Schroder Real Estate Investment Trust Ltd

LSE:SREI

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Schroder Real Estate Investment Trust Limited Investor presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today, and we'll publish those responses where it's appropriate to do so on the Investor Meet Company platform.

Before we begin, I would like to submit the following poll, which will just appear on your screens now. And I would now like to hand you over to Head of U.K. real estate, Nick Montgomery.

[Nick Montgomery, executive]

Good afternoon. Thanks very much, Jake, and welcome, everybody to our quarterly investor update for Schroder Real Estate Investment Trust. As Jake just said, I'm Nick Montgomery. I'm one of the fund managers for the trust. I will be joined shortly by my colleague, Bradley Biggins. It will be our usual tag-team effort. And because this is a quarterly update rather than obviously announcing interims or finals, this will be slightly shorter than normal, but I think it's important that we give you an update firstly on what we're seeing in the market. but obviously, how we responded to that as part of our strategy and the results that we're delivering for you as shareholders.

So I guess just to start, with where we are in the market. And broadly speaking, for those of you that have been dialing in over the course of the last 12 months or so, things are moving in line with our expectations. I guess, first of all, looking at the market from a more macro perspective, on the left-hand side of this slide, you can see the expected fall in inflation from a very high rate, obviously experienced -- obviously, due to supply chain issues during the pandemic, but obviously also the energy crisis or the rapid rise in energy prices.

The gray line that you can see here particularly focused to the right of the dotted line is our forecast for U.K. CPI inflation. And positively, and I guess, as expected, we are expecting inflation to fall so that CPI dipped just below that 2% Bank of England target over the course of the next few months. Having said that, although that's clearly positive, we are expecting inflation to tick back up for different reasons, obviously, employment levels remain very healthy. There is still inflationary pressures in the system. And as a result of that, on the right-hand side, we're showing the market implied interest rate levels over the course of this year, which is derived from option pricing.

And essentially, what you can see here in the red boxes are the most likely rate according to those option prices. And you can see that essentially what's happened over the course of the last few months is those red boxes have moved to the right as markets have kind of look forward and think that the prospects for the bank to reduce rates earlier on are less likely than previously.

Now what that means is from a real estate perspective, there's a little bit more caution perhaps about how quickly rates will fall. And although as we've said in previous calls, there isn't a significant amount of debt in the real estate market compared certainly with the [ pre-GFC ] period. there are a lot of borrowers nonetheless, who are facing refinancings and where they are facing refinancings, obviously, these rates will mean the [ div ] is more expensive, and therefore, that is leading to a little bit more caution in the market. Now, in terms of what that means for real estate on the left-hand side here, we're showing you a really important relationship between property yields the net initial yield, which is essentially the rent you're receiving today divided into property values. And we're showing that against the 10-year bond yield, which today is in the region of around 4.2%.

So the gray bars that you can see there is showing the difference between 2. So essentially, the spread, the average real estate yields are offering over and above that, if you like, risk-free rate.

Now long, long run, we'd expect that relationship to be somewhere between sort of 100 and 200 basis points or 1% or 2%. And the gap at the moment at least, is slightly narrower than that. And so our expectations, looking forward, are that with rates falling slightly perhaps slower than expected towards the back end of this year and into next, but also the possibility of a further small step down in property values we will see that move towards being in that region of 150 basis points, probably towards the middle end of this year. And at that point, on that very simple basis, we can say that the sector is moving to being fairly priced. And on the right-hand side of the chart, you can see we have experienced a very significant correction within the U.K. real estate market. The data on the right is for average, all properties. So this is not our company. Our portfolio has performed better on a consistent basis but it does really illustrate the significance of the correction that we've experienced and how -- for people that are now looking at the U.K. real estate market, why we think increasingly, people see this as an interesting entry point to come into listed funds such as ourselves or indeed into some of the bigger unlisted real estate funds. And what the data is showing you here very simply is from June '22 to the recent cycle peak, the dotted line there, average values are down somewhere between 25% and 27%. You can see there the dark blue line, which is the industrial sector that suffered a more swift reduction in values largely because it was the lowest yielding sector. And when we saw that significant rerating in yields, particularly after the minibudget, clearly, the low-yielding sectors experienced a greater impact of those rising yields. But importantly, we are beginning to see and for reasons I'll come on to in a moment in terms of rental growth, industrial values are beginning to bottom out and indeed, that is probably the most liquid part of the market and where in fact, we have 50% of our portfolio allocated.

