Schroder Real Estate Investment Trust Limited (SREIL.XC) Earnings Call Transcript & Summary

Well, good morning, ladies and gentlemen, and welcome to the Schroder Real Estate Investment Trust Interim Results Presentation. My name is James Lowe, and I'm pleased to be joined in our London studio this morning by our 2 fund managers, Nick Montgomery and Bradley Biggins. Just before we get into the presentation, if you'd like to ask us a question as we go through the presentation, please do so in the Q&A tab on your screen. You also have the option now of downloading the presentation to follow along, and you can also download a copy of the interim results for more detail. But with that short introduction, I'll hand you over to Nick.

Fantastic. Thanks, James. And as he says, welcome to the unaudited interim results for the 6 months ending 30th of September. So I'm Nick Montgomery. I'm the Fund Manager alongside Bradley, and we'll give you a brief canter through the results, which we feel are very respectable. So moving, I guess, just to some of the highlights before we move into the detailed results. The key messages hopefully come through today is that we continue to have a high income, a low debt cost, which gives us the potential for further both income and future earnings growth. If you look at the share price late last night, it was around a 6.6% dividend yield. And importantly, our dividends were up 5% on the equivalent 6-month period ending last year. And we completely stand behind that commitment to delivering a progressive dividend policy when sustainable. And again, one of the key things we're going to get across today is visibility on some of the activity that we have going on within the portfolio that will hopefully give us further support to future earnings growth. I guess just to illustrate that point, we have, always had and continue to have both a higher initial rental yield than the benchmark. So that's today at about 5.9% compared with the benchmark at about 5.1%. But arguably more significantly is that reversionary yield, at 8.3%, which compares to the benchmark at 6.2%. I guess much more relevant is to give that pound note number because that's an additional rent where we to crystallize all of that to just over GBP 12 million, which compares with the annualized dividend based on the most recently announced of about GBP 17.5 million a year. So you can see the faster that we can crystallize that reversion, the greater potential we have to deliver that further earnings growth. We also continue to benefit from an earnings perspective, by a sector-leading debt book, an average debt cost of about 3.4%, of which just under 90% is fixed with that very attractive aggregate maturity of 7.9 years, obviously, much longer in relation to our fixed rate debt. And although we have obviously seen an improvement in the share price rating. Yesterday's close, it still reflected a discount to the September NAV of around 12% which we think obviously is an attractive entry point, given as you'll hear me briefly outline later, we do think we are at a cyclical turning point for the U.K. real estate market, albeit slightly delayed. I guess what's also hopefully will come across very clearly today from Bradley is how we are continuing to progress our thematic strategy, which is very much focused on how an active approach to incorporating sustainability characteristics, measures within our property strategy is allowing us to drive higher rents, extract the green premium, mitigate the brand discount and deliver the higher earnings growth. I think it's also worth noting that this strategy continues to resonate well with investors. And we spent a lot of time over the course of the last 12 months, engaging particularly with retail platforms, conferences, asset tours, targeted marketing which has -- if you dig into the shareholder analysis, it has seen a significant pickup, particularly along those retail platforms. Obviously, we don't talk about individual shareholders, but I think it is important to note that we are seeing very encouraging levels of interest, particularly from those 3 main retail platforms. Now a little bit more color before I dive into the actual numbers. This is sort of really highlighting all the activity. Bradley will talk to the very significant number of transactions that we've undertaken. As those of you that know us well know, we have a granular portfolio, over 300 tenants. It is very actively managed. And I'm pleased to say that although the sort of the long and uncertain buildup to the budget meant that in some cases, investors and occupiers have delayed decisions, and more on that later, it is nonetheless very encouraging that we have seen a very significant level of activity during the period, but also importantly, since the period end, and we'll give you a sense of that in terms of how that's led to a reduction in our void rates, both at the period end, but also with pending activity that is ongoing. I guess the second point to note is, and again, more for those that perhaps don't know us so well is that we do have almost 2/3 of our portfolio allocated towards those higher-growth sectors, particularly in the images on the top right here, multi-let regional industrial estates. We are seeing a bit of vacancy and higher supply in the prime Southeast markets where there's more development. I think across the multi-let regional markets, we're seeing much less of that, and that's been reflected in -- certainly in the activity Bradley will outline where through our refurbishment strategies, we're delivering very attractive rental growth. And notwithstanding that, interestingly, Leeds, top right-hand corner there, that delivered a total return over the period of about 5.5% against the benchmark of just under 3%, but that still only reflects a capital value of about GBP 107 a foot. And we know that it costs GBP 110, GBP 120 to build something of an equivalent size to a high standard. So I think we're seeing continued positive momentum across our industrial portfolio. Just under 1/4 of our portfolio now is offices, so that continues to trend down. Values unsurprisingly there were flat on average, but the team are highly focused on delivering both lettings on some of our assets like City Tower, where we do have a little bit of vacancy, but also importantly, delivering on business plans where we have potential upside and Store Street in Bloomsbury, is a great example where we're making progress of our planning gain strategy, where we've had some very positive feedback from Camden, which we hope to provide more detail on in due course. All of that, I'd say, is contributing to that relative outperformance. So over the period, a total return of 3.5% for our portfolio against a benchmark of just under 3%, at 2.8%. And also very positively, you may recall, last year, we won the best 10-year risk-adjusted return for Europe from MSCI, which is a very large peer group. I'm pleased to say that we also won that for 2024. So that 2 years on the trough, which we're delighted by. And that is a long-term performance, obviously driven both by that positive sector allocation, but also the active management through the cycle, which has driven that higher income return. Obviously, increasingly, our focus is on not just financial metrics, but also sustainability metrics. And you can see here all the work that you'll hear about later is driving that performance as well. We have the highest GRESB score in our peer group, so the top of our peer group, but also practically on the ground and whole building greenhouse gas intensity improving by 14% over the most recent recorded year over the prior year. The final point to note is that we are doing everything we can to demonstrate best-in-class governance. That includes, obviously, succession planning for both, our Chair, Alastair, but also for me, following my role change here. We are making good progress on both, and we hope to make an announcement of next steps before the end of this financial year. So that is in process. And obviously, as you know, over the period, we made the manager fee change which has delivered those further alignment, but also the cost savings. Now moving on to the numbers. As I mentioned at the start, in the context of the wider market, investors delaying decisions, lower transactional activity in the market meant that we did see a slowdown in capital values. But nonetheless, we're delighted to report, as I say, a 0.7% upward movement in our underlying portfolio value. That in turn drove a NAV increase per share of 0.5% over the 6-month period, which combined with those dividends paid, resulted in a NAV total return of 3.5%. So slightly down on the previous 6-month period, but nonetheless, a positive momentum continues. Not a huge amount to say on the numbers. We're continuing obviously to invest in our portfolio, and Bradley will give you a further update on where we are with live CapEx projects and