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

Good afternoon, and welcome to the Schroder Real Estate Investment Trust Limited Investor Presentation. [Operator Instructions]. Before we begin, I'd like to make the following prompt. I'd now like to hand you over to Global Head of Real Estate, Nick Montgomery.

Fantastic. Alejandre, thank you very much, and good afternoon, everybody, and we are delighted to be here, and thank you. We realize this is the last Friday before Christmas, so we have some very dedicated people on the line, which we appreciate. So, it's -- for those of you who haven't seen it before, I'm Nick Montgomery, so I'm the Global Head of Real Estate Schroder and I'm the manager of Schroder Real Estate Investment Trust alongside my colleague Bradley. You will hear from him very shortly. I think various of us on the call of recovering from this repeated flu. So apologies if we bit [crockery] as we go through. We are on end. So just moving to the first slide. These are based on the results, if you can go to, sorry move the slide along. There you go. So these are the results essentially to the 30th of September. What we'll try to do as we go through is give you an update on where we see things that have changed in the market. Obviously, we were reporting very shortly after the budget. And of course, we have the interest rate cut this week. So we'll give some context as we go through. I guess for those who don't know us so well, we're drawing out here, if you like, the 5 key messages, 5 key -- the points we think you should be considering if you are looking to invest into -- for a real estate investment trust. Fundamentally, we have a good quality portfolio of direct real estate across the U.K. that generates a high yield, which combined with asset management and a really low debt cost has allowed us to deliver a progressive dividend, but also, as you'll hear as we go through the presentation, we believe the potential for accelerated growth in earnings and in time, the level of dividend. Because of the rating of real estate generally, shares are trading in a discount still. And so actually, the discount when you're looking at the share price yield of the dividend against share price, that's a dividend yield of around 6.7% today. And actually, very positively, if you look at the most recent 6-month period, we reported at the end of September to the prior 6 months to September '24, we saw a 5% increase in dividends over that period. One of the reasons I made the comment around future dividend growth is because we have a very high, what we call, a reversionary potential in the portfolio. So that's where the market rents are significantly above the current rents that we're receiving. Our reversionary yield on that basis is about 8.3%, which compares with the benchmark at the end of September at 6.2%. And Bradley will give you a feel for as we go through the deck is where we're starting to crystallize that reversion since the period end results. Again, just to adding context because the real numbers are helpful. If you look at the difference between the rents we were receiving at the end of September and the value was review of those reversionary rents, that equates to about GBP 12 million a year, would you set in the context of a dividend based on the prevailing rate at about GBP 17.5 million a year. So you never crystallize all of that, but it does illustrate that we've got this potential uplift in the portfolio still to come. Now alongside that top line growth, we're very fortunate to have a very low cost of debt. And importantly, that low cost is locked in for a long period of time. So our average debt cost is about 3.5%, of which 90% is fixed rate or capped with around 8 years expired, and more on that later. And as I noted, the ahead of this, our shares today are still trading at around 12% to 13% discount to NAV. Now the other consistency you'll hear as we go through the deck is this continued focus on progress in how we're progressing our sustainability strategy where we're incorporating high sustainability standards within our refurbishment projects, which is allowing us to drive higher rents and crystallize that green premium where tenants are prepared to pay more rent for more sustainable accommodation. And increasingly, we're seeing investors being prepared to pay a premium for where those buildings have some form of green certification, and that is helping us drive that earnings growth. That strategy also is resonating with new investors. We have made a huge effort this year, particularly Bradley out presenting to private investors through channels like [indiscernible] Interactive Investor, [HFL Conference]. And we've seen continued buy-side support from retail investors within just those 3 main platforms now representing about 22% of our shareholder register. Now, just a bit -- a little bit more detail on the portfolio. I won't go to all of this detail, but I just -- starting at the top left-hand side there, lots of activity at the underlying portfolio level during the period, but importantly, since the period end, which we'll talk to. In fact we've even today, lots of e-mails flying around with lawyers trying to get the leasing deals over the line before the middle of next week. Bradley will talk to the fact that we're continuing to crystallize rent reviews, lease renewals above the prevailing rents, but also proving the rental values that I mentioned earlier on the 8.4% reversionary yield. Again, for those that know us, you've heard us say before, although we think that returns across the sort of traditional real estate sectors in the U.K. will be less polarized than we've seen historically. We, nonetheless, still believe that multi-let industrial particularly in regions, retail warehousing, those are the sectors where we still see the most attractive risk