Schroder Real Estate Investment Trust Ltd

LSE:SREI

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Schroder Real Estate Investment Trust Limited Investor presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful.

I'd now like to hand over to Head of U.K. Real Estate, Nick Montgomery. Good morning, sir.

[Nick Montgomery, executive]

Good morning. Sorry for jumping the gun. I seem too enthusiastic. But really good to have an opportunity to present again. This is the second time that we will be presenting using the Investor Meet Company format. We have some really good feedback and actually -- some actually constructive helpful feedback on how to do it differently last time around. So it's great to be here again.

We're here are, first and foremost, to give a view on our most recent quarter results. So as you just heard, I'm Nick Montgomery. I'm one of the firm managers here. I'm joined by my colleague, Bradley Biggins, and together, we're responsible for running Schroder Real Estate Investment Trust.

So as I say, the most up-to-date information we have now is to June. But I think probably more interestingly, clearly, we are in volatile markets. real estate markets tend to lag with the wider capital markets, and we're seeing that come through. So those results, although the results are very positive, they are very much in the rearview mirror, but hopefully, what will come across as we go through the presentation, is a very encouraging level of continuing activity, which we think we'll continue to deliver sustainable net income growth and mean that the shares really do look very interesting value today, where we're trading today offer discounts of around 30% to the June net asset value.

Just in terms of a little bit of detail on the results. So when we last presented month or 2 ago, we were reporting our year-end results to March, and we reported there a NAV total return of 31% with actually a NAV total return for the quarter to March over the year to March of about 9%.

Now very encouragingly, over the quarter to June, we have reported a NAV total return of 5.4%. So down a little bit, but nonetheless, still reflecting very, very healthy levels of capital value growth.

I guess on more importance, taking a long-term view, given this company is here to deliver an attractive income return, we paid the 3% higher level of dividend over the quarter to June. And then with the NAV that we announced a few weeks -- a week or so ago, we announced a further 1% increase in the quarterly dividend that we paid.

Now that is consistent with what we have said, which is when we are able to recommend to the Board that we can pay a high dividend on the basis that it is sustainable, we will do so. And so we hope to continue doing that and deliver the progressive dividend policy going forward.

And it's also important to note that, and a little bit more later, but the earnings are robust, and our dividend cover over the most recent quarter was 102%. So it's more than fully covered.

From a balance sheet perspective, and again, more on this later, we remain in a very good position. Our net loan-to-value consolidated is 29%, and we have an average cost of debt of 2.7%, and more on that later. Obviously, it's a property performance that drove that quarterly return, encouraging levels of growth, so a 3% uplift in the valuation of the portfolio over the quarter. We don't actually have our full benchmark data out yet that will probably be with us later this week. But when we compare ourselves to the best proxy of the monthly index, we continue to be tracking ahead of that, both in capital value movements but also again, more importantly, by delivering a higher income return.

Lots of activity, as I say, in terms of leasing. 22 leasing transactions actually we'd have completed since the year-end at the end of March, which generated GBP 3.2 million of new rent, an uplift of GBP 1.5 million with previous run payable. And when we're looking at an overall rental of about GBP 30 million, those numbers are material.

What we've also been doing and we have done consistently is look to sell assets and realize profits where we deliver on the asset management. One notable transaction over the quarter was we sold a single-let warehouse units, that in Portsmouth. We've done all the work we could do there. We saw that now quite unbelievably actually at a 33% premium to the March valuation, which reflected a very low yield of 3.2%.

The market clearly has changed since then, not least because they were in the slower summer period, but also generally in terms of sentiment towards industrial. And so we're very pleased to crystallize that very, very strong return from the asset. And again, we have obviously acquired our asset in Manchester. We did touch on this briefly last time. The mixed-use asset in the City Center offering a very attractive yield of nearly 8%, so more than double the yield that we sold Portsmouth at.

So income remains key. So I've mentioned that we paid a further 1% increase in the dividend or we will be paying, I should say, very shortly to 0.803%. And the dividend is now 4% above the pre-pandemic level. We remain the only one in our peer group to be paying a dividend that is above the pre-pandemic level.

We touched last time on how we were looking to change the emphasis of the strategy, not the financial target, but certainly the way that we deliver the financial target by having a greater emphasis on ESG, and that being a core part of how we deliver improvements to assets. And we're doing more work on that, which Bradley will update on later in the presentation.

I guess the last point on total strategy because we included an update here, for example, with the new Chair Alastair Hughes, who has replaced Lorraine Baldry, our outgoing Chair, who's been a great Chair, but as he equally, we think, is very well placed. He's actually also a Non-Executive on both British Land and Tritax Big Box. So actually, that does give them an interesting perspective on market. So we're looking very much to look to working closely with Alastair, who has been a senior independent up till now.

The last point to note just on the overview is recognizing where our shares are now trading and the value that we see in our shares, we have announced recommencement of our share buyback program. We did actually -- we were one of the first in our peer group over the last cycle to do a share buyback program. In the previous financial year, we bought about 10 million of shares at an average discount of between 30% and 40%.

