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

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

Good afternoon. Good afternoon, everybody. Thank you very much for joining us. So we're here to present our unaudited results for the 6 months ended 30 September as well as also giving you an update on activity post period end, which is very encouraging and more on that later. So Bradley and I, I hope most of you are familiar faces. And so we'll do our usual tag team. I guess before I move on to, if you like, the key points as to why we think we genuinely are looking very interesting today, I'd just draw your attention to the labels you can see there on the front page headed MSCI. On behalf of the whole team here, we're very pleased to receive an award from MSCI, who provide performance information for our underlying portfolio compared to the whole of the U.K. real estate sector. And we actually won during this period, the highest 10-year risk-adjusted return, not just for the U.K., but also the Continental Europe at portfolio level. So portfolio rather than company level of 8.5% per annum over that 10-year period. So we were absolutely obviously delighted with that. So I guess just an introduction before we go into the results themselves. So as we've said over the course of the last few presentations, we genuinely believe that we are well positioned. We've got a high income return on any metric, whether you're looking at portfolio level or obviously the current dividend. And obviously, the dividends themselves and the visibility we have on future earnings are supported by our low debt cost. We've delivered continued good relative performance, obviously, as noted by those MSCI statistics, that's largely because of our high-growth weighting. So we're -- 62% of our portfolio is now allocated to the multi-let industrial and the retail warehouse sector. And we have a significant upside in terms of portfolio rents and what we call the reversion, the difference between the current rent we receive and the market rent, and Bradley will provide more color on that later. Because of the activity, we have actually announced a further dividend increase on top of the amount over the period for the dividend that will be paid in December. That's a 3% uplift. And if you take yesterday's closing share price based on that higher dividend, our dividend yield on the share price represents about 7%. And importantly, that was fully covered by earnings over the period. Strong balance sheet, more on that later. Likewise, alongside that attractive dividend yield, we still have the discount to NAV. It has narrowed but it's still sitting at around 14%. It got as tight as about minus 7% and not long before the most recent election where we've obviously subsequently seen more volatility in interest rates and therefore, REIT prices. I guess what I'd also say and actually is partly thanks to doing activity like this is we have seen a more diverse range of shareholders coming on the register, which is fantastic. We have some of the smaller wealth managers coming on to the register for the first time because they think our strategy is differentiated from some of our peers. But also very positively, again, through platforms like this, we have an increased holding from retail shareholders. So if you take the main 3 platforms that you will all know, those represent about 20% of our register now. We've also, as you know, because we mentioned it previously, within Schroders, we've been lobbying to try and encourage change relating to the PRIIPs rules, which are what require us to produce a key information document, but in particular, require us to provide an estimate of a total expense ratio -- or a total expense ratio, I should say, that we believe is -- doesn't represent the true cost of running the company. The FCA now appear to recognize that. And we think with those changes, again, it could lead to more demand, particularly from smaller wealth managers who will present a more realistic fee of owning SREIT to their clients. Last point there, obviously, we have talked about the strategic evolution. What you'll hear more about in this presentation is actually how we're implementing that and most importantly, how we believe that will continue to add to return. As we have said before, very clearly, I think our strategic pivot was more about how asset managing through a sustainability lens with it being fully integrated will allow us to drive higher rents and therefore, deliver better returns for our shareholders. So just moving on, these are notes, a bit more color on the actual results themselves. So the net asset value total return over the 6-month period was 4% as I say, largely because of better than benchmark valuation movements because of that higher allocation to the multi-let industrial and retail warehouse sector. I've spoken about the award we received. I've spoken obviously also about the 3% dividend increase that will be paid in December. I guess what we're mainly focusing on this slide is, again, just to recap on the types of assets that we own. So the 6 assets you can see on the right-hand side of this slide represents about half of our portfolio value. And I guess we're just drawing attention to the nature of the assets, the quality of the locations, the quality of the real estate and where we also see potential upside. So for example, the 2 industrial estates you can see at the top there, there are our 2 biggest assets, together representing about GBP 100 million of value, remembering that our portfolio value today is about GBP 470 million, and we've continued to see very healthy levels of rental growth through that active management. Within the office sector, the office sector is becoming a slightly less dirty word than it has been, certainly coming out of the pandemic. Parts of the London office market now are