how we expect that will drive higher earnings. We have, as previously communicated, continued to sell some of our smaller assets. We completed 3 asset sales over the period at an average premium of 5% to the valuation at the start of the period. And we have subsequently post period end exchanged or completed on a further 2. And again, more on that later from Bradley. And the expectation is that those proceeds will both go to short term, repay our revolving credit facilities, but also see those proceeds redeployed into some of the activity that you'll hear about as we go through. The final point to note before I move to the income statement is linking to the Canada Life debt position, not in our NAV, but worth noting that were you to fair value, the Canada Life loan, in a way that you would earn interest rate derivative, there would be a positive impact to our NAV of over GBP 19 million, just reflecting the difference between obviously, the very low rate we're paying on that at 2.5% and prevailing market rates. So moving to the income statement. So dividends, as I mentioned, paid are up 5% on the previous 12-year (sic) [12-month] period. We had healthy rental income growth within our direct portfolio. We did see some reduction in the joint venture income, which was partly due to expenses relating to planning and activity at Store Street, but also because of essentially a step-up in void rate at City Tower as we go through that re-leasing, refurbishment program there. So that's why you saw the reduction in the JV income. In terms of the expenses, again, reflecting a lot of that activity that we mentioned, we obviously saw letting fees, legal fees, which go through the expenses line that those are good expenses to have, and we will start to see the benefit of that activity obviously, as we go through the rest of the financial year and into -- and thereafter. Finance costs ticked up a bit again because we draw on that revolving credit facility to fund some of the CapEx, but the expectation is that we will continue to manage that very carefully. If we can repay it, we will before redrawing and recycling. That resulted in a very small drop in the EPRA earnings, with the dividends paid, as you can see there, 5% higher, 96% covered by recurring earnings. I think what we're clear to express today and hopefully, what will come through the activity is we do expect, obviously, to be covered for the full financial year as we see the activity post period end complete and we get the full benefit of activity that obviously completed during the period. Briefly, most of you, I think, will be very familiar with this, and I've given you the broad headlines, but you can see here the debt stack. The really interesting and important piece, obviously, is that Canada Life term loan. The average fixed rate there at 2.5 years with a remaining maturity average of just under 11 years. So fantastic long-term debt, which means really our focus can be on growing that top line rental number rather than worrying about having any sort of near-term refinancing. The revolving credit facility, where we to refinance that today, I think we'd probably be at or slightly below the current level, and we will probably in the next 6 to 12 months, start to look at plans for that. Obviously, we have a very long-standing relationship with RBS as a key sort of relationship lender. And the expectation is that we will refinance that, but we will run a process probably over the next 6 to 12 months. You'd have heard us say last time around that we were looking to move the net loan-to-value consolidated down to within our long-term target range of 25% to 35%. That remains our objective. If you calculate it today and assume completion of the pending sale that's exchanged, that complete shortly, our net loan-to-value today is 35.9%. So it's drifting down into that area, which we've given as a target, and we have further sales planned, which should allow us to achieve that as well as also fund the CapEx that we have ongoing. Now I won't spend too long on performance. I've touched on it. But we are very proud of the long-term performance from the portfolio for the reasons I've mentioned. I think the key thing to note here just is on the bottom right-hand side, which is obviously not just performance over that short term, but as recognized by MSCI, that long-term meaningful performance driven by the higher income return, driven by that favorable sector allocation and also driven by that higher income return. I guess it's worth noting we are seeing less convergence -- or less divergence, I should say, between the sectors. And although we still believe, for example, multi-let industrial will probably deliver the best risk-adjusted returns over the next year or 2, actually having the benefit of being diversified and the flexibility to allocate capital across the market, we think, is probably more of an advantage today than it has been for the last 5 years, for the reasons I've just noted. Now market context. I'm glad we didn't have this yesterday because it might have been a slightly different discussion. But obviously, we are digesting, all of us, the feedback following yesterday's budget. Now again, you'll be reading updates as to what it means. I think our initial reaction is that there is a backloading of fiscal tightening, which means that the bond markets may remain a degree of caution. I guess what we would also say is that the measures don't appear to be inflationary. And so we did see a relief rally yesterday. And I think our view is it's positive for the real estate market in a sense that it's likely, inflation will continue in its downward pathway. And in doing so, it will give the Bank of England more flexibility to continue to lower interest rates. And that's what we're showing on the right-hand side here, which are the interest rate probabilities from last night. And you can see there's been a slight shift to the left in terms of market expectations of the direction of those interest rates. And I think from a real estate perspective, as I say, that should be supportive. And I think also the market has obviously been looking to the budget. Investment volumes have been low. And we would expect that having the budget out of the way, if we do see markets respond favorably in terms of that rate reduction, it ought to lead to more activity within the real estate market. But as I say, time will tell. I guess just spending a bit more time digging into the real estate market. I do -- we do believe that we are at a cyclical turning point. As we note in the statements, I think we have seen a pickup clearly off the market lows, which you can see on the top left-hand chart there. Obviously, values falling around 25%, with those now starting to pick up. On the top right-hand side, you can see, this sort of history doesn't repeat, but it echoes in the way that compared with past cycles, rents are behaving very differently, at least in nominal terms where we're seeing continued healthy levels of rental growth, whereas in obviously comparable downturns, the GFC or the late '90s, early 2000s, obviously, rents behave very differently. We all know why that is. If you look at the bottom left, it is this effective cost push inflation, which is driving rents higher as supply is constrained, particularly in those more prime markets, and we see that continuing. And if anything, let's hope we see a resolution of conflicts in Europe, then one might assume actually there will be even more cost push inflation as there is that competition for resources as well as obviously the scarcity of labor. So what that means is, we do see that recovery. I think we see the recovery more through the lens of continued rental growth given that constrain supply, but also in those more prime markets, which you can see on the bottom right-hand side of this slide, low vacancy in most prime parts of the market. We're using offices as the example here, but the same point applies broadly across other sectors. So therefore, when we're looking at return outlook in the context of yesterday's announcement, we see continued scope for rental growth. We see an attractive income return. but we also see the potential perhaps for support from a degree of falling yields in response to the budget. What we're showing here are our latest forecast for the U.K. market. So these are obviously a guide only. But as I say, we think a combination of the attractive initial income return, continued rental growth, particularly in those prime, more structurally supported markets. With some support from yields means that we will see a total return of somewhere between 8% and 10% over the coming sort of 3 to 5 years, which is above that long run average. And we think, with more confidence, we might see more capital being allocated to the sector as we go into 2026. So with that, I will pause, and I will hand over to Bradley to give you an update on the strategy and the portfolio.