And so we think based on where the current share price is and given our robust our balance sheet is that we should be using our capital to buy our shares back alongside, obviously, other uses for and notably investing in refurbishments, redevelopments and also opportunistically looking at where there may be valued in the market.

So just moving forward in terms of the NAV. I won't spend too long on this slide, but it's a similar format to one that we showed last time. You can see that the positive NAV movement of 4.4% over the quarter to June or 79.1p per share, which compares to today's share price of about 55p. And you can see here how that valuation uplift is made up, obviously, coming from the portfolio. We incurred some acquisition costs associated with Manchester, which were dilutive, but we realized that a very significant gain, 30% uplift on the March valuation from the disposal. And then finally, you can see there the EPRA earnings of GBP 4 million, which gave us that cover of 102%. So a very -- we think a very positive quarter for us.

And I guess just to draw out the point about the dividend in a little bit more detail, as I say, for those that perhaps weren't with us on the last call, we have a progressive policy. We look every quarter with the Board at what we consider to be a sustainable level. And if we believe we can move it in the norm, then we will do. We know there is no high watermark that we're working to. And so you can see here the progression to the 0.803p per share per quarter, which compares to that pre-pandemic level of 0.77p per quarter per share. And it's worth noting per share because, obviously, over that period, we also benefited from the previous share buyback that we did that concentrated the shares in fewer hands. So good progression exactly what we were hoping.

I think interestingly, what we're seeing in terms of the market, obviously, more persistent high levels of inflation and the response in terms of monetary policy means that we are very well positioned in a rising interest rate environment.

So first of all, because we have a very strong dividend yield. And what we're showing here on this slide is a representation of our peer group, which most people would consider our peer group of what are the diversified -- largely but diversified investment companies. So these are peers who own assets across the different parts of the U.K. real estate market rather than being specialists in any one particular sector.

And you can see here, we screen very favorably on each metric. So first of all, from the top, what is our dividend yield? Our dividend yield today based on the share price is between 5.8% and 5.9% on the share price. And importantly, that is fully covered, you can see there at 102%. The only company in our peer group to currently offer a higher level of dividend yield is AEW. They're at 6.7%, but notably, they have dividend cover of 75%. So we have a low yield, but we are obviously fully covered.

As I noted earlier, we are the only company in the peer group to be paying a dividend above the pre-pandemic level. You can see that a range 104%, which is where we are on the most recent announcement down to as low as 80% in some cases. And I think really importantly, looking from a resilience perspective, our ability to pay future dividends is to look at our cost of debt, but also really importantly, to look at the duration of our debt. And again, Bradley will touch on this later on.

But our total debt cost over the most recent quarter is around 2.7%. But very importantly, the vast majority of our debt is fixed for 13.5 years at a fixed rate of 2.5%. So from a perspective of looking at our future earnings and making the decisions about the dividends, we can do so knowing that the vast majority of our debt and our interest cost is known. And there are other companies in our peer group who have near-term refinancings, which could potentially how the bearing on the level of sustainable dividend that they can pay going forward.

So just moving back or what I should say, looking at the performance. This is showing -- actually, this is showing performance to March. This is not the most -- the latest data, as I say, we will get that from an MSCI over the next few days. But for those people perhaps who work with this last time around, I'll just direct you to the bottom right-hand color of the chart here that shows that if you look at our underlying portfolio, all parts of the market have outperformed the vast majority over all time period, 2.9% outperformance over 1 year, 2.5% over 3 years and over 1% since IPO back in 2004. So good performance all around.

Now the next slide is slightly something your house is at risk slide, but actually, there's a point to make here as well. One of the reasons that we have such a secure and resilient debt facility is because of a refinancing that we did just under 3 years ago. So we had a loan facility that was costing us about 4.5%. And we saw an opportunity to refinance that loan both to reduce the interest rates to 2.5%, but also to extend the loan. So as I say, we currently have about 13.5 years on our long-term loan facility.

Now there was a cost of that. And it was at the time, it was a difficult decision because the cost was quite significant at about GBP 27 million to break that facility, and that was a hit to NAV. So what we're showing here is the impact of that on our NAV total returns. So one of the key measures that shareholders look at is obviously a 3-year rolling out potential return. And we still have the impact of that break cost within our 3-year NAV.

So although we're now benefiting obviously from having a much lower interest cost and obviously a much longer-term duration debt some shareholders, analysts do screen the sector looking at 3-year rolling. So when they're looking at us, there is still that impact in the 3 years, which will drop out when we get to the end of this year. But I flagged that only because, as I say, we know it's a metric that some shareholders tell us to look at.

Now strategy, again, apologies to those that heard us last time around, but these are, if you like, the 5 key pillars of our strategy. We are moving as you here shortly into a new phase in the cycle we were expecting already to see convergence so that the industrial sector, which has had a phenomenal 5 to 6 years of performance. That run was going to end, and hence, we'll be looking to take some profits, for example, Portsmouth. But actually also, we were expecting to see more convergence and retail warehousing, for example, as a sector that was ended up being a lot more pandemic resilient, and we are overweight retail warehousing. So we think we're well positioned.