delivering rents as high as they ever have been in nominal terms and our asset in Bloomsbury, which is our biggest office exposure, and you see in the middle left is really benefiting from that in terms of the infrastructure improvements at Crossrail or Elizabeth Line, I should now call it, but also the improvements around [ UCL ] going up towards the medical corridor linking Houston to Kings Cross. Obviously, the Manchester asset, we've spoken about before. And then finally, at the bottom here, you can see our 2 biggest retail assets. As I said previously, the retail warehousing we have is focused on the value end of retail warehousing, so a little the Aldi, the home bargains, et cetera, where we're seeing strong occupational demand, but also our retail is focused on convenience. So that basket shop, the cost of coffees, but the Greggs, and you can see Headingley Central there, anchored by Sainsbury's, where we've got exactly that sort of profile of tenants. Now a bit more on the numbers, not a huge amount, but you can see here the breakdown of that 1% NAV movement, which on top of that, obviously, with the dividends resulted in a NAV total return of 4%. The 90 bps positive valuation movement over the period of 6 months compared with the benchmark positive at 0.3%. And you can see with that, the market has turned. We believe we're going through that stabilization phase and what we can see in the investment market now suggests that we are going to see a recovery in values as we move through into the next cycle and more on that later on. I won't go through all the numbers here, but you can see we're continuing to invest capital expenditure in our portfolio and a big part of that now is increasingly driven by the sustainability aspects, and Bradley will touch on that in much more detail later. You can see there that the dividend fully covered and the net asset value per share of 59.4p, which compares to today's share price of around 51p. Also worth noting here that the net asset value that we report doesn't include the fair value of our very attractive long-term loans because we're not required or allowed to under IFRS. Were we to fair value that loan as at the end of September, there'd be an additional GBP 17 million to the NAV or around 3.5p per share. So if you like, that's the embedded value that reflects a very low cost of our debt. Now more importantly, why do we own the shares? Well, of course, we own it all of us, I guess, first and foremost, for income. And we're showing here the income statement summary with the 102% dividend coverage having had a 2% increase over the period compared with the period to September '23. As I've noted, subsequently, we've announced a further 3% in the dividend, which reflects confidence around activity completed post, but also the visibility we've got on activity as we go into 2025. I think the key point to note here is if you look at the rental income and the share of net income in joint ventures, that's, if you like, our total rent. That increased from GBP 14 million to GBP 15.1 million up, so an uplift of 6%. And that also reflected the fact we sold 2 offices over that period. So what we've been talking about to you over the most recent years about the fact that we have this activity at portfolio level driving higher rents is now feeding through into that top line. As we move down the income statement, very close management of expenses, where we have seen an uptick in expenses, it's largely reflective of that transactional activity, so letting fees, leasing fees, so expenses because it is linked to that activity. Zero bad debt provisional write-off over the most recent 6-month period, and that's reflected also in our rent collection stats at approaching almost 100%, 98%. Finance costs are flat. All that in summary, therefore, means that over the 6-month period, we were able to pay a dividend of GBP 8.3 million, fully covered by earnings, 102% dividend cover there, as I mentioned earlier. Now as I said, part of the reason why we have been able to pass on the high dividends is not just because of that top line earnings growth, it's also because we've got like great visibility of interest payments. And this is just showing you a summary of our current debt drawn. So at the period end, debt drawn of just under GBP 180 million. Of that GBP 180 million, the vast majority, GBP 130 million is a Canada Life long-term loan, where we have a fixed for a further 11.5 years interest rate of 2.5%. We then have a revolving credit facility, which is partly hedged with an interest rate collar and partly unhedged. And one of the key objectives we have over the course of the next few months is to, through sales, reduce our net loan to value to within our long-term range of 25% to 35%. We are making progress. We've literally just exchanged the sale post period end that Bradley will talk to and we have more sales planned or in progress. Just to bring that to life visually, so you can see here the progression of the dividend. We quite often reference back to the dividend level in 2019. So a little while ago now but the reason we do that is because that's when we completed our refinancing. And when we did the refinancing, we committed to passing on that interest saving to shareholders by way of increased dividend. We obviously then had the pandemic where we did rebase the dividend. But you can see there having rebuilt it and certainly with the most recent increase, we're now 35% ahead of the level in 2019. And I think we are standing alone within our peer group of being able to say that we've increased dividend by that sort of quantum. At portfolio level, continued good performance, as I say, I've mentioned the 10-year performance awards, but actually, it's overall periods, and this is a reflection of obviously having the asset allocation right in terms of being overweight, industrials, retail