Great. Thanks, Nick. Good morning, everybody. I've got some really interesting updates to talk you through with regards to the portfolio. But first, I thought it would be helpful just to recap on our strategy. And as Nick says, sustainability is a core tenet of our strategy. But of course, we consider that alongside all of the real estate fundamentals that Nick just outlined in the market update, and he has described our 64% allocation to multi-let and retail warehouses. But the reason for this sustainability focus is because we believe that looking at real estate through this lens will help us to enhance long-term total returns for our shareholders. And we've got some excellent examples of where this has been successfully applied, and it really is helping with our continued investment outperformance. Now with that, our sort of key and first proof of concept is Stanley Green Trading Estate in Manchester. So we acquired this asset in December 2020. And interestingly, there was a 3-acre development site on the estate. Now the team took the conscious decision to build high-quality space here. And as Nick said, it costs around GBP 110 per square foot. The space was developed to be EPC A+ and BREEAM Excellent. And as a result, the rents we've been able to achieve on those units is 39% higher than equivalent size units on the sort of less sustainable units on the same estate. So it's the same location, but just different sustainability quality. And not only do you get the higher rent, but the independent valuer applies a keener equivalent yield to the valuation of those units. So you're looking at around 5.2% for the new EPC A+ units compared to 6.25% plus for the older units with EPC C or D. So not only are you getting more rent, but you're getting more value per unit of rent. And looking forward, what we've been doing successfully is refurbing the existing estate, so those older units to bring them up to an EPC B to benefit from a washover effect of the higher rents on the new units. And to put that into perspective, we've recently agreed a higher rent with Screwfix who trade extremely well on the estate, at a 54% increase to the previous passing level. And there are other examples of that happening now and that have already happened. So we do expect some further performance to come from this asset. In terms of activity that we've been busy with since the 1st of April, well, there's lots to talk about. And what's really encouraging is, certainly, in the last few weeks, the team have noticed a real acceleration in lease completions, but also engagement from our tenants in terms of getting new deals agreed. Much of the activity I'm about to speak to happened either post period end or became effective post period end. So as Nick says, we do expect an acceleration in the income that we get from this activity looking forward. But overall, since the 1st of April, we've completed 45 lettings, and that represents GBP 4 million of annualized rent. But really encouragingly, those lettings were in line with -- in aggregate, in line with the period-end ERV because as Nick has described, we've got this really attractive reversionary yield of 8.3%. And a question we often get is, "Well, is that achievable?" Whereas you can see from these leases, the evidence is, yes, it is. The other couple of key points I'd flag on the leasing is that our renewals have been 24% ahead of the previous passing levels, and our rent reviews have been 29% ahead of the previous passing levels. And that really speaks to that active approach, the quality of the refurbishments and the fundamentals of the assets, particularly those warehouses. We have been progressing smaller sales. And if you include all 5 sales that either completed during the period, completed post period end or exchanged post period end, that adds up to GBP 10.5 million, and that was 6% ahead of the March book value. So that is encouraging and gives us confidence in our NAV. We continue to control costs. So the ongoing charges was 1.27% for the half year, broadly in line with the previous full financial year. And we do expect a further saving from the new fee structure where not only are we aligning ourselves with shareholders even more strongly, but we do expect at today's share price, approximately 6% saving on the management fee, which is fantastic for shareholders, and I'm sure you'll all feel really sorry for the manager. Now in terms of some activity that really draws out our strategy in action. And the key point across these 4 examples I'm going to briefly describe is the rental growth. So the 4 add up to an additional GBP 1.9 million of rent, which is material in the context of that GBP 28 million cash passing rent at the period end. And with that, I'll start with St. Ann's House, where we've undertaken an extensive refurbishment of the basement, ground floor and top floor. We've really activated the space. We've added wellness studio, end of journey facilities, a podcast studio, breakout areas and produce an institutional sort of style reception. And the question is, "You're spending just over GBP 3 million to achieve that, has it been worth it?" Well, we're quoting a rent on the top floor, which is 74% higher than the previous passing level, so that's GBP 28 per square foot. And our business plan IRR shows a 13% IRR over the next 4 years, where, roughly speaking, we're looking to increase rent to GBP 1.5 million compared to GBP 0.9 million today. On the right-hand side, we show Millshaw Park Industrial Estate, which is an asset we've owned for about 10 years. And over that 10-year period, we've achieved a total return of 12% per annum for the asset, so really strong, particularly compared to the MSCI in industrial, which is around 10% over the same period. The lead industrial market is very tight. So the