And I think the key point we think is as we move into this new phase in the cycle, we think more investors will be prepared to look at diversified strategies. Because if all you can do at the moment is invest in the industrial sector, you have very few levers really to drive income growth. And whereas with our strategy, we have the ability to sell industrial at 3% and rotate into offices at 8%.

And so the point we're making here is the diversified strategy, we think, is now our benefits. And within Schroders the team that Bradley and I oversee, we have multi-sector specialists across the business. So we have specialists based up in Manchester who are experts in industrial, but equally, we have experts down in London who are experts, for example, in retail housing or central other offices. So we think that, that is a real value now as we see more opportunities in other parts of the market to attack and change to deliver both higher income return, but also more attractive total returns.

Active management is key. We talk a lot about operational excellence. I mean a recent example there, of course, is working closely with our property managers to try and limit the impact of inflation or energy costs, for example, through service charge budget. So it is an increasingly operational asset class, and the closer we are to our tenants more likely we are to drive that income return.

Disciplined approach. I think we will, as I've mentioned, like with Portsmouth continue to sell assets on completion of business plans. We have a number of smaller interests, small GBP 2 million, 3 million, 4 million assets, which we will continue to look to recycle and invest into either the development projects, refurbishment projects or newer, bigger assets where we expect to get more bang for our buck, so to speak.

Balance sheet, I've touched on. I guess the last point to note there is we have GBP 45 million of remaining capacity, which is obviously being used partly for our share buyback program alongside the other uses that we can apply. And ESG leadership, we are very serious about that. We are working hard on the work to try and get to a point where we are able to differentiate our strategy more based on ESG without obviously losing the focus on the financial objectives. And we are aiming to give shareholders more of an update on that later in the year.

So I guess just before I hand over to Bradley, just to briefly touch on the market. I mean clearly, you've all seen what's happening out there in terms of inflation and interest rates. The real estate market tends to lag. We have an independent valuations carried out every quarter. Large parts of the market, you'll know how valuation is done every month.

There are early signs now of some of those monthly valuations ticking down. Some of the open-ended funds, for example, saw the valuation drop somewhere between 1% or 2% in July. And we are seeing pricing in the transaction market particularly for very low yielding logistics or London industrial, for example, the difference between where values are and price being achieved is now some -- anywhere between 5% and 10% different.

Now what does that mean for us? I think that there is a consensus that if we do see 10-year gilt rates moving above 2.5% and towards 3%, and that is the general consensus then we will see that have an impact on real estate yields. And so we are expecting that on average, between the start of this year to the end of next year, average real estate values could fall between 10% and 15%.

Now that's not saying we expect our portfolio to fall 15% because we think we're well positioned. We have higher income return, and we're less vulnerable, we think, to what we're seeing just in terms of rising interest rates impacting very, very low-yielding assets. But you won't be surprised to hear that we are moving more towards a risk off environment where when we are investing capital expenditure, we're doing so off the back of ideally pre-lets and there are some examples that you'll hear about later on and where we've also been working very hard to lock down new leases with strong tenants. So Bradley will talk later on about an asset and shipping where we've had some fantastic results, creating longer income and the punch line being at Siemens are now our second biggest tenant. So there's been a lot of very, very encouraging activity.

I think looking forward, actually, we see continued healthy levels of demand, both for yield because again, our yield today on share price is very attractive. If you were to factor in a 10% decline in capital values and then on NAV, even more so. But actually, looking forward, we think there are other reasons to be more positive about the real estate market. We don't have a significant oversupply issue in many regional cities where you are looking across the skyline is seeing cranes, a lot of those cranes are residential.

In markets such as multi-let industrial, there's an acute undersupply. No one is building it. I think if you're a developer of industrial, you'll build a big box you won't build a multi-let industrial state. So for that reason, we continue to believe we're well placed. And actually, even if you do apply a 15% valuation decline to our portfolio and assume as a recovery from there on, at a 30% discount to NAV, our shares arguably still look attractive. And that's why, again, we're sort of putting our money where our mouth is. That's why we are proceeding with our share buyback program.

So happy to take questions on the market later. But in first instance, I'll hand over to Bradley.

[Bradley Biggins, executive]

Thanks, Nick. It's a pleasure to be here talking to you all about SREIT today. On this slide, in the table on the left-hand side, we show a selection of important data points for the portfolio. The first 2 rows that highlighted show that we own 42 properties that are occupied by 312 tenants. This illustrates the diverse and granular nature of our portfolio, which in our view makes it more resilient. A characteristic that will be particularly important as you will navigate a more tangent period.