warehousing, being underweight offices, but it's also a reflection of both the higher income return and the value that the team are adding through asset management. We can see the 6-month period here, so the 3.8% versus 2.6% of the benchmark. I guess what's more relevant probably is to look at the longer-term performance because you can really look at the longer-term trends. And I'd just draw a couple of things. When you look at the 3-year outperformance, which is a relative positive 470 basis points per annum, that's largely coming from having a higher income return. So our average income return over that period was 6% versus the benchmark of 4.4%. But actually, having that sector allocation to the higher-growth sectors also allowed us to deliver rental value growth over that same period of 6.6% per annum against a benchmark of 3.7%. And interestingly, to reflect, I guess, the fact that the industrial sector has driven the overall performance, our industrial assets delivered rental growth of 11% per annum versus the benchmark at 8.4%. So you can see there how the industrial sector driving our performance and also that of the benchmark. Now where are we in the market? So I guess the first thing to say is we have seen a bit more volatility, obviously, since the budget and obviously, following that with the U.K. -- or the U.S. election, I should say. And one of the key things we've seen and what the chart on the left shows you are the implied probabilities for the Bank of England rate from options. And what you can see is the market's view of the most likely outcome being the squares in red, showing the rate itself and the monetary policy decision date with obviously the next one on the 19th of December. And what has happened, obviously, since the election -- the US election is those red boxes have moved to the right. So there is an expectation that the reduction in rates will be slower. We'll have a longer runway, I think, is probably the best way to put it, to getting any sort of meaningful positive impact from falling interest rates, but we still believe that will happen. It will just be further into the future. We've spoken before about the relationship between the -- in this case, the 10-year gilt rates on the right-hand side and property yields. And there is a long-term relationship and the relationship is typically anywhere between 100 and 200 basis points. And based on where we think property values will go and where we think deal yields will go, at the end of this year, we think that gap will be somewhere between 1% and 1.25%. So although that's at the lower end of that historic range, what's different this time around, as we said before, is we are in a market where we're having much stronger rental growth. And so what's -- that sort of history doesn't repeat, but it echoes point is on the left-hand side, you can see that significant reduction in capital values. So average value is falling 25%. And you can see with that light blue line there, the industrial value is starting to recover. But more interestingly, on the right-hand side, you can see whilst values have fallen 25%, rental values have gone up 10%. And that is markedly different from the experience coming out of the global financial crisis and indeed, the period in the late '90s into the early 2000s. So consequently, I think our view is investors will be prepared to accept perhaps a smaller yield gap between the property yield and gilt yields because they will have expectations of higher rental growth. And as you'll hear when Bradley walks through the portfolio activity, that's exactly what we're seeing on the ground in terms of activity. Now what the volatility has meant is the investment market in terms of volumes does actually remain relatively low. The left-hand side there, you can see that's all U.K. property investments, obviously, principally commercial. So this excludes the residential sector largely. And then on the right-hand side, you can see the cumulative buildup of transactional activity trailing well behind the more bullish markets we saw in 2020 and 2021. What we can say, and this is live data because we have teams running other mandates where they have capital they're deploying is the transactional market is improving. There is always a lag on the bid side because, obviously, property transactions will take anywhere between 1 and 3 months. And we can see that in the sort of the weeds of the market, assets are trading, bids are happening. And we see, in many cases, those bids are ahead of valuation. And the example Bradley will give you later on within our own portfolio is a case in point. So what does that mean for the outlook? Again, our forecast here, the only guarantees that they're wrong. But what I can say is I think there's an increasing consensus that we are moving into a new cycle. We think capital values will potentially be flat or possibly even slightly positive in calendar 2024. And as we go into 2025, as we see the continued support from rents, but also some support from an expectation that interest rates will trend down, we see average returns from real estate between 7% and 10%, depending upon which part of the market you're in. That's above the long-run average. And so consequently, we are expecting and indeed are already seeing more capital looking at the sector. U.S. private equity already relatively active, particularly focused on portfolios and industrials, but also increasingly Asian, Middle Eastern investors who are viewing the U.K. as a safe harbor, particularly the London office market where transaction volume has been very low really since Brexit. But now we're beginning to see more interest and particularly at the prime end in those markets, which, again, we believe will be overall positive for sentiment towards the sector as we go into next year. So with that, I will hand over to Bradley.