vacancy is around 3% compared to a national average of 5.5%. So again, well-located regional multi-industrial estate. Now in terms of the example we're drawing out on the slide, we got back a unit in June. So this unit is around 50,000 square feet, which is approximately 10% of the floor space on this site, which is around 28 acres, so a very large industrial estate, just south of Leeds City Center, close to the M62 Motorway. Well, we've got this unit back in June. We're undertaking a refurbishment. It's going to cost us around GBP 1.9 million. And again, the question is, "Well, is that worthwhile spending that money to move the EPC from a C to an A?" Well, again, we think emphatically, yes. That's because we're going to be quoting a rent that's 86% higher than the previous passing level that we were achieving in June. And actually, that space is under offer at that level of GBP 9 per square foot. So really encouraging activity there. Now in terms of profitability of that initiative, we're expecting to make GBP 1 million to GBP 1.5 million of profit from that initiative alone, and that takes account the site value, construction costs, legal fees, tenant incentives, everything. We expect a profit of GBP 1 million to GBP 1.5 million at the end. On Headingley, on the top left-hand corner, so this is the prominent sort of retail scheme in the area. We've got great tenants on the site. So we've got Premier Inn. We've got the Gym Group, Sainsbury's. We've got McDonald's now as well, and we're hoping to bring Tesco's in. Now a couple of years ago, you might remember Wilkinson's went bust. We have been able to successfully take that unit back. We've split it into 2. We've completed the lease of McDonald's at a rent that's 28% higher than what we were receiving from Wilkos on a per square foot basis. And the other half is currently under offer to Tesco's in advanced legal negotiations at a rent that's 93% higher than the previous passing rent from Wilkos. Now as a result of all this activity at Headingley over the years, so bringing in Premier Inn, the Gym, McDonald's, Tesco's, Sainsbury's, we've done a reversionary release with them, keeping them at the scheme for around 15 years, means that the WAULT is some 11 years long, which is really attractive and is actually more than double the average for the portfolio. There's a lot of inflation-linked rent reviews on the site, including with Tesco's. So it kind of shows what we can do with our active approach. The final example I'd like to give is Churchill Way West in Salisbury. This is a retail warehouse scheme. We own 3 units, which are next to a very large Waitrose. There's a very big parking facility, and you can see that in the photo in the top right-hand corner as well. Now what we did here is -- we think this is a great site. We think it's a great scheme. We ran the leases with Smyths Toys and Homesense down to expiry. Because we felt that this place would be really attractive to a convenience retailer, we had Lidl and Aldi compete for that space. And eventually, we achieved a great deal with Lidl, where the rent will be GBP 440,000 per annum. That's 67% higher than what Smyths and Homesense were paying on a per square foot basis. It's also extremely long lease, so 25 years, with a break at year 20 with inflation-linked rent reviews as well. Now again, the question is, of course, we're having to spend some money to bring Lidl to the scheme. The ESG performance of the asset was very important to us as well as Lidl. So we're targeting an A, including PVs, EV chargers, new M&E and initiatives like that. So has it been profitable? Well, when we undertook our analysis at the time of agreeing the deal, the income return on cost was around 12%. And as I've said, the rents are 67% higher than the previous passing. So we think this is an excellent initiative which will add a lot of value to the site and has driven performance over the last year or so already. The final sort of detailed slide we're going to present to you today just tries to bring to life that reversion. So as Nick says, we've got GBP 12.1 million of reversionary rent to achieve, and that is really material in the context of our annualized dividend of GBP 17.5 million. Now as at the period end, our cash passing rent was GBP 28 million, and you can see that on the left-hand side. We've already had an uplift of GBP 2.4 million to that because the University of Law rent free ended on the 16th of October. So that increases our cash passing rent to GBP 30.4 million, and that reflects that net initial yield of 5.9%, which we mentioned earlier. Now how are we going to get the rest of the way to that reversionary rent? Well, there's further fixed uplifts in the 12-month period post 30th of September of GBP 2.7 million per annum. As at the period end, we had exchanged AFLs of GBP 0.8 million. So good examples there would be the Lidl AFL that we referred to on the previous case study, or the McDonald's AFL that I referred to, which is now completed already. There are units and areas of space where the ERV is currently in excess of the passing rent. So as we get rent reviews and lease renewals, we'd expect to move those rents on as we have done since the beginning of the period. And finally, we have some vacant space, which is an excellent opportunity to accelerate our earnings growth. So of that GBP 4.9 million of vacant space as at the 30th of September, GBP 0.5 million is either let or sold since then, GBP 1.2 million is under offer. So a great example of that would be the Tesco's or Unit 22 and Millshaw. They're both under offer. And GBP 1.1 million is under refurb. So that's why we've said that we expect to be fully covered over the full year in terms of our dividend as a result of all this activity that has accelerated in the last few weeks.