return profile, and that's where we are overweight. On the right-hand side of the slide, we're showing you 6 of our largest assets that represented almost half of our portfolio value. As I noted, half of our portfolio by value is in multi-let low cycle of our industrial estates on the edge of areas. The one you can see on the top left-hand side here is an estate we own Milton Keynes, where we've had huge success most recently with a new development and a letting to a bigger EV manufacturer. On the top right-hand side there, you can see our estate in Leeds, one of the biggest contiguous ownerships on the Leeds Ring Road where interestingly, the valuation, despite having very strong performance for that asset, still represents about GBP 110 a foot, if you take the value and divide in the floor area when we know from what we're doing elsewhere in the portfolio, it costs you at least start to build new. So we see significant value still in those multi-let assets. In the middle, you can see there our office exposure, our 2 biggest office assets. On the left-hand side, we have a university building in Bloomsbury, it's a very near Tottenham Court Road in that sort of knowledge quarter that goes up from Tottenham Court Road through UCL up towards Kings Cross in Houston. We have a lease until 2029, and we're making great progress in our planning game strategy where ultimately, we think we might want to get planning consent prove and increased entity and sell. And we also then have a large asset in Manchester, which is another co-ownership asset where it's mixed-use office, hotel, we're in the process of doing a new lease and retail in one of the busiest spots in whole of Manchester City Center. And then finally, you see at the bottom there, we've got warehouse exposure. Alongside that, we also have convenient retail exposure. And again, Bradley will talk to some of the really positive leasing activity we've seen particularly up value end of the retail market, notably where you've got food anchors, the likes of Tesco, Lidl -- we are in the process of doing deals with. So portfolio makeup active approach that's allowed to continue outperforming our peers. We were delighted some of you will recall, last year, so for calendar '23, we won -- before I should say we won the best risk-adjusted 10-year return for the whole MSCI peer group. Delighted to say we achieved the same outcome for 2024, all to do, as I say, with the asset allocation, the asset management, that higher income return. And alongside those financial returns, we've continued to deliver that sustainability performance I mentioned driving those green premiums, but also reducing the greenhouse gas intensity by 14% here in 2024, which is the most recent data point we have versus the prior year. A final point to note is we continue to pride ourselves on best-in-class governance. We've got a succession planning for our outgoing non-exec Chairman, but also for me because I've stepped up into a new role. And so although I'll remain involved, overseeing the portfolio in Strategy, Chairing our Investment Committee. We will be bringing somebody in alongside Bradley, who's done a great job working with me over the last few years driving the strategy forward. And also, some of you remember, we recently implemented a further fee change to increase the alignment with shareholders even more by having half a fee linked to the share price returns with the balance linked to the net asset value return. Now the next slide, some of this is a little historic, but this gives you the movement in the NAV over that 6-month period to the end of September, that was 0.5% increase, which combined with the dividends we paid with a net asset value total return of 3.5%. We continuing to invest in the portfolio, as I mentioned, Bradley will give you some examples of how we're doing that. We're also continuing to sell smaller assets. And we've, again, either during or post we've sold 6 assets at premiums to prevailing valuation. And actually, we have a few more small sales planned and the expectation is we use those proceeds, repay debt, but also the recycle those proceeds into some of those high-returning projects we've got in the portfolio. And the final point to note, we have the net asset value of GBP 302 million, but excluded from a net asset value is the fair value of our debt and that's because it's a fixed rate loan rather than having, if you like, a mark-to-market value as you would a derivative. And so if you were to fair value, that very cheap long-dated loan that we have, that would add about GBP 19 million to that NAV, which, as I said at the start -- the share price already reflects a 12% discount to that number. So moving forward to the P&L. The most important number there, obviously, is that we were 5% up in terms of dividends paid over the previous 6-month period to September 2024. You can see there in terms of rent and related income, 4% up over the prevailing period. I guess the only point I really hear is because of some of the leasing activity we've been doing because we've been refurbishing assets, we have some vacancy and therefore, vacancy costs associated, whether it's service charges, empty rates. And as we've been leasing the space up, we've also incurred one-off leasing fees, legal fees. So that diluted our earnings slightly, which meant that actually, although the dividends were up 5% over that previous half year period. Our earnings were pretty much flat. But as you'll hear, we've got lots of activity ongoing, which we believe will allow us to continue to the earnings growth I mentioned earlier on. Now I mentioned the balance sheet. We can show you here the breakdown of the balance sheet. So I mentioned that Canada Life loan where we have a fair value of GBP 19 million, that's associated with the blue bar you can see the [GBP 129.6 million] that's