The second set of rows we've highlighted showed a net initial yield and the reversionary yield of our portfolio. You can see our net initial yield is 5.2%. This is higher than the benchmark at 3.9%, and our reversion yield is 6.4%, which is also higher than the benchmark of 4.6%. This illustrates that our portfolio is high yielding and also has the potential for rental growth. This means we're well positioned for an environment where interest rates and therefore, the cost of debt is rising and where capital growth may slow.

Final comment on that table. With regard to the WAULT, which is our weighted average unexpired lease term, importantly to earliest break. So our benchmark includes the largest sample of the MSCI index, that means it includes everything, including the long income funds. That's why our water break of 5.4 years is much lower than the benchmark of 11 years. However, we're comfortable with our WAULT. It reflects our active asset management approach. And as we look at some of our peers, for example, AEW, they have a WAULT of 2.5 years.

Now looking at the data on the right-hand side. One of the strengths of our portfolio is our ability to invest across the sectors, as Nick said. This enables us to find higher yield in acquisitions that we expect to perform strongly from a total return perspective regardless of the sector that the asset is in.

Our sector allocations on the right there, we've highlighted our overweight positions in industrial and also in retail warehouse. These are areas that performed strongly and that we expect to outperform in the short to medium term.

Moving on to the next slide. We have good quality assets with good fundamentals located in higher-growth areas. To provide more color on the portfolio, we show 6 of our largest assets by value on this slide. These 6 assets represent around half of the value of our portfolio.

The first 2 photos on the left-hand side show our 2 largest multi-let industrial estates. Incidentally, as we saw on the previous slide, half of the portfolio is in the industrial sector. And our industrial assets are almost all multi-let industrial estates, like those 2, you can see in the picture there on the left-hand side.

This is very important because we're seeing materially less development of new multi-industrial estates compared to the large big box distribution warehouses that you see along the motorway. And because of this supply-demand imbalance partly caused by a lack of its new development, our view is that multi-let industrial estates will continue to benefit from strong tenant demand, attractive rental growth and will also remain resilient in a recessionary environment because the rent for these assets tends to represent a very small percentage of tenant revenues.

In the center of the slide, you can see our 2 largest office exposures. Our offices are in higher-growth locations such as London, Manchester and Edinburgh. So we're comfortable with those. On the right-hand side, you can see our largest retail warehouse at the top and a mixed-use scheme in Leeds. This scheme is comprised of retail, a hotel and a gym that trades very strongly.

Across our portfolio, we've got exposure to good quality retail warehouses which is a sector we expect to outperform over the next 3 or 4 years relative to other sectors, as we mentioned on the previous slide.

So as you move into the next 4 slides, we're going to provide a bit more details on 4 assets. And in case you're curious, in the appendix for the list of our 15 largest assets by value. So this is Langley Park Industrial Estate in Chippenham. It's is located right next to the train station. Activity in the past quarter includes: we completed a rent review with Siemens to increase their rent by 26% per annum to GBP 1.22 million per annum. This will mean they become our second largest tenant. Siemens occupy a large amount of space at Langley Park, and they have around 800 people on site.

The lease expires in 2026, and we are in early discussions to increase their occupation at the site. This is fantastic because we're also working with surveyors and the planning authorities when adding more units to the site. These will be built to an operational net zero carbon standard. And there's also interest from the other tenants currently in place at the site.

In addition, during the quarter, we completed a 10-year lease renewal of Littelfuse. They are a global electronic manufacturing company. The rent will be 31% higher than the previous level. The lease has no brakes and is linked to inflation.

And the final point we'll make here is that we have engagement with the planning authorities for 130,000 square feet of new space on the site. And this is what we hope to collaborate with Siemens on as well as other tenants at the site.

Moving on. This is Stanley Green Trading Estate, located in Cheadle. This is just off of Manchester and right next to the A555, which you can see in the main photo. And it's also very close to a number of motorways such as the M6 and the M60. So it's really superb location for transport links. At the moment, you can look at Stanley Green as 2 parts: the existing estate and the new development. And you can see both in the main photo on the slide. The entry piece of land to the top of the yellow outline is the development side. When we acquired this estate, there was a historic planning consent for 48,000 square feet of new space.

Our strategy was to obtain an improved planning consent for a larger development to maximize value and we have achieved that. We're currently constructing 80,000 square feet of operating net zero carbon space. And we was actually on site last week, and fantastic progress has been made. The sites really started to take shape. We're now working to obtain pre-lets, and we have conservatively assumed in our modeling that we get total rent of GBP 1 million per annum from the new site.

But since developing the business plan, the world has moved on, and we expect to get 10% to 20% higher than that. In addition, at the existing site, we're in heads of terms on a number of rent reviews and niche renewals, and we expect to achieve material increases to the rents that are currently passing.

Moving on. On the slide here, you can see our office in Store Street in Bloomsbury, which really is an excellent location. The area is experiencing very high demand from life sciences, in particular. University of Law combined the building, and the rent is currently very low at GBP 43 per square foot. With the right development, there's potential to more than double this rent.