Good. Thank you. So just to finish off before we move to questions, I hope that's been a helpful update. I think as we note at the top, the market, we think, is recovering. We are, we feel, at a cyclical turning point for the reasons I've outlined. But hopefully, what's come across is there has been a pause in some activity, particularly obviously, the investment market, but also tenants delaying decisions, but that actually appears to be changing based on the activity we're seeing within the portfolio, and we hope to make a further announcement of activity in due course. I'll just move to the third point. Obviously, our overriding focus here is driving the higher earnings growth through crystallizing that portfolio reversion. We have a large team here who are working very hard across the portfolio, across the assets, both out of London and our team up in Manchester to drive that earnings growth, where we also benefit from that low debt cost, which means that we can really focus on driving that top line rather than worrying about any sort of refinancing over the medium to long term. And finally, hopefully, what's come across today is we're continuing to deliver benefits that are more directly linked to our strategy in terms of how that sustainability performance is enabling us to extract green premium and deliver our sustainability commitments, which we'll provide a full update on when we come to announce the finals next year. So thank you very much for your time, everyone, and very happy now go to questions.

Thanks, Nick. Thanks, Bradley, and thank you, everyone, for sending in your questions. Please do continue to do so as we go through this Q&A part of the presentation. Bradley, maybe just starting with you as we've just seen the chart on reversionary yield. There's a question here that's just come in. Just asking for a bit more detail around the time scale to delivering that potential reversion and also then your thoughts around how that might be reflected in future dividends. Obviously, we're not going to forecast future dividends on this call. But just how does that play through to income for investors down the line?