Thank you very much, Nick, and good afternoon, everyone. Thank you for listening to our presentation today. We've got some really interesting activity to talk about. But first, I think it's worth just giving a reminder as to what we've done with our strategy. So in December last year, we updated our investment objective where we're now required to make meaningful improvements in the sustainability profile of the assets that we own. And we're going to measure our progress against this objective on an annual basis by using 2 KPIs. The first KPI is an asset level assessment using our proprietary ESG scorecard. And the second KPI is the portfolio-wide net zero pathway commitments that the company has made. And the key reason for making these changes is we believe that a focus on sustainability will enable us to deliver enhanced long-term total returns for our shareholders. In short, we think we can profitably manufacture the green premium. Briefly, on the right-hand side of this chart, I'd just like to address a proof of concept for this strategy. And this is based on the work we've done at Stanley Green Trading Estate in Manchester. Since we acquired the asset in December 2020, we've achieved an annualized total return of 17% per annum. And that compares to the MSCI all industrial benchmark at 7% per annum. So really strong outperformance over that time. Now how have we done that? Well, what we've been able to do is secure rents on the new green units that are 39% higher than the rents on the older brown units. And this is for leases that were agreed around the same time for units that are around the same size. So really compelling evidence there, that 39% premium. And the second point to highlight with that regard is that the yield that the valuer has attributed to units are keener for the green new units. So they are applying a yield of an equivalent yield of 5.35% to the new units that are very sustainable versus 6.5% to 7% for the older units. And as we make progress elsewhere in our portfolio with the strategy, what we're seeing is these higher rents being achieved as well, and we've got some examples coming up shortly. And in terms of Stanley Green before I move on, the next phase of the strategy is to apply refurbishments to sort of retrofit the existing estate. So the brown units, we're trying to bring the sustainability performance up so we can close that rental gap. So try to achieve the rents up to 39% higher than they are currently passing. And interestingly, we're able to do this whilst our tenants remain in occupation, so we can keep that income flowing and that helps us to continue paying that really attractive dividend that our investors like. Now I thought it would be useful to set out another example. So this is a live example of our supply and strategy this time to a mixed-use asset located in Manchester City Center called St. Ann's House. This asset has 5 floors of office accommodation with a ground floor of retail units. And what we are -- what we've done at St. Ann's is we carried out a sustainability audit and the output of that audit has been a completed scorecard setting the baseline score for the asset. So this is our proprietary ESG scorecard. You can see the output of that on the left-hand side. And along with the baseline scorecard, we have a number of recommended interventions we can make to improve the score on that scorecard, improve the desirability of the asset to future tenants. At the moment, we're going through a refurbishment of the common areas and the fifth floor. The common areas we're working on are the ground floor and the basement floors. Here, we're looking to introduce lots of new amenity and journey facilities and make sustainability improvements. And on the fifth floor, we are undertaking a Cat A refurb, and we only recently got the fifth floor back. Now in terms of what are we doing to push the scores on and improve that sustainability performance? Well, to give you some examples, we're putting new glazing in place in some places on the facade. So what we should see is an improvement in the fabric score at the top there, which is currently 2 out of 5. It should also help the energy and carbon score because that enhanced insulation will mean less use of energy. We're adding on the ground and basement floors, new meeting rooms, breakout areas, studio, a place for sort of community gathering. And what that should do is enhance the community and social integration score, which you can see towards the bottom of the scorecard. We're also progressing with electrification through new HVAC systems, which create a nicer environment for tenants, cleaner air, and that will improve the health and well-being score as well as that energy and carbon score because we're using more efficient electric systems. We're also adding PV panels to the roof. So we have some on-site renewable energy generation, which again will help our energy and carbon score. Taking this sort of a holistic approach also will help some of the sort of more broad categories such as certifications and ratings. Our EPC ratings will move on. We'd expect to get an EPC A on the fifth floor. As a recap, the whole building has an EPC of a D at the moment, so that's a significant improvement. And the tenant profile will improve as we introduce new tenants into the building with green lease clauses, and we're hoping to attract better tenants to the building given this extensive work we've been doing. Now the question is, is it worthwhile? So we're spending GBP 2.4 million on this phase of the refurbishment. Is it accretive for our shareholders? Well, yes, we believe so. So the current