We've bid on adjoining ownerships, which we think could unlock marriage value and open up exciting development options for the site. If we do manage to acquire these adjoining ownerships, we'd have a very large freehold site in Camden, which is very rare, and we're very excited about the potential there.

On this slide, you can now see St. John's Retail Park in Bedford. In our view, this is the best retail park in the area, and it's performed very strongly in the year to March. You see the total return in the blue circle there. The park is fully let at sustainable rents and anchor tenants such as Lidl drive footfall. During the quarter, we completed a 15-year pre-let with Starbucks for a new drive-through that they will construct on the site. The rents for this fleet will also be linked to inflation.

At the same time, we've agreed a similar deal also with Starbucks another of our retail parks, Bletchley, which is in Milton Keynes. Here, we listed our 15 largest tenants by annual rent as at the 30th of June. And as you can see, these are well-known quality household names, and we think this is a result of the quality of the portfolio and our approach to operational excellence. This leads to a resilient income, and it's pleasing to report our rent collection, which is in the bottom right-hand corner, was 98% for the June quarter.

As requested on our previous call on this platform, the Investor Meet Company, we have here shown our lease expiry profile. Importantly, what we're showing here is a period of time to earliest break. Earliest break is often much sooner than the actual lease expiry. Our overall average unexpired lease term to break is 5.4 years. So it makes sense that the majority of our rents expire over the next 5 years, and that's what you can see on the chart here.

The peak, you can see in the year ended March 24 and the year ended March 27 are related to 2 of our larger tenants. So in the year to March 24, we have a break at Uxbridge, which is corny occupied by New Buckinghamshire University. And we'll find out in November this year, if the tenant chooses to exercise their break option, so we can update you on that later in the year.

And as I mentioned, when we talk about Store Street, the University of Law, who occupied Store Street, their lease expires in 2026, and that's around GBP 1.85 million per annum of rent, and that's why the blue bar in that year is higher.

And then final point on this slide. And as I previously mentioned, the benchmark includes long-income funds. And that's why you can see the large red bar on the right-hand side there, as we show the benchmark expiry profile.

On this slide, which is illustrative and has a lot of moving parts, what we're trying to show you is where we think we can deliver rental growth. So the first bar on the left-hand side is our current annual rent as at the 30th of June. So that's GBP 30.8 million per annum. This reflects a net initial yield of 5.2%.

And then the middle blue bar is our estimated rental value. So this is the rent that our independent value believes we can achieve were we to get market rents today across the whole portfolio. How can we bridge the gap there? Well, firstly, we've got a number of fixed uplifts coming through in the next 24 months. So these are contractual uplifts in rates that tenants are paying. Secondly, there are a number of leases where our current rent has fallen below the market level, which is perfectly normal because leases often last for 5, 10 or longer years or so.

I mentioned the Starbucks developments that will bring in around $200,000 of rent per annum once completed. So that will increase our passing rent. And then finally, there's vacant space in the portfolio, and this represents an annual rental value of GBP 2.9 million. So if we were able to let all of that space, we will achieve at the middle blue bar of GBP 35.3 million.

But then beyond that, there are a number of other -- management activities were undertaken to increase our rents. So I mentioned the Stanley Green development, and we spoke about that previously, bringing in GBP 1 million of rents once completed. So that's not currently included in our ERV or our reversionary yield.

Secondly, we've got a CapEx pipeline, which we think could bring in another GBP 0.5 million per annum of rent over time. And then finally, we've got, once we spend the CapEx, once we spent the development cost of Stanley Green, we have around GBP 15 million to deploy, and we've shown it a conservative yield of around 4%, and that could bring in around $600,000 of additional rents per annum. And then that could get us to total rent of around GBP 37 million.

But what we've shown is in the bar, we have split to show, okay, look, if we don't manage to let the vacant space, would land at around GBP 34.5 million. So just to emphasize, this is initiative and just give you an idea of the work we're doing to try to drive income.

On to the next slide. So you can see here, it's St. Ann's House in Manchester. This was another higher yielding acquisition we made. We completed this in May. We paid GBP 14.7 million with this mixed-use office and retail asset. It generates GBP 1.22 million per annum of headline rent. This reflects a net initial yield of 7.8% and a reversion yield of 9.1%. We paid a low average capital value of GBP 283 per square foot.

The asset is prominently located in the city center near to the prime retail core. And our view compared to other major cities. Manchester currently has the lowest office vacancy rate and we expect relatively higher growth in office rents over the next 5 years. Not only does this asset have excellent fundamentals, there's also a really interesting opportunity to improve the sustainability credentials. And in our business plan, we've included GBP 4 million of CapEx, which we don't have to spend, it will be spent over time. And our view is spending this on sustainability improvements will increase the value of the asset, increase the rents we can achieve, will reduce void periods. So it would be very accretive.

On this slide here, we talk about our balance sheet. We've got 2 debt facilities, a term loan from Canada Life and an RRCF from RBS. On the left-hand side, you can see the key points on the term loan from Canada Life. It's GBP 129.6 million. It's at an attractive average fixed interest cost of 2.5%. And as Nick said, this is locked in for a very long duration of around 14 years on average. Clearly, in a rising interest rate environment, this is very attractive and provides a competitive advantage versus our peers.