Yes. Very fair question. With the ERV, the first thing to note is the ERV will grow over time as well. So it's kind of like a carrot in front of you that you can never fully catch. But if we're doing things right, the ERV should grow as well. But what gives us great confidence in terms of the timing of capturing that is these fixed uplifts. So we've already had GBP 2.4 million. There's a further GBP 2.7 million to come before the end of September '26. The AFLs we've got exchange, usually completion is subject to completion of landlord works or achieving planning. And of course, we've got a good track record of doing that. And the vacant space, look, it was 11.4% yesterday. We expect that to come down to below 10% by the year-end. So hopefully, that just gives you a sense of the timing of capturing the fixed uplifts alone of more than GBP 5 million, plus the AFL of GBP 5.8 million. That's material in terms of our passing rent. So lots to come before the end of September '26 is the answer.

And maybe a follow-on question to that, just slightly different topic, though. You gave some really good examples there in terms of lettings that are ongoing, things we've achieved over the period. But there's one question here just asking for a bit more color about lettings that you have mentioned on aggregate that are in line with ERV. How does that look from a sector perspective?

So yes, that's a very detailed question. So overall, the lettings are in aggregate in line with ERV. And there's not much variation around that is the answer. Now in terms of sector, that means they're all going to be broadly in line with ERV. And the reality is, given the portfolio, the majority of these lettings are in the industrial sector anyway. And that's because that's just a function of the fact we have multi-let industrial estates. You got 60 tenants across an estate. So broadly -- to be in aggregate in line with ERV, you can't have much variance. And the majority of the deals here are in the industrial sector in any case.

Yes. I think the only point I'd add is that's right. And there isn't a huge amount of variation, albeit we can perhaps come back with that just to give the exact data points, but we wouldn't expect that too much variation. I guess what probably does differ is between the sectors, obviously, the office sector is more challenging. And so the tenant incentives are greater than you would otherwise be giving to tenants across both the industrial and the retail warehousing parts of the portfolio in order to achieve that ERV. But again, broadly speaking, the valuers are making those assumptions within the valuations of those office assets as well. Obviously, what Bradley has articulated is there's a meaningful part of our office portfolio where we're confident enough about the fundamentals to invest in those assets. And so we would also expect to see a pickup in those ERVs in response to those improvements.

Yes. And that's a nice segue into one of the other questions we've had specifically on offices, you showed a chart there where we were showing real estate values by sector and industrial retail coming back, office still in decline. You just mentioned that our office portfolio is slightly different to that. Can you just give a bit more color about what it looks like on the ground for us in our office portfolio versus what we're seeing at the aggregate level?

Yes. Great question. So I guess the first thing to say is our office portfolio continues to outperform offices, so all offices, according to MSCI. And that's partly a function of location because the majority of the assets are located in towns or cities where there is sufficient demand. Obviously, our 2 biggest office exposures, one being Store Street in Bloomsbury, and I touched on it briefly, a really, really interesting location, freehold site surrounded by Bedford Estates. A number of people on the call will be reading about what the likes of Great Portland Estates, Derwent and others are doing around that area, north of Tottenham Court Road running up to Euston Road. So that's fully leased. We obviously extended the lease to 2029. And part of the reason we did that was to allow us more -- well, firstly, because we felt the right thing to do was to continue taking the income, but I think also because it gave us more time to work up the ultimate ambition, which is to obtain planning consent for a much bigger scheme with Camden. Again, consistent with our strategy, preserving a lot of what's there already, but increasing the density and the quality. And I noted in the introduction that we're making good progress with that strategy with Camden. And it may be that, that's an asset that we do sell as we go to next year because it's relatively low yielding, but that -- that's on the basis we have the value. So from our offices include really interesting positions like Store Street, our biggest office asset. Bradley has articulated what we're doing at St. Ann's Square in Manchester, where we see a positive upside. I guess as we move into the vacancy risk, obviously, City Tower is an absolutely key focus for us. It is a mixed-use asset. We've got some interesting activity going on with the hotel. The retail is quite well leased, but we do have some office vacancy, which I mentioned earlier on, which the team are working hard to manage. Again, it's a great location in a great city. We do though need to invest as we are doing in order to get the maximum rent and get that space leased up. I think outside of that, again, we've invested already in a lot of the assets. We've seen great progress at our asset in Edinburgh, and we're in discussions with the BBC there about extending their commitment to the building. And then we're also -- where we've got much smaller assets, where we don't see the potential to add the value, we've been selling. So whether it was a small asset in Bedford, we sold last year, as Bradley has noted here. We sold one of our smaller vacant assets in Marlow. So I think overall, we feel comfortable about our exposure versus the market, but it's really important that we maintain the focus on the asset management to get the space leased up and then obviously deliver the value on projects where we see upside, real upside like Store Street.