the bedrock, if you like, of our balance sheet, and that's fixed at 2.5% for further average of 11 years. So that's fixed 2.5% for a further 11 years. So that's fantastic because it gives us great visibility of future interest payments. Sitting on top of that, if you like, we have our revolving credit facility, which is much more tactical. That facility, we can repay, redraw at any time. And therefore, as we sell assets, we will repay. And as I said earlier, we'll redraw to fund capital expenditure. That facility runs until 2027. And we will, over the course for the next month or so, start to look at refinancing that. Again, there will be no issue doing that, it's a very comfortable LTV. And obviously, with interest rates ticking down, although our view is that interest rates perhaps won't fall as quickly to a level that the markets are expecting. Clearly, the environment for refinancing, we think is likely to improve. Final point to note on the slide is, at the period end, the loan-to-value was [36%] further assets and the impact of those sold assets and therefore, holding cash means that our net loan-to-value is now at 35.9%. So moving on, I just had a message to the network is a bit unstable. So I hope everybody can hear me okay. The next slide just sets out the performance of our underlying portfolio, which I touched on earlier on, I won't bore you all these numbers. The main thing to note is on the bottom right-hand side there, which is if you look at the performance of our portfolio compared with our peers, this includes the whole peer group, the bigger REITs, the small investment companies, we have consistent outperformance over every time period, which again resulted in receiving that MSCI award. Now market context. So interestingly, when we made the presentation back in November with our interims, we showed what the interest rate probabilities were at that point in time. And obviously, we've had the interest rate cut subsequently, as it happens, the market implied probabilities haven't changed dramatically when we did this originally back in November, the expectation was that by December '26, about 32% implied by option prices, probability of the rate being at 3.5%. It's now slightly higher, but not dramatically. SO we've obviously all seen the inflation print. One of the reasons why we're a little more cautious, I think, than the market is that core inflation number remains much stickier, obviously driven by services. And so our assumption is that we won't get a huge amount of support from falling yields, but it will be positive because we don't -- we're obviously not expecting rates to go the other way. So interest rates falling, we believe, is supportive to the real estate sector. But for us, we continue to believe actually that the bigger driver of return will be rental growth. As I say, we have that inflation still in the system. We have, whether it's rebuilding, hopefully, at some point of Ukraine, across Europe, the shortage of skilled labor, material shortages, construction costs and, therefore, cost push inflation we see as persisting. And therefore, if you own good quality real estate that you can reposition, then you should be able to enjoy continued healthy levels of rental growth. And that's really what is the key driver of where we see the cyclical recovery in real estate markets. So just -- I guess just to give you a little bit more color on that, the top left-hand chart here shows the decline in capital values, and this is for the whole market rather than our portfolio. So we have had, give or take, a 20% decline now from peak in the mid '22 period, obviously, before the mini budget. To set that in context that compares with the GFC period of about minus 40%. But what's different this time around, if you move to the top right-hand chart, is real estate is doing what it should do in terms of providing the inflation protection on the rents. And the top line, you can see there growing to about 120 from an index of when the market turned in mid-'22 shows rents are up 20%, whereas in most equivalent periods of time post the market downturn of the GFC, but also the period in the late '90s, early 2000s, no more rent in those periods actually fell. And so the rising rents in this time is all to do with a pass-through inflation, the restricted supply of new development and that being principally because of the rising build costs, meaning new developments in many cases, just isn't viable. And final point, therefore, linked to that in the bottom right-hand corner is even in the office sector, which, of course, has been very out of favor for the last 5 years or so, there is a chronic shortage of high-quality space. So if you own new space or if you own good quality grade B space that you can reposition, then we still see the potential for attractive rents and a recovery values. So just to conclude my section before I hand over to Bradley, for those reasons, we do see ourselves as a turning point for real estate, sentiment does remain still relatively fragile, I will say. But when you step back and look at the sector is delivering an initial return of around 5.5% in our case, near to 6%, when you look at the potential for that to be rental growth, even where it attract just inflation of 2% to 3%, even before any sort of valuation impact from falling yields, the sector can comfortably deliver return of 7% to 8%, which is above it's longer than average. So as a consequence, we're seeing across our wider platform. We are expecting more capital flows into the sector. We are beginning to see more international interest, particularly in London, which is where the investors typically starts, whether it's Australian, some private European money. And therefore, we do expect that to lead to more positive sentiment as we move into 2026. So with that, I will pass over to Bardley.