On the right-hand side, you can see the key points on our RRCF from RBS. We completed a refinancing on this during the quarter. We increased the facility to GBP 75 million. It was previously GBP 52.5 million. So that's an increase of GBP 22.5 million. And importantly, we extended the term from 5 years to 5 years rather than 1 year, which it was previously. And we achieved a very low margin of 1.65%. Previously, we had 1.6%. We think that's an excellent outcome given where interest rates have been moving this year.

We're in the progress of green loan KPIs with RBS. And then at the bottom, we note that we already have GBP 30 million of interest rate cuts in pace with regard to the RCF. These are until July next year and have a strike rate of 1.5%. We should start to benefit from payouts on these caps over the next year because the SONIA rate is currently in excess of 1.5%. The forward rate -- the forward curve at the moment shows that this will remain the case for the duration of the cap.

We're currently considering a phased hedging strategy, further hedging of the RCF. But what we're seeing at the moment is interest rates caps are the most expensive. They've been for a decade. So we're going to take a conservative wait-and-see approach or head on a phase basis as I mentioned.

The final point to note on this slide is that our net loan to value is 29%, and this is comfortably within our strategic target range of 25% to 35%. As Nick said, we've made significant progress in developing our sustainability strategy over the year. We delivered on the commitments we made in the 2021 annual report.

And then in terms of strategy, given the need to improve U.K. building stock, we view refurbishment and redevelopment as a critical opportunity to deliver future-proof assets. And during the year, we also announced a pathway to net zero carbon. Now in addition to making these commitments, it's increasingly clear that there's evidence of a green premium or a brown discount. Research today shows the valuation premium can be as high as 20%, and the rental premium can be as high as 10%.

And whilst most research has focused on London offices or offices in other key locations globally, our view is this opportunity extends to other sectors and other regions in the U.K. Therefore, we see an opportunity to manufacture the green premium. And we have the ability, the resource and the track record in-house to do that.

This is in the backdrop of the built environment having a profound impact on our climate and the accounts were almost 1/3 of CO2 emissions, and that's according to our IPCC. So therefore, to achieve net zero, we have to address the built environment.

Now the nuance of real estate is that the majority of today's existing stock you see out of the window. We're still being used to 2050. This is a date by which many nations have committed to achieve net zero, if not sooner. So this means simply acquiring or building green assets. We will not address the challenge we face. So in our mind, this presents a compelling opportunity to evolve our strategy, where we would acquire assets that are not reaching their full potential from a sustainability perspective, then we would implement our active asset management approach to enhance sustainability credentials with a view to manufacture in the green premium, we discussed in the previous slide, which would justify any CapEx that we spend to upgrade the buildings.

This based on our asset management expertise with the set of specialists we have within the real estate and our deep ESG resources, both within real estate and across traders. St. Ann's House, in our view, an excellent example of this, where our work will be focused on improving sustainability to enable us to achieve the higher rents and higher valuation.

Thank you for your time. I'll hand over to Nick now for any closing comments, and it would be great to address your questions, which I see have been coming in over temptation.

[Nick Montgomery, executive]

Fantastic. Thanks, Bradley. Well, just very briefly, I think there are 3 really important points to make, which we're showing on the right-hand side here. We have continued to deliver very strong performance over the course of June. That is very much now in the rearview mirror and the market outlook has changed.

But notwithstanding that, I think our portfolio is very well positioned given what we're seeing in the market and the longer-term structural trends I think when you look at the potential outturn for property values, given what we're seeing from a macro perspective, the share price discount represents, we think, still good value, and that's reflected in our share buyback. And finally, as Bradley has outlined, the combination of the Board, just for management, but importantly, the asset management expertise that we have on the ground and the specialist ESG expertise within the variety of business, we think we're really well placed to evolve the strategy: a, to make us more differentiated; but b, also to ensure that we are evolving the portfolio given the imperative around sustainability.

So I'll pause there. We have got lots of questions, which is great. So should we proceed into questions?

[Operator]

Nick, Bradley, that's great. [Operator Instructions] I would like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via our investor dashboard.

And Nick, Bradley, as you can see, we have received a number of questions for our today's presentation. So thank you to all the investors for their engagement this morning. If I could please just hand back to you guys to read out those questions and where appropriate to do so, if you could please just give a response and then I'll pick up from you at the end.

[Nick Montgomery, executive]

Yes. Sure. We'll -- I'll take the lead on these, and I'll bring Bradley in as we go through. So the first question is I see that offices are around 27% of value. Lots of office-focused REITs trade at discounts. How is this different?

Well, that's right. I think we have seen specialists both in the office sector, but actually more broadly even industrial specialists begin to move and trade at discounts. Our office weighting, as you've heard, is focused in particular on 2 key assets: one in Manchester, and one really interesting situation in London.