And then maybe just there's a question on the smaller asset sales. Obviously, that's a program you've been working through for a while now. What is the -- how far through that program are you? What can we expect to see going forward?

Yes. We've made excellent progress on that program. We probably sold around 10 assets over the last 4 years or so. So we've got 35 assets in the portfolio now. I think we could easily sell another 10 in the next couple of years and reinvest into our sort of strategy of focus on the larger assets where we can really move the needle, the sort of Stanley Green, the Millshaw, the Stacey Bushes, where our strategy has been working really well. And I think it's becoming increasingly operational. We've got the teams and expertise to deliver that. So I think that's a really great opportunity actually for us with the fund looking forward.

So moving from a question on sales to now investment and CapEx. You've outlined a lot of CapEx that we're doing from a sustainability point of view with some really interesting returns that you're generating. One of the questions that's come through off the back of that, those points is, particularly with Screwfix, you mentioned quite a large number of 54% in terms of rental increase there. Clearly, they're getting better space. But what are the conversations you're having with tenants that are driving those -- that scale of rental increases? Is it their corporate strategy? What is it that's driving that?

I think fundamentally, our assets, Screwfix are on Stanley Green, they're well-located assets where tenants want to be. So that's a trade counter scheme, and Screwfix sort of sells to the public there. The reason they're happy to pay the higher rent is because they are trading very well and obviously very profitable. And there's evidence around them that, that rent is the market level because we're achieving it on other units. And I think a lot of these older multi-industrial schemes, the rents are very low. And so when you do make those improvements to the sustainability profile or general aesthetics, you can achieve those material uplifts, and the tenants are happy to pay for them.

Makes sense. Question here just around dividend cover. Clearly, dividend cover has fallen under 100%. There's a clear reason as to why we're going to get back up to 100%. That was very clear in the presentation. But where do you want dividend cover to be on the medium term? It's obviously been around 100%. But is there a -- is there a medium-term target you're looking to get to? Again, we're not going to forecast. Didn't cover on this. So just a direction of trend.

Yes. I mean I've described the -- yes, I'm sorry to interrupt, the principles. Obviously, the decision to pay the dividend is a decision for the Board based on our recommendation. The approach that the Board and we take is we do detailed modeling quarterly, prior to the announcement, and we will only pay what we feel is sustainable over the medium to long term. And so that's why we haven't included the chart, but you can see the progression in the dividend has continued to go up from the COVID lows. I think it's in the appendix. Yes. And I think we're something like, what are we, 30% up, I think, on the pre-refinancing dividend back in 2019, unbelievably. So I think that's the principle we're applying. So it's less about giving ourselves -- saying we're going to get it to 110%. I think as long as we've got visibility that it is sustainable and we have future growth, we will pay up to the level where we're covered there or thereabouts. But we've always said it might sometimes be a bit bumpy, but that's the broad principle. And so as you rightly say, we can't forecast, but the key message today is obviously, we've got a very significant reversion. We have a very low debt cost where we don't have a concern about the refinancing risk anytime soon, which means that if we execute those business plans and barring any significant shock, then we're confident we will be covered for the financial year, and we should see growth thereafter.

Yes, that's really clear. Thank you. And just moving on to the LTV now. Similar question. LTV is moving towards the target range. Again, where would you like to see that at this point in the cycle?

Yes, sure. So we would like it to be slightly under 35%, which is the top end of the range. But I think Nick articulated clearly that we do feel we're at a turning point for the real estate market. So it would be a good time to have that higher level of leverage.

I think that's right. The ranges have a reason. We've been clear. We want to get down within the range, and that's the plan.

So moving slightly away from the investment sales and the statistics around the portfolio. There's a couple of questions with a common theme here around scale of the company, any thoughts and discussions that are happening between the manager and the Board around scaling, appealing more to wealth managers. It's actually a question here as to whether Schroder's wealth manager uses SRE in their portfolio. I mean they're on the top 5 shareholders. So we can say, yes, they do, whoever has asked this question. But can you just give us some thoughts about the scale of the company, some of the actions we're trying to take to develop it?