Good afternoon, everybody. Good to be speaking to you today, and thanks for joining. So first of all, I'll start off with our strategy. Just to remind you of what we're working to do every day. Sustainability is a core tenet of our strategy. But to be absolutely clear, we consider that alongside all the standard real estate fundamentals. But we think that also viewing our investment activity for the lens of sustainability will enable us to make enhanced long-term total returns for our shareholders. So it's really important that that's the key driver for us. Now of course, it's fantastic that we're reducing our greenhouse gas emissions. And in fact, in 2024 we've reduced our greenhouse gas intensity by 14% versus 2023, as a result of our activity across the portfolio. But as Nick has outlined, our investment performance has been very strong, including within that 10-year MSCI award. Now I think the best way to describe our strategy is for a proof of concept. And on the right-hand side of the slide, you can see Stanley Green Trading Estate, which we acquired in December 2020. It came with 14 existing units and 3-acre development site. So the team says about developing 80,000 square feet of new accommodation on that 3-acre site. And we've got 11 new units there now, of which all [indiscernible]. Now the team took the decision to spend around 20% extra on the CapEx to develop really best-in-class accommodation from an ESG perspective. So for example, is the units are EPC A+ and BREEAM Excellent which compares to C to E on the existing estate. Now what that has meant is we've been able to deliver rents that are 39% higher than equivalent size space on the existing estate. Now some of that 39% premium will be because the units are new and shiny. But at the same time, we -- our view is a large element of that 39% uptick in rent is due to green premium. Now not only we get in higher rents, but we're attracting better tenants. So for example, we've got Siemens PLC on the new estate. And part of the rationale for them taking that space was that excellent -- the excellent credentials from an ESG perspective. Tenants, they're happy to pay more rent for this high-quality space to reduce utility bills, to attract and retain their staff and because they have their own net zero carbon ambitions that they have to meet. And often, the real estate footprint is an important part of that for any operating company. Furthermore, our valuer, who is independent from us, but they apply a keener yield to the units. So to the EPC 'A' pass units, for example, their client equivalent yield of 5.25% of the units versus 6.25% plus for the older units. So what that means in plain English is you get more value per unit of rent, to get higher rent and more value per unit of that rent. Now we're not quite finished at Stanley Green. So what we're doing at the moment is undertaking rolling and refurbishments of the older accommodation. And what has enabled us to do is push rents on. And that is partly because of the benefit, the washover effect from the new units. So we're obviously setting evidence of really high rents in the estate. So it gives us a good -- good leverage to push rents on the older units, I want to refurb them. So for example, we've executed rent reviews and regears. We've established tenants on the estates such as Screwfix where the rents gone up more than 50%. Now moving on to the next slide. What we're showing here is some of the activity that we've been up to since the 1st of April, so the beginning of the half year period, and we have been very, very busy. So we've done 45 new lettings or rent reviews. And that, in aggregate, represented GBP 4 million of rent. And what's really interesting about that is that GBP 4 million in aggregate is in line with the reversionary rent or the ERV as at the 30th of September. And the reason why that's really important is because we talked about this really attractive reversionary yield we have of 8.3%. And the question we're even asked is, well, is that achievable? Well, not only is it achievable in our view, but we're achieving it right now. In addition, we've had some really attractive uplifts on the rent reviews and renewals. And again, that gives us confidence that we have great space and that we can continue to put rent on in the future. In terms of sales, we have sold or exchanged on 5 assets since the beginning of the period. In fact, they will complete it now. So some have completed since period end. And again, what's really sort of interesting about those are that they are 6% ahead of that opening book value. So that gives us confidence in our valuations and in our net asset value as of the 30th of September. Finally, in terms of costs, we think we've got a really competitive cost ratio of 1.27% there, and that was fairly flat on the previous full year. And as Nick mentioned, we have changed our management fee structure. We think this will enhance our alignment with shareholders by having 50% based on the market capitalization, which is more in line with what our shareholders experience in their own holdings. But in addition, and I think the key point here is that, that only becomes effective from the 1st of October, so the benefit of that cost saving is not in the P&L that you've just seen earlier in the deck. Now given we're trading around 12%, 13% discount to NAV, that means that there will be a sort of 6% saving for shareholders looking forward, subject to where that discount remains. Moving on to the next slide. We've got some really interesting examples of our active asset management approach, and we are very, very active, and