So that is one of the reasons clearly why the offices weighting is 1 of the reasons we're trading at a discount. In a sense, that's why we think the share price is interesting because it is only 20% of our portfolio, and half of the portfolio now is comprising really good quality in multi-let industrial estates where we still see potential on the income side.

So I guess I would say in response to that question that we think we're really well placed.

The next question, I think, probably may have picked up already, but just in case Bradley, you want to clarify anything. The question is, please could you comment on the RBSI interest rate cap that expires in July. I think you did mention it, but do you want to just clarify for the record?

[Bradley Biggins, executive]

Yes, sure. So yes, we have an interest rate cap in place at the moment. It covers a notional value of GBP 30.5 million, and the strike rate is 1.5%. As I mentioned, we do expect this cap to start paying out for us over the next year, probably until the CapEx fires based on the current forward curve. In terms of future hedging, just a couple of points to note.

Firstly, the majority of our debt is to carry the lifetime loan, which is at a fixed rate of 2.5% on average. And then we have drawn down at the moment, GBP 46.3 million of RCF. And clearly, once the cap expires, that amount will be unhedged. But what we're doing is reviewing the situation because cap prices are very expensive at the moment. So what we might do we'll take advice from internal debt specialists we have and also from our some advisers.

And we're just going to wait and see potentially some of the interest rate volatility may sort of decline over time as people get a better view of what central banks are going to do with interest rates. And also, I think there's been a bit of a scramble across many companies to cap their debt as interest rates are rising probably more aggressively than what people thought at the beginning of the year. So we are in a situation. We are taking advice. We're thinking about base hedging strategy, and we'll update you later in the year on where we are.

[Nick Montgomery, executive]

Perfect. Thanks, Bradley. That's clear. So the next question is, when do you expect planning to be approved in Bletchley and in Bedford? How we're finding planning generally in terms of time frames?

So Bletchley and St. Johns Retail Park, and this actually links into a subsequent question, which is around construction. So the way that we dealt with Bletchley and St. Johns because those pre-lets are with Starbucks, as Bradley mentioned. Starbucks have their own team at their planning.

So we have put that obligation on Starbucks, they're making the application at their cost. We are hoping that those planning decisions will be determined this year. But there are delays in the planning system generally, and I'll come on to that at the moment. But we are hoping we will get a determination this year.

Just looking here to the subsequent question about construction costs. We are clearly seeing cost inflation and obviously, a key part of that is the wage inflation, particularly on specialist trades, and we make sure we do what we can to derisk that.

One of the ways we're derisking Bletchley and St. Johns has actually put the obligation to build on Starbucks. They have their own people. It's a modular construction. They can source out much better than we can. So the deal with the group of Starbucks is effectively we pay up to a fixed amount. If there is an element of overspend that is capped, then we charge a return on that, which effectively comes through as an additional rent for that 15-year lease term.

In terms of -- and again, this is a subsequent question about our counterparty risk at the moment. So First of all, when we are undertaking developments and Stanley Green is the best live example. We have the expertise within our team to deliver those projects. So what we're not doing is paying a developer to deliver it for us, and therefore, we are paying the profit away to that developer.

At Stanley Green, we get all profit. That's really important as we do at Bedford and Bletchley. What's important, therefore, is understanding a counterparty risk. And so when we tender construction contracts, we always do, obviously, we are going for tenders. We have parties that we believe are financially secure.

So in the case of Stanley Green, for example, the developer -- the other -- sorry, the contractor there, I should say, our cadet construction, who are a very substantial lead base contractor. They actually also have a development home, but there are only contractor here. They have very sound balance sheet, and we did a lot of work on them as part of the due diligence you'd expect us to do.

Final point on planning delays, I think it does vary by local authority. A lot of planners are under a lot of strain with cuts. We do what we can using our local relationships to try and hurry those along in terms of getting the right advisers that know the actual people within the local authorities, but it is an issue.

We just need to make sure we build it into our time lines when we are doing any sort of development.

If I just keep going through briefly, so how is new Chairman is settling in?

Very well, only weak, but Alastair was previously the senior independent, Non-Exec Director. So he's been on the Board now for almost 4 years.

So we've had a really sort of very good period of obviously a handover. And so Alastair becoming Chair also coincides with bringing a new senior independent director onto the Board, a lady called Priscilla Davies. She had her first quarterly board meeting last week, made great contribution she's actually amongst other things, Chair of UBS Asset Management in the U.K. So it's a great experience and actually both Alastair and Priscilla have a real interest in ESG. Alastair sits on the Sustainability Committee at British Land. And Priscilla is involved in various businesses connected with renewables. So we think genuinely, we think that's a real addition to the Board.

Going forward, this question here about the monetary value of the share buyback.

So we don't give that information. Companies typically don't. All we do is announce our intention to recommence a share buyback and then we obviously announce to the market when we have bought back shares. Although we have got GBP 45 million of capacity now, both equity and debt or cash and undrawn loan facilities, we have other calls on our capital, not least developing out the warehouse scheme at Stanley Green. But also, we are always on the lookout for deals that support our strategy, whether that's adjoining ownership or completely new deals.