passing rent for the office space, the average across the 5 floors is around GBP 19 per square foot. As a result of these works, we have just signed a deal at GBP 25.50 with a tenant who has already moved into the third floor. And for the fifth floor, which will be let after the refurbishments, we expect to achieve GBP 28 per square foot or better. So moving from GBP 19 to GBP 28 per square foot is an increase in rent of 48%. So it's really material. So not only are we improving the scorecard and achieving our ESG objective, but at the same time, we're achieving really great returns and the 5-year forecast IRR for this asset following this work is 13% per annum. Moving on to this slide before we highlight some pipeline initiatives we have. And sometimes, we're regularly assessing our assets and sometimes we see that there's a higher value use for all or part of an asset. So if we look at the left-hand side, we're showing Langley Park Industrial Estate in Chippenham, right in the town center, close to the train station. And in the image, the top image, you can see the yellow units, which is currently where Siemens are in accommodation. And they are going to leave at the end of their lease, which is June '26. We actually think they're going to need to stay for another couple of years through to the end of 2028. So in preparation for that, we're preparing a planning submission to convert that site, which is outlined in green on the lower photo and it's essentially what you can see in the upper photo, so the car park and the accommodation. We're looking to get permission to turn that into a build-to-rent scheme. And we think the market value of that scheme could be somewhere in the region of GBP 10 million to GBP 20 million, and that compares to the current site value in our valuation of GBP 9 million roughly. So potential for a really accretive scheme there. And just a point on Siemens. So as I said, their lease expires June 26. They need to stay probably until late '28. We're probably going to be able to agree a really attractive rent for that additional 2-year period beyond their expiry. On the right-hand side, we show another example, which is Haywood House, an office currently or a building currently used as an office located in Cardiff Town Center, City Center. And it's a really interesting case because there's a really big need for student accommodation in Cardiff. And what we've seen are some schemes close to our asset being converted to purpose-built student accommodation. We're in the process of submitting a pre-planning application to the council at the moment. As I said, because of these recent applications that have been approved, we think we've got a good chance of getting approval here. And then the outcome will be our residual appraisal shows a valuation of GBP 7 million to GBP 10 million, and that compares to the current book value of GBP 4.2 million. So again, another potentially accretive change-of-use scheme that we have in the pipeline. Moving on to our portfolio. And many of you will be familiar with these metrics in this slide. I like to draw a couple of points on the left-hand side. First, we've got 39 properties and more than 300 tenants. That speaks to the granularity of the portfolio, which we think makes it more resilient. And then secondly, we highlight the really attractive income profile of the portfolio. Our net initial yield is 6.1%. That's well in excess of the benchmark of 5.1%, but also well in excess of our debt cost, which on average is 3.5%. The reversionary yield is 8.5%, really attractive, and that's well ahead of the benchmark. And to put those yields into context, the reversionary rent is around GBP 10 million higher per annum than the current annual rent. And to put that GBP 10 million into context, our annualized dividend is around GBP 17 million. So if we're able to capture some of that reversion, it should enable us to move on the dividend in a way that moves the dial. On the right-hand side, we show the structure of our portfolio in terms of sector allocations. And the key point to take away here is the 62% allocation to multi-industrial estates and retail warehouses. Here's our void analysis. As at the 30th of September, the void was 11.2% as measured by ERV. And whilst that's within the 10-year range of 5% to 13%, we normally expect the void to probably hover around 8% and the reason we're a bit above 8% at the moment is because we've had recently completed developments and major refurbishments that we're in the process of letting up. And since the summer and since the quarter end, we've made really, really good progress. with some really great lettings done at material rents for the fund. So just to pull out some examples, Stirling Court, an industrial estate in Swindon, we just let Unit C at GBP 280,000 per annum. That's a rent of GBP 8.25 per square foot, which is above the September ERV. So we've actually beat that reversion yield, and it's roughly 1/3 higher than the previous passing rent for the unit. We also have 19 Hollin Lane under offer. Now as a reminder, 19 Hollin Lane is a sustainability-focused sort of new development on an industrial estate in Milton Keynes. And the ERV for that unit is GBP 13, and we've actually achieved a rent of GBP 15 per square foot. So we've again beat the 30th of September reversionary rent. And to put that into context, the average rough passing rent for the overall asset, so Stacey Bushes and Milton Keynes is GBP 10 per square foot. So it's around GBP 8 per square foot. The ERV for the overall -- for the whole site is GBP 10 per square foot. So that GBP 15 per square feet is 50% higher than the