we can't emphasize that enough. In addition, these initiatives have a really important ESG element to them, and you'll see that as I go through. So if I take the top left hand corner to start St. Ann's House in Manchester. This is a mixed-use office and retail building in Manchester City Center. It's prominently located on to Ann's Square, which is near to the prime retail core. We're currently undertaken and very close to completing an extensive refurbishment of this building. So we have opened up the basement space, and we've installed wellness studios, yoga studios, podcast studio, meeting rooms and breakout areas as well as end of journey facilities so people can cycle in, use the chairs, et cetera. We've connected that to the ground floor where we've installed an institutional standard reception. So it's a really attractive entry into the building. And we have also refurbished the common areas and the fifth-floor office. Now in terms of what does that mean, you're spending GBP 3 million to do that. Well, if we take the top floor, we are quoting a rent that's 74% higher than the previous passing level. And the reason we're able to do that is because of the enhanced amenity in the building. Now -- okay, you might say great. You're going to charge a higher rent. Is that worthwhile in terms of GBP 3 million CapEx? With our 5-year business plan, which you cut a year ago showed an IRR of 13% per annum, which we think is attractive. Looking at the top right corner, we show Millshaw Park Industrial Estate in Leeds. This was referred to earlier in the presentation. Now we acquired this asset around 10 years ago, and it's been a very strong performer over that time period, really benefiting from the constrained supply of industrial both in Leeds, and multi-industrial in general. So to put that into context, we've achieved a 12% per annum total return over those 10 years, and that compares very favorably to around 10% from the MSCI all industrial. Now this estate is very large. It's got 460,000 square feet of lettable area. And in June, we got back around 50,000 square feet in one of the largest units, and we decided to undertake a brown to green refurb or an ESG-focused refurb, we're spending GBP 1.9 million. We're moving the EPC from a C up to an A. And we have that space under offer at GBP 9 per square foot, which is very attractive and is in fact, 86% higher than the rent we were receiving in June. So a very profitable transaction for us, and that will result in a profit of GBP 1.1 million to around GBP 1.5 million when you take into account all costs of the cost of the site, the cost of construction, professional fees, tenant incentives, et cetera. So a really attractive initiative there. On the next slide, we've got 2 more examples I'd like to briefly share with you. So on the left-hand side, we show heading [ decentral ] which is one of our largest retail exposures. This is a mixed-use scheme. It's just over 100,000 square feet. It's prominently located in the town center. And for those of you that are familiar with the area, it's where the infamous Otley Run starts. We've got some excellent tenants and operators on the site. So we've got Premier Inn at one end on a very long-term lease. We've got the [ team ] the other end, again, on a very long-term lease. And across the parade, we've got Sainsbury's, now McDonald's and hopefully, Tesco soon. And that's what I'd like to talk to you briefly about now. So you might remember, Wilkinson's went bust a couple of years ago, where they had a large unit on our -- on site here. We've got the space back, we split it in half. We've now let and completed the letting to McDonald's. So they are open and trading and the store looks fantastic. And the McDonald's rent is 28% higher than the Wilkin's rent on a per square foot basis. It's also a really attractive lease, so it's 15 years, minimum term, which is significantly ahead of our 5-year or 5.3 year walk to early strike. And of course, a very strong covenant, so we can rely on them to pay the rent. And as I mentioned, we split that with [ Wilco ] unit in half, with McDonald's taking half. And then Tesco is going to take the other half or we have it under offer at the moment, we're very close to exchanging a lease. And again, their rent is 93% higher than the previous past level. And importantly, both tenants are installing new M&A, which will improve the performance of the units from an ESG perspective. In addition, that Tesco's lease is also a 15-year minimum term. So again, pushing that [indiscernible] and adding value to the scheme. The final example I'd like to briefly touch on today is on the right-hand side, and that's Churchill Way West Retail Park, which is in Salisbury. Just to give you some context, we own 3 units on the scheme, and that's next to a very large Waitrose, you can hopefully just about make up the size of the scheme in the photos. There's ample parking provision? And what was really sort of driving this initiative was, historically, we weren't allowed to sell food, but we are able to persuade Waitrose to allow us to sell food as a result of some commentary from the [competition] authorities. So we're able to unlock that option to sell food. And that then we're able to run down the leases of Smyths Toys and Homesense who were occupying units 1 and 2. So we run those leases down. And in the background, we were negotiating a deal with both Lidl and Aldi who are both very keen to come to the scheme that's very well located. So we're able to push really attractive terms from Lidl. And what's also important to Lidl and us is the ESG angle. So