So I don't want to give any guidance. I don't think we can give guidance other than to say that as and when we believe they look like great value, and we've got capacity, then we'll do it. I guess just by way of comparison, but I'm not drawing this comparison to say to guide you, but, obviously, as I said earlier on, we did buy about GBP 10 million worth of shares when we last undertook the strategy in the previous financial year. So hopefully, that -- I'm not seriously dodging the question, but I think that's all I can really say.

So the next question, I'm just [Indiscernible] time as well. So we'll try and wrap it up in the next 5 minutes. I like the portfolio, it's diversified. It also performs more or less in line with some of the other trusts, I see many similarities in this trust. Well, I compare it to others such as Balanced Commercial, which is a vehicle that some people may know, was run by BMO, now Columbia Threadneedle, following that acquisition. And the question is would you highlight some differences between SREI and BCPT?

So I can obviously say that we think we're better. But I think it is probably worth looking at the numbers. I would say that, I guess, there are a number of differences. Actually, BCPT is a lot bigger. So the gross assets are about GBP 1.2 billion, GBP 1.3 billion. They have more concentration risk. So they had a very large asset in Central London called St. Christopher's Place, which is very low yielding.

They tend to have a more lower-yielding portfolio through the cycle. And actually, that -- you can see that on the slide, Bradley is just showing Slide 5. So they are second from the right. So you can see that very similar dividend coverage to us. But you can see a very different yield on share price. And that's partly because their discount, I think, is probably a little bit tighter than ours today, but I don't have that data in front of me.

But it's much more about the fact that their portfolio just generally is lower yielding. Their leverage isn't that much different to ours. I think in the low 20s, but it's mainly about the fact that they simply have a lower yield. And we would say, joking apart, that we are actively managing our portfolio more and that we are also buying assets that require more active management, best example as Bradley's outline being something like Cheadle. So again, I hope that answers the question.

A question here about impact on our properties or from droughts or flooding.

Yes, that's a very, very pertinent question. So we run climate-related stress tests on our portfolio using an external data source. And I'm pleased to say that in both cases of drought or flooding, we are relatively well positioned. That's data produced by a group called Verisk Maplecroft, who -- and actually, our insurers use very similar data.

So for us, it's less about risk associated with immediate climate effects, flooding or droughts, it's more about actually the resilience of our buildings, improving the energy efficiency of our buildings, which Bradley has obviously talked about. Clearly, when we are buying assets, new assets, assessing drought and flood risk is very important.

I remember even 10 years ago, assets where you have reports saying that they're at risk of flooding once in every 3 years, now once in every 100 unless. So it is a real issue and one that we do pick up as part of our normal due diligence.

And then the last question, which Bradley may just want to talk to you briefly is a time line for the illustrative bridge that gets us to the reversion. So again, Bradley, I'll just pass back to you here.

[Bradley Biggins, executive]

Yes. So this is illustrative, and we may not get to that GBP 37 million. And one way we're showing that is just to show what it looks like if we don't improve the void space. So therefore, we get to GBP 34.5 million. But I guess a few points we can make are the fixed uplifts are due to occur within the next 24 months. So the GBP 0.8 million, you can see there.

The Starbucks development rents will hopefully start coming through at the beginning of 2024. Stanley Green development will hopefully come through towards the end of next year. And there's really no time line on the CapEx or the acquisitions, very much dependent on specific situations and decisions we make at the time.

[Nick Montgomery, executive]

Great. Thank you very much for all those questions. They are great questions. And if there's any follow-up after this, we'll very happily respond.

[Operator]

Nick, Bradley, that's great. And thank you of very much for being so generous of your time then addressing all of those questions that came in from investors today. And of course, as you just said, if there are any further questions, we'll make these available to you immediately after the presentations ended for you to review. And ladies and gentlemen, we'll publish all those responses where it's appropriate to do so on the Investor Meet Company platform.

Nick, perhaps for redirecting those on the call to provide you their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments to wrap up with, that would be great.

[Nick Montgomery, executive]

Of course. Well, first of all, most importantly, thank you very much for your time. It's a second time we've done this. It's great engagement, and we will continue doing it.

I guess, hopefully, what you'll take away is although we are facing a much more uncertain outlook, we remain well positioned. We've got good performance. We've got the ability to asset manage the portfolio to, we believe, continue delivering the growth in net income. And we think we've got a really interesting way that we can differentiate our strategy to make us more appealing to a wider group of shareholders.

So again, given time, we have used our hour. I will leave it there.

[Operator]

Nick, that's great, and Bradley as well, thank you very much indeed for taking the time to update investors today. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order the management team can better understand your views and expectations? This will only take a few moments to complete, but I'm sure it will be greatly valued by the company.

On behalf of the management team and Schroder Real Estate Investment Trust Limited, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.