average ERV for the whole estate. So again, it shows the decision to create this really sort of cutting-edge sustainable accommodation is paying off. And as you can see on the slide, there's been some other activity since the period end that we -- that will push that rate down. Now just to speak to that reversion and to give you a sense of what we're doing to try to achieve it. So our annual rent as at the 30th of September was GBP 30.1 million. Over the next 24 months, we have fixed uplift. So they are almost entirely the end of rent-free periods. And we have already had GBP 700,000 worth coming to effect since the period end. There's a further GBP 2.2 million worth to come into effect over the next just under 2 years. So that's work already done. The big red bar relates to Stanley Green. That's the new development we touched on earlier or partly a new development on an existing estate that we touched on earlier. There was at the period end, GBP 600,000 of rent that was void. And since then, we have just over GBP 200,000 worth let, and we have a further GBP 120,000 worth under offer. So that means that there will only be one unit left vacant after this activity on Stanley Green in terms of the new development. And then there are some units and spaces where the current passing rent is below the market level. So when rent reviews come around and lease expiries and regears occur, we would expect to push the rents on. And we touched on the vacant space on the previous slide where we've made some really good progress in the last couple of months. And then the final point for me, I'd just like to highlight what we're doing to further drive earnings growth in the second half of this financial year. I already touched on Stirling Court in Swindon, where we have let unit C at a really great rent. And as Nick mentioned, we have sold an asset. So we've exchanged contracts to sell Howard House, which is a small office in Bedford. And encouragingly, the price for that sale was GBP 1.475 million, which is 23% ahead of the book value as at the 30th of September. And then the final point to make in terms of current asset management that we have underway. We are progressing the planning application to get Lidl into our retail warehouse scheme in Salisbury. And when we do get Lidl in, assuming it all goes to plan and assuming we -- so there are 3 units, there will be 3 units. So there are currently 3 units. And in the new 3 unit lineup, which have Sports Direct, the lease is complete. Little we get in planning and then there will be a final unit that we'd have to let. If that all happens, the total rent of Salisbury will be GBP 865,000, which is 144% ahead of the current passing rent. So really material increase in rent there. And then the final thing I'd like to touch on is the optionality we have to recycle assets. So to sell at keen yields. So we think we might be able to sell some assets at around 5.5% initial yield. And then initially pay down the RCF, where the uncapped element of that is costing us 6.6% per annum. So that will be immediately accretive. But then we took to reinvest into higher growth sectors at yields of around 7% to drive further earnings growth. So just illustratively, taking GBP 40 million and selling at GBP 5.5 million, redeploying at GBP 7 million, you're looking at around GBP 0.6 million of run rate annualized uptick in rent and earnings. And the last point, we are always looking to control our costs. Our fund expenses of 1.2%, very competitive. And as I touched on before, with the void, if we bring that 11.2% back down to where we would expect to be at around 8%, that should reduce our property costs as well. I'll pause there and hand back to Nick, and we welcome any questions that you have.

Great stuff. Thanks, Bradley. So I guess just to end where we started in terms of just confirming, we do think we're well positioned because of that higher income return and the low debt cost. The market has stabilized, but it remains volatile, particularly given interest rates moving around post the U.K. election and obviously, the U.S. election. Notwithstanding that, we do see a recovery as we go into 2025 led by the sectors where we currently have the high allocation, particularly [indiscernible] industrial and parts of the value-rated warehouse market. Our focus, and I hope this has come across very clearly, is on executing on the asset management. We've got some really interesting projects, largely where we're implementing our sustainability-driven initiatives, but we are now genuinely seeing that green premium come through. And to supplement that and hopefully, to support further dividend growth, we are also looking at rotating assets, selling some of our lower-yielding assets on completed business plans, recycling those proceeds into a combination of debt repayments, but also looking forward high-yielding acquisitions where we can continue adding the value. So Jake, I will pause there. I can see we've got some questions, which is great, but I'll hand back to you.

Perfect. That's great. Nick and Bradley, thank you very much indeed for your presentation this afternoon. [Operator Instructions] I'd just 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. Guys, as you can rightly see there, we have received a number of questions throughout your presentation this afternoon, and thank you to all of those on the call for taking the time to submit their questions. But Bradley, Nick, at this point, if I may, just hand back to you just to read out those questions and give your responses where it's appropriate to do so. And if I pick up from you at the end, that would be great.