we're moving the EPC up to an A, Lidl themselves are installing PV on the roof and we're investing GBP 1.5 million into the asset to reconfigure it as well as bring that ESG standard up, which is great for us and Lidl. Now the rent that Lidl agreed is 67% higher than the per square foot rent we were receiving from the previous tenants. And again, it's a very long-term lease. So it's a 25-year lease with a break at year 20 and it has inflation-linked rent reviews. So -- and of course, Lidl fantastic tenant. We think to be fairly confident they will continue to pay the rent. Now the landlord works are close to completion as the other tenant works and we expect the lease to complete in February next year. And the cash rent will begin being paid from the 1st of July. So Lidl -- so we had units 1 and 2, Lidl we're taking roughly 1.5 of those units. So all of part of 2. And we now have the unit 2 under offer. So on the slide, I think we've talked about GBP 135,000 of annual rent, we got that under offer at GBP 155,000. And again, it's on a long lease with inflation-linked rent reviews. So this when all is said and done will be a fantastic scheme, and we would have generated a lot of value since the start of this initiative. Now sometimes hearing about our reversion and our rents, it can be quite abstract. And so we devised this slide to kind of show what does this mean? So if you take it from left to right, our annual cash passing rent as of the 30th of September was GBP 28 million. Now on the 16th of October, our largest tenant, their rent-free period ended, so we are now receiving an additional GBP 2.4 million per annum of cash rent, and that brings us to GBP 30.4 million of annualized rent. And that reflects a net initial yield of 5.9% and it's around that level where we've been for a period of time now for a number of years. Now how we're going to move our rents from that GBP 30 million up to that GBP 40 million reversion. Well, we're probably not ever going to achieve that full reversion. But given it's an additional GBP 10 million, clear, we only need to achieve some of it to have a material impact on our annualized dividend, which is currently [GBP 7.5 million]. Now between now and the end of September next year, we've got fixed uplifts in our leases of GBP 2.7 million per annum. So they are contractual. They will happen. That cash rent will start to flow. As at the period end, we'd exchange agreement for leases of GBP 800,000. Now an agreement for lease is where we basically say to a tenant, we will enter into a lease review and then with us, but there are conditions that need to be met before that lease completes. The most common conditions are receiving planning permission or completing landlord works. Now a great example of one of the tenants within this GBP 800,000 is McDonald's. And that lease is now completed because we have completed our landlord works. So that is rent that we are now going to start receiving after the rent-free period has ended. Lidl is another good example here where we have an agreement for lease exchange. And as soon as those annual work to complete, again, that lease will complete and Lidl will start paying us cash rents after the rent-free period. There is some space in the portfolio where the current passing rents. So the rent we're receiving from our tenants today is below the market level. And that market level is determined by our independent valuer. So as rent reviews come around and as lease renewals come around, we would expect to push those rents on. And I think the rent reviews and renewals we looked at on the side earlier, which was some 27% up from the previous passing level, they should give you confidence that we are able to achieve those uplifts. Finally, we have some vacant space. It's around GBP 4.9 million as at the period end. And of that GBP 4.9 million, we've already let or sold GBP 0.5 million. And in fact, that's increased just today. We have GBP 1.2 million under offer and some of that will transfer into that level sold bucket. So we did a lease -- today [ Lidl ] complete today for GBP 0.25 million, which will move up to that GBP 0.5 million. And then there's GBP 1.1 million under refurb. So a good example of that space on the refurb would be St. Ann's house. So once we finish that refurb, we hope to let that very quickly. So that's why you get from our cash passing rent today to our reversionary rent in the future now. As we keep saying, you're not going to get all the way there, but we only need to make some progress against it to hopefully have a really positive effect on that dividend. Just briefly, closing out on Slide 19. We spoke to all these points. We do think that the U.K. real estate market values are going to continue their recoveries be very gradual so far, but hopefully, rate cuts and cheaper debt will help us coming into 2026 and really increase the capital flows into real estate. We are continuing to deliver very strong performance, as evidenced by those MSCI awards. We think there's significant potential to accelerate our earnings growth. And we spoke about how we can achieve our reversion over time on the previous slide. And of course, Nick outlined very clearly the strength of our balance sheet and the visibility on the cost that gives us looking forward. And finally, there's plenty in the pipeline for us to go for. And the final point I'll make is on those 4 initiatives that I spoke to earlier, there's so far no upside in our P&L. So whilst we have incurred some of the CapEx costs, we are enjoying that rental upside in the P&L yet, but that is to come. So really welcome any questions.

