before. And also, we have to just be cognizant of the fact that it can take time to start the initiatives because of the leases in place. But something that's quite attractive, we think, about our fund is the [ wall ] is just over 5 years. So that means that these opportunities come around more quickly than if it was a long income fund where the leases were for longer.

I agree. That's very clear. Next question, again, I just have one. This is the last. So joint venture income has dropped over the last couple of years. Why is this? And what's the outlook? So on Page 5 of the deck, that was great. So those that haven't seen that perhaps earlier on, so we have 2 joint ventures held in very simple co-ownership structures with funds that are also part of the Schroder's capital real estate stable. We have the 50% interest in the Store Street asset that Bradley mentioned, and we have 25% interest in the City Tower office in Manchester, which is actually more of a mixed-use asset, predominantly offices but also retail, leisure and a hotel. Now the way that we report on those in the P&L is a net income line, so rather than having a gross rental income from the direct portfolio then -- and then you're showing your property expenses line separately, those lines get merged. And so what's happened over the year and the reason why this has been flagged is because we had higher expenses running through that net income line, not least relating to the costs associated with the lease restructuring that Bradley outlined earlier on, on the Store Street, where obviously we had a legal adviser. We had an agent onboard who's helping us negotiate that deal with that occupier. One of the reasons we included the data for the quarter ended 31 March is because for a number of different reasons, but it was also showing that some of the activity we've been doing is now coming through on a more full run rate basis. And if you annualize the quarter's net income from those joint ventures you get to about GBP 3.6 million, so more in line with where we were in 2023. It is worth noting, though, particularly for City Tower, it's a very heavily multi-let building. There's always a lot of active management going on. And so there is more volatility going through that expenses line than there appears to be the rental income line above because, as I say, that rental income line excludes property expenses. Those are shown below the rental and related income. So hopefully, that's clear. So in a sense, it's for a good reason because it's linked to value-accretive activity. Now last question, what are your thoughts to merge with other property funds? Is the current fund size optimal? Are you able to comment if there have been any discussions with any entities? Okay. So what are our thoughts? Well, Obviously, this is a much question for the Board as it is for Bradley and me. Our #1 focus is to ensure that our shareholders' interests are protected and that we deliver on our strategy. There is clearly M&A happening in the market. You've read about it. Some of it has happened. Some of it has failed spectacularly and is clearly not to the shareholders' interest. And various other companies are having to report aborted costs associated with aborted transactions. Our Board and we are open-minded. However, if there is activity that is very clearly in shareholders' interest, that is accretive in terms of overall return, I guess, one of the quality problems, if you like, that we have is, as I noted earlier on, our dividend yield is almost 8% on a fully covered basis. That's higher than pretty much everybody else in the sector, save for a couple of companies that essentially are in distressed situations. So most activity you've read about in the sector isn't where companies will be taken up for cash, is where companies are merging on a NAV-to-NAV basis or on a pay per basis. Therefore, because we have the highest yield in the sector, it's more likely than not the activity would probably lead to a dilution in our dividend yield. So that's not to say that there may be other reasons for doing it, impact on total returns, portfolio mix, quality, et cetera. But that is a particular quality problem that we have [ because ] of all the work we've done in terms of the refinancing, obviously the income that we've then used to boost earnings and dividends. So that's, I guess, the first response. We're open to it if it's in shareholders' interests, but we think we have a clear strategy to continue delivering for you. I guess related to that, is the current fund size optimal? I would say it's neither optimal nor suboptimal. I don't think we are suffering in terms of return from our size currently. In fact, over the year, Bradley and I, we've managed costs very, very closely, and our fund expenses actually have gone down from about 1.3% to about [ 1.19% ] of NAV. I guess looking forward and looking forward to the recovery, I'm expecting, I would love to be in a position today where we have firepower because I think we can genuinely add to return. And that's the frustration perhaps, is that we're unable to raise new capital to really take full advantage of that. But then, again, growth doesn't guarantee that either because not many companies are in that position currently. So as I say, I think some of our shareholders would prefer us to be bigger, but many of our shareholders are quite happy and actually really, they won't see any dilution in the yield. As to whether there have been any discussions, obviously, if we were in discussions, I wouldn't be able to tell you [ under mark ], but we're not currently. We have been approached via the Board. There was one approach last year to ask us to make a proposal with another company. I can tell you that because that discussion is no longer progressing. We did a deep dive on the assets, and as a result of looking at the assets, concluded that there weren't of sufficient quality at the price. So although we made a proposal, it was a discounted proposal. That Board elected to go with another party, and that deal ended up not happening. And so I guess that just illustrates the challenges associated with every M&A activity in the sector. So I guess, just to summarize, we're open-minded, but it could be a real distraction. And if it goes wrong, it can be very expensive. So our focus of what hopefully comes across really clearly is we have a clear plan. I think it is working. For those of you that have been on the call for the last year or so, we are delivering what we said we're going to do, and we have real confidence that the new strategy, the activity of the portfolio should allow us to continue delivering for you on route 1, noting that, clearly, we need to have one eye on what's happening in the wider market. And if it's something that looks really interesting, then we'll give it consideration. So I think we have addressed all those questions. They are great questions. Thank you for your engagement. So I will hand back.

Perfect. Nick, Bradley, that's great. Thank you very much indeed for addressing all of those questions that came in from investors this afternoon. And of course, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended, just for you to review, to then add any additional responses, of course, where it's appropriate to do so. And we'll publish all those responses out on the platform. 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 yourself and the company, if I could please just ask you for a few closing comments to wrap up with, that would be great.

Thank you. Most importantly, I'd just say thank you. Thank you for your time this afternoon. And for those -- our shareholders, thank you for your support. We are very, very focused on delivering on the strategy for you. Our shareholders, ourselves, I think it's genuinely a really interesting point in the real estate cycle. And I think the current share price yield and discount, I think, represents a really attractive entry point. So again, thank you again and look forward to receiving any further feedback.

Perfect. That's great. Nick, Bradley, thank you once again for updating investors this afternoon. Could I please ask investors not to close this session, which will now be automatically redirected for the opportunity to provide your feedback in order the management team could 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.

Thank you.