Lovely. Great. Thank you. So I'll take the easy ones. So I'll just start, I guess, we've got some really good questions. Thank you. Just starting with the point regarding acquisition activity. So as I said, volumes, investment volumes, buying, selling in the market have been relatively low this year, certainly, if you compare it to the 2020, 2021 period for obvious reasons. There is always a lag between the headline data, what you then see and what we are seeing on the ground and those transactions actually getting reported as having completed. And what I can say is although I think the U.S. election, in particular, the labor win obviously has led to a meaningful uptick in gilt rates and will potentially mean that the banks don't move with the next interest rate cut in December, the market is still expecting that rates will trend down. What we're seeing on the ground is quite encouraging. So we, on behalf of other strategies here are currently buying where we have capital, but we are also selling. And what we can see, particularly for multi-let industrial, particularly for retail warehousing is actual proper competition. We are selling for another strategy some industrials at the moment and there are multiple bidders as part of that process. In aggregate, many tens or hundreds of millions, and we are achieving premiums to valuation. Valuations are inherently in the rearview mirror. So I would say, although there is some caution still rightly, not least because of interest rates and the wider geopolitics and the challenges in different parts of the world, sentiment does appear to be becoming more positive. And I think the U.K. and particularly London, having been regarded traditionally as a safe haven, now we have some more political stability. We are expecting more international capital to step in. So it's not -- certainly, I would describe it as a bullish market at all, but I can say in response to that question, that activity is coming off a relatively low base, but it does appear to be improving. As to how we fit within this, we've given some examples, 2 office sales over the last 12 months or 3 now if you include the post period end. We're getting premium to valuation. And our aim is that we will continue to sell particularly our smaller assets into that market as it recovers and also possibly sell some larger assets or assets where we've got conviction that we've added the value, but in particular, as Bradley has said, where we can recycle those proceeds into higher yields into more value-enhancing projects in order to drive total return. So I'll leave that one there. I think the other 3 questions, and I'll start on this, but I will hand over to Bradley on this one as well. Interestingly, are all in a similar -- on a similar theme, which is around the typical spend for the sustainability improvements and the typical payback period, particularly with reference to St. Ann's House, to what extent do our energy improving measures save tenants costs? And what's the next step on our journey in terms of delivering on the strategy and value creation. So I guess the first response is probably quite helpful. It's quite hard to give a definitive answer because it varies significantly by the nature of the project, nature of the asset and the sector it's in and whether you're just undertaking a refurbishment or redevelopment and so on. I guess one way to answer it is to use a real example. So let's say, for example, take Stanley Green Trading Estate, the new units we built there that are operational net zero. Bradley and I estimated that it might have cost us an extra 10% to deliver it to the highest sustainability specification. So let's say that's GBP 10 or GBP 15 a foot in terms of additional construction cost to build those units. We estimate that we've probably got an extra GBP 4 to GBP 5 a foot possibly as a result of delivering that versus what we would otherwise have delivered, maybe 3 to 4. It's quite hard to be precise because there are other factors like location, which have a bearing, which implies that in that case, it was sort of 3-year payback on that additional cost. Now that's attractive from a real estate perspective, but it's also attractive because it's not just payback in terms of income, it's actually the value effect. So our view, and I think this is increasingly visible is the green premium doesn't just relate to income, it also relates to value. And increasingly, investors, particularly public sector funds, institutions are specifically wanting to buy assets that have a certain level of building certification. And so by creating an operational net zero warehouse development as we have done at Stanley Green, although we haven't proven it because we haven't sold it, our view is that someone will pay more, will accept a lower yield in return for getting an asset we built to that standard. So two sides. Payback is probably 3 to 5 years. But once you allow for value enhancements, you can potentially accelerate that payback much more quickly. I'll answer the next one, and then I'll pass over to Bradley on the next steps. St Ann's house. So you've heard that the rent we're targeting there is about GBP 28 to GBP 30 a foot. On a building of that nature, once the work is done, the service charge per square foot might be GBP 8 to GBP 9 a foot and utilities might be GBP 2 a foot. So occupiers taking buildings where they are operational net zero or where they are made much more energy efficient, have the ability to save GBP 1 to GBP 2 a foot depending upon the nature of the building and the energy efficiency of the building and how it's being used. And that's an office example. It will vary by sector. So we are seeing occupiers place more importance on buildings where there are these enhancements because they will save them money. But in the whole scheme of things, the saving in and of itself isn't a deal breaker, right? What is is occupiers who are wanting to report as REIT are doing now, the proportion of space they're occupying that has these higher standards. And so again, back to Sterling Green Trading Estate, the first big letting we did having delivered that new scheme was to Siemens because they're a big energy user themselves through their own business and actually taking an operational net zero warehouse allows them to report that in their accounts. And therefore, there's a wider advantage or benefit to them. So it does vary by sector. It does vary by the extent to which tenants are heavy energy users. There is a pound benefit that will drive behavior, but there is also wanting to be seen to take the space to be part of that net zero journey, which increasingly companies have targets for. So Bradley, I don't know if you want to add anything to that second question, but then likewise, just following on from the question on the sort of pipeline.

I thought that was really, really clear. And we would only go ahead and undertake these projects where we see it to be economically accretive. So you see this in Ann's forecast IRR of 13%. And on Stanley green, you can see the really strong total return performance well ahead of the benchmark. And that's about us assessing the property risk and taking on that risk in order to create profits for shareholders. It's not just about going around and upgrading buildings for the sake of it. It's about being selective. And in terms of -- so we've been asked what are the next steps with regard to our sustainability strategy and net zero commitments and how we're going to unlock long-term value. Well, what we've been working on recently and are continuing to work on are assessing the current baseline. So we have done 14 sustainability or net zero carbon audits on our assets. And in the next round of business plans, which we'll do at the beginning of 2025, we'll be reflecting all of those costs in those business plans over the long term as well as our assumptions on what that might do to the rents and values. And then it's a case of selecting the most accretive projects and progressing in that way. And as we undertake those projects and push on rents and hopefully increase the valuations, that's where the long-term value creation comes from. And when we complete projects, the idea will be to recycle. So attempt to sell at lower yields, reinvest at higher yields and start that transition process again whilst increasing the income of the portfolio.