Yes. Look, I guess on the scale point, I think what hopefully people can see is that at our current size, we can deliver positive outcomes for shareholders. So whether it's the underlying returns, if you compare our underlying portfolio performance and indeed our share price performance to even some of our biggest peers, we compare very favorably, right? And that's because I think what Schroder can offer in terms of the top down, the proprietary research, but also really importantly, a very large team of people, both asset managers, sustainability specialists who can very efficiently deliver the value across a portfolio of this type, as I said earlier, from both London and Manchester. So in that sense, we're not negatively impacted through size as what we can deliver. And I guess the last point to note on that is, the cost ratio that we've given today, we think it's very competitive, right? Having said all that, we also understand that there are certain shareholders who would like to be bigger. And I think -- and therefore -- and this is more of a board point. Clearly, we have to look at those options. I think from a manager perspective, what we need to do is just deliver business as usual as best as we can, and look across our landscape and see that actually where companies have higher retail shareholdings, in some cases, those ratings are better. And therefore, if we can continue to improve our rating, then we may have the opportunity to pursue organic growth by issuing equity at some point down the line. And we've got more than enough capability and capacity in the team to do that. We've done it before. We can do it again. And so that's why alongside obviously spending a lot of time engaging with our existing investor base, we're spending a lot of time also engaging through retail platforms, as I mentioned earlier, and you're obviously very involved in that. Because we do see these products -- investment companies offering higher yields, benefiting from increased retail demand. So I guess that's probably the only way I can answer that question. At the moment, we've obviously looked at growth opportunities, nothing has progressed. We remain open to that if it's the right thing for shareholders. But most importantly, that's a Board decision that we're here to help the Board with as and when.

Yes. Understood and very clear. And I would just say to our listeners, there are a couple of questions just noting some new shareholders on the register, which obviously we are quite aware of. And so I just think we're probably not going to comment on specifics of individual shareholders. So, yes, Nick is clarifying, that's the case. So there we go. So we're not ignoring your questions. We just weren't able to comment on it at this point. Just maybe a final question. I appreciate we're coming up to 50 minutes here. And I really like this possibly as a final question because it's quite a future-looking question and who can have a webinar these days without talking about AI? So it is an AI-specific question. And it's a very reasonable question just asking whether what's the impact of AI on real estate investments. And specifically, the question is asking about AI replacement of human jobs and whether employees -- there won't be a requirement for as much space, I guess, it particularly might impact the office market. We're obviously seeing robots in larger-scale industrial units now. So crystal ball, what do you think?

I'm probably not going to be on the couch next June, but hopefully not because of AI, maybe somebody else. Yes. Look, I mean, there's been so much written on this and we're people who invest in physical assets. But look, I think it's clearly going to have a very significant impact on business, the way we live our lives. But interestingly, adoption rates, currently, there was a report this week, are behind certainly what a lot of those share prices are implying. I think even if you read content written by the makers of these technologies, they see it as something which should be enabling. It augments rather than replaces and we believe will lead to locations like London, like Manchester from an office perspective, if anything, having more demand for human and financial capital as clusters, knowledge-based clusters, same for the Oxford-Cambridge corridor to support growth. And clearly, as announced yesterday, clearly, that is a huge area of focus alongside life science more generally for the U.K. in terms of our productivity strategy. So around the edges, I can definitely see it will lead to further risk for more secondary offices and more secondary locations, as an example, taking a long-term view, which we're already seeing sort of post pandemic. And clearly, it will lead to increased investment in data centers. And in the U.K., we're already seeing that. And there might be really interesting adjacencies, powered land and other related uses, which a company of our size could capitalize on, right? Because obviously, a lot of these, particularly the hyperscaler, facilities are so huge. They are, in many cases, reserved for any of the biggest global investors. So I think if anything, it ought to be slightly positive in terms of the medium-term impact at least on our company in terms of where our assets are located and the types of assets that we have. I think as a business, and you might want to add to this, we see further opportunities to extract efficiencies. And certainly, our occupiers are ever demanding of data. And therefore, if we are able to provide that by having smarter systems in our buildings and the way that we're communicating with our occupiers, it ought to allow us to continue offering best-in-class service to our occupiers. The sector, as Bradley said, is becoming increasingly operational. I think also from our own perspective here from an investment point of view, again, we're working with, as you know, with our data scientists on the AI side to look increasingly at how that can improve the investment decision-making. So as a physical asset class, the way that we can now use geospatial data to understand locations so much better than we could have done with a month's work even 12 months ago. So I think there are lots of areas where I think it could actually benefit us both in terms of the real estate strategy, but also the way that we're running our assets and engaging with our stakeholders.

Thanks, Nick. Very interesting. Unconsciously, we've now run over 50 minutes, so we'll probably leave it there. Thank you, everyone, very much for joining us this morning for this presentation. Thank you very much for sending in your questions. Please do send us feedback. You should see that on your screen now, if not, in a couple of seconds time. We do read it. So massively appreciate if you fill that form in. That's all the time we have this morning. Thank you to Nick and Bradley for the presentation. Thank you all for watching and speak to you all again very soon. Goodbye.