[Operator Instructions] I'd like to remind you the recording of the presentation, along with a copy of the slides and the published Q&A can be accessed via your investor dashboards. [Operator Instructions] And Nick, perhaps I'll hand over to you to run through the Q&A, and I'll pick up from you at the end.

Thank you. I can't actually see them, I'm afraid. Bradley, I don't know if you can, you might need to...

In the bottom right-hand corner of your screen, Nick, there might be a blue buttons as chat.

Yes. Got it. Got it. I'm really sorry. Thank you sorry about that. So I can see -- I have a number of questions, thank you. So I guess the first one, if the University of Law gets planning commission, will you develop or sell the property, what sort of costs you're looking at to develop? I think the asset valuation at the moment, as I think you all know, we have a simple joint venture structure where we own 50% of the assets. Our share is worth about GBP 38 million according to the independent valuer. The development, assuming we get planning consent is too big for us to do either on our own or with the existing partner, and we believe that we can extract the necessary return from securing planning and selling. We're under absolutely no pressure to do that. We actually extended the lease to the tenants a little while ago to lease our rents until 2029. From a timing point of view, we think that's great because firstly, it allows us to get the planning, but also we do see a recovery in the London office market as a chronic supply shortage as I mentioned earlier on, and we think this area in particular, will benefit from its mix of uses, education, tech, biotech, managing consulting, et cetera. So we're not looking at any cost to develop at the moment, it is simply planning fees in order to secure that exits. Bradley, next one regarding Stanley Green?

Yes, sure. So we've made really good progress with Stanley Green. So of the 11 new units we had let 10, 1 just hang back to us. And that means there are 2 left to let and they're both under offer. So hopefully, that's how we speak, I'd be able to say the whole Stanley Green is let. But at the moment, there are 2 to go, both under offer.

Thank you. The next question, surprisingly, he's asking us to talk a little bit about the 11% stake that LondonMetric have in our company. I think you won't also be surprised to hear that we can't talk about individual shareholders. I think we are very much focused to achieve hopefully taking from today on driving higher earnings growth on driving that progressive dividend policy. And so that's really what we are focused on. The next question is, do the government's lease or the form have any impact on the REIT? So I'll just take this and Bradley will comment on it just after. So the government have a number of different legislative proposals on the books, which could potentially impact the real estate sector. There has been a lot of press commentary around leasehold reform, which is question refers to directly, which only really impacts residential results. And so we don't own any residential leaseholds, so we shouldn't be impacting, we won't be impacted by that. It is, however, worth noting that there are other proposals that the government is consulting on albeit late-stage consulting on matters such as the banning of what I called upward-only rent reviews, which is the lease structure that we have in the U.K., where typically you might have 5 yearly rent reviews where the rents can't go down only up during that lease period. The government are consulting now on whether those should be banned, which has happened in other countries, most recently, probably most relevant being Ireland. We've provided information to the British Property Federation who are an industry body on our portfolio, making a point that we don't think the change is required, nor is it fair. And actually, part of the reason that is leases are actually increasingly typically 5 years on average, which is where we are currently. So the effect of banning up rent views, we think is going to be negligible and we also believe that government should not be changing those sorts of laws in a way that would have any sort of impacts retrospectively. So I think that's our position on those 2 points, neither of which we think will have a material impact on us based on those current proposals. Next question, Bradley, just on the rent-free agreements.

Yes. So the question says, following the end of the rent-free period in Bloomsbury, which is the University of Law, so if you look at Slide 17 on the chart, you can see that change. What percentage of the portfolio is now subject to rent-free agreements. So in the 12 months ended September '26, there will be an additional GBP 2.7 million of rent-free periods ending. So another 30 of September, we can say that around 10% of the contracted annual rent is currently under rent-free. So that's to say you go from 28 plus 10%, excluding the University of Law. So -- and there will be some room freeze that end beyond that September '26 period, but not many because not many rent-free periods will be more than 12 months. Of course, it is subject to the specific terms of every lease. So hopefully, that helps with the question.

Yes. Should we go Bradley to the next one. You'll take that?