Yes. Thank you. So I guess last couple of questions just given time. You referenced tenant demand is outstripping supply in several sectors, which sectors are experiencing the strongest growth. So within the traditional sectors, without doubt, it's multi-let industrial. There's a shortage. As many of you will know, because you can see it driving around the U.K. The new industrial that is being built is largely comprising of the big logistics, the big boxes, very little multi-let industrial is actually being constructed. So that's where we see the biggest supply and demand imbalance and therefore, the strongest rental growth outlook. Interestingly, actually parts of the residential, the rental space is delivering even higher rental growth, but there are lower yields in that sector. And we obviously need a higher starting yield in order to continue paying our dividends. Having said that, I think we are increasingly open-minded to alternative sectors. And as we grow in time, that's potentially an option for us. And interestingly, the question just popped up actually with referenced to future rating exposure. So yes, I think -- as I say, I think residential purpose-built students are sectors that we do invest in across the real estate business of Schroders. The barrier historically has been simply the yields are too low for us given our objective to deliver that high dividend yield going forward, but that could well change. So I guess just last couple, what's your view on M&A activity? Well, there clearly is M&A activity going on in the sector. I would say that in some cases, what we have seen hasn't necessarily been in shareholders' interest, and we've seen some deals agreed and then not happen for that very reason. I think in our case, our focus is on business as usual, driving earnings growth, passing it on to shareholders with high dividends. And if our rating gets to a point where we have the ability to raise equity accretively, then we'll consider it, but only where it achieves that objective of driving shareholder returns. I guess the last point to note is where there has been M&A, quite often the company being taken over has, for example, got its financing wrong. And so the Board have been left in a situation where the alternative is more attractive. I guess the last point I'll note on that is, hopefully, what you see and what you hear is, although we are smaller than obviously the main internally managed REIT sector, we're big enough to deliver good enough returns for shareholders. With the asset mix that we've got, the team we have here in terms of the sector specialists, we are more than capable of delivering a very attractive long-term return for shareholders. Last point, please, can you comment on SREIT's overall capital return policy and willingness to undertake other forms of capital returns to close the discount? Yes, good question. So at the moment, we don't have the cash to progress a share buyback strategy. We have done in the past. We were the first in our direct peer group a few years ago to actively implement a share buyback program, and it was accretive. It didn't particularly move the share price, but it did obviously concentrate the NAV and therefore concentrate the dividend. I'd say going forward, we are open-minded to it. But we do -- we obviously need the capital to have that choice, and it's something which we will discuss with the Board as part of moving forward and potentially undertaking some more asset sales. So given time, I think, Jake, we've covered, I think, the questions generally. There were some ones that hopefully, we addressed where they were a little similar. If there are more questions that come in, Jake, we'll very happily provide a response to those later in the day.

Absolutely. Nick, Bradley, thank you very much indeed for being so generous of your time and then 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 and just for you to review and add any additional responses, and we'll publish those on the platform. But Nick, perhaps before really just looking to redirect those on the call to provide you with their feedback, which I know is particularly important to yourself and the company. If I could please just ask you for a few closing comments just to wrap up with, that would be great.

Lovely. Thank you. Well, I guess most importantly, on behalf of Bradley and me, just to say thank you very much for joining us again. We do appreciate your time. I hope what comes across in these presentations is that we're being realistic. We are being really clear about our strategy, and we are doing exactly what we say we're going to do. I think the returns have come through as we hoped. The most recent dividend increase, obviously, is a further step in that direction. We do think that we are well positioned, both in absolute terms but also versus peers. We think today, particularly with the shares selling off alongside the wider REIT market, a yield of almost 7% and a 14% discount to September NAV, given the outlook in terms of an expected recovery, we think looks very good value. And our aim is to continue doing exactly what we say we're going to do. We've got, as Bradley has said, some quite interesting deals that we were running both near-term lettings, but also projects like Chippenham and Cardiff, where we will hopefully be able to provide you with positive updates over the course of the next few months and into 2025. So thank you again.

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 as you will now be automatically redirected for the opportunity to provide your feedback in order 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 will be greatly valued by the company. On behalf of the management team of Schroder Real Estate Investment Trust Limited, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.