Yes. So the question was how do we allow for obsolescence in your buildings? Well, I mean, obviously, we try to avoid obsolescence in our building. So that's probably first and foremost, for owning good quality real estate in good locations that tenants want. In terms of obsolescence, sometimes you've got most industrial state and tariffs might be old or dated. We take a commercial approach. So -- for example, at Millshaw in Leeds, I mentioned we're undertaking that major refurbishment, taking 50,000 square feet from an EPC 'C' to an 'A' and as a result, getting a big 86% rental uplift. But at the same time, on Millshaw, we have had some space back. And because there's so much demand for the space, even though maybe it is a bit old and dilapidated, the tenants want the space. We're happy to rent it in a [ brimstone ] condition. And then in the future, we will come back and undertake the refurb if we feel we need to do that to push the rents on. But again, we're always prioritizing the most accretive projects that we have. And I think a really keen focus on ESG as well as other real estate fundamentals means we have a really good eye on where we will be needing to upgrade multi-let industrial estate units. So I'd say our approach is a commercial one. But ultimately, we're not here to own billions and we going to come obsolescent. It's more about sometimes space just need to refresh.

Yes. That's right. And I think we would -- we're typically buying I wouldn't describe it as the worst house on the best street, but we're typically buying Grade B buildings in Grade A locations and improving them. And so we're pricing in the obsolescence risk. And what we're typically finding is where we're investing the capital expenditure, we are delivering a return on that expenditure, which is attractive and accretive. The other point I notice slightly linked to the sort of legislative question. The independent valuers over the last few years have become much better at reflecting obsolescence risk within their valuations. So they're much more explicit in the way that they are reflecting capital expenditure and nonrecoverable costs and the RICS has issued a very useful guidance to values, for example, in how they should be reflecting sustainability risk within the portfolios that they are valuing. Next one, Bradley, on void.

Yes. So the question is, what is the most up-to-date figure for the void rate that we can give. Well, as at -- as at the 26th of November, the void rate was 11.4%. And our guidance was that we were working to bring that down to around 10% by the financial year-end. And we don't have a specific update since the 26th of November, but the guidance hasn't changed.

Okay. Next one, Bradley, is improving quality gold-bar to you?

Is the improving quality of lessees being reflected in NAVs good question. I think the values do have an eye on the covenant strength, what we call it real estate or which basically means how likely is the tenant to pay their rent. And yes, they do actually, particularly for the longer leases. So they will apply a keener yield to a tenant like Siemens or Premier Inn compared to a weak covenant. Sometimes when you got multi-industrial estate with 60 units, you do take a view on the tenants. You took a commercial view. But we are obviously always looking very closely the tenant's rent, particularly where we've undertaken significant works or are going to take on a longer lease. But in answer to your question, I would say, yes.

Excellent. The last three questions. There are 2 that linked back to the first point we had regarding the metric. So I think the same point applies there, but I understand why you're asking. The second, slightly related question relates to how the question, and we would like to see the trust grow and how we can achieve this given the prevailing discounts? I would say that we have seen an improvement in our rating versus some of our peers. And we are hoping, but necessarily expecting that if we continue delivering the earnings growth for dividend growth, at some point, we might see the shares trade nearer to NAV and historically in other cycles, they have done. At the same time, we remain open to exploring other ways to grow the company and the better our rating is compared with peers potentially those options open up. I guess from our point of view, we're very focused on ensuring that any sort of growth that we deliver is accretive. We're in a very fortunate position in that our earnings yield is much higher than most of the peers. And so what we wouldn't want to do, obviously, is do something which might need a significant dilution. And therefore, alongside business as usual, which is what we can most costly control in terms of earnings and dividend growth, we will continue to look at those options, particularly as we near hopefully, as we trade here at NAV. And the last -- the penultimate question, it relates to my change and how Bradley, I guess, and I are incentivized. We have, what we described as a competitive remuneration policy here. Bradley and I are very well supported by a very big team of Schroder. So we have over 100 people just in the U.K. business, comprising a diverse range of specialist investors and asset managers, restructure our remuneration, so that we are as aligned as we can be. And obviously, as a manager, we've recently introduced those changes so that we are fully aligned either in terms of NAV or share price in terms of the level of our fee. So yes, it's a short answer. And I guess the final point, which we genuinely appreciate is saying here, making the presentation, and I hope you have a great year ahead. So with that, we're absolutely delighted that you've all joined. So thank you very much, and best wishes for a great Christmas and a prosperous '26.

Thank you. Bye-bye.

That's great. Well, thank you both for updating investors today. Can I please ask investors not to close the session as you now be automatically redirected to provide your feedback in order management team can better understand your views and expectations. On behalf of management team of Schroder Real Estate Investment Trust Limited, we'd like to thank you for attending today's presentation, and good afternoon to you all.

Thank you.