The blue line up there on top, that's a retail sector. Clearly, a very diverse range of retail within that sample, retail warehousing, convenience retail, where we have almost all of our retail exposure actually is doing relatively well. Shopping centers less so will be even in the shopping center market, we are beginning to see signs of life with that sector really having been in the doldrums for 10 years.

The orange line or the sort of [ reddy-orange ] line being the office sector, that you can see there is continuing to decline. The rate of decline, we think will slow over the coming months for a host of different reasons, not least, we're seeing obviously much improved return to work rates in London, in particular, but also in the bigger regional cities, we're seeing a good level of return to work. And also within that sample, we have very prime offices at one end, where in some markets, whether it's Central London, obviously, the city, the West End but also regional cities like Manchester, prime rent the very best new space in nominal terms have never been as high, interestingly. But we will be much more concerned about more secondary out-of-town offices where we see further valuation declines, but I'm pleased to say that's not a part of the market where we have any significant exposure.

Now the same history doesn't repeat, but it echoes and I think it's interesting to compare the current market cycle with previous cycles. And just to put the capital value side in context, the 27% or so average decline in values that I've just outlined compared with 44% reduction in values during the global financial crisis.

So we're not at that level, but from a historical perspective, and again, this gets back to this being, we think, an interesting entry point into the sector. This -- we have experienced a significant correction.

Now what's different because it is always different is actually the way that rents are behaving this time around. And what we're showing on the left-hand side of this chart is something that I think may have seen before is how rental values have recovered since the most recent correction compared with those past 2 cycle corrections being, as you can see on the left-hand side in the key, the [indiscernible] bust 89 into 90, Obviously, the GFC, the period from 2007, 2009 and the most recent correction from the middle of 2022. And what we've shown is indexed, you can see there's a 100 -- we're showing how rents have behaved over the subsequent months following those previous cycle highs into the downturn. And what's really interesting on the left-hand side is you can see compared with those past cycles, average rents are actually performing quite differently.

Now this is partly about inflation. Clearly, these are nominal rates and the level of inflation we've experienced over the recent years clearly exceeds what was experienced, particularly during the GFC, but also the late 80s. But that does really illustrate, I guess, one of real estate's benefits, which is at least on the income side, the sector is a good hedge in rental, the rentals generally grow more strongly in higher inflationary environment.

But it's not just about the inflation. There are obviously structural factors that are driving this. And the first structural factor is that we simply have less new development happening. So the tenants want the very best quality space. They are having to pay rents, as I say, in some cases, higher than they ever have been prime Manchester office rents, for example, GBP 45 a foot compared with previous cycle highs in the low to mid-30s.

But there are also the bigger structural trends that are impacting rents, and that's best illustrated on the right-hand side, where we're showing exactly the same data periods not for all the property but focusing specifically on industrial. And when we say industrial, we mean everything from the multi-let industrial estates that we own through to the big boxes that you'll see popping up on major transport routes.

And you can see there that, that sort of divergence is even more dramatic. So the dotted line in the bottom there in blue, that's how industrial rents behaves during the period after the global financial crisis. But you can see actually over this most recent period, we've seen very strong levels of industrial rents. And this is partly that inflation, obviously. But it is also very much about structural changes and obviously, the shift that we've seen from physical retail to online retail, third-party logistics, operators restructuring their pipelines.

But really importantly for us, the fact that no one is really building multi-let industrial estates. There is a chronic shortage in many urban areas, not enough has been built. So if you do own these assets, notwithstanding the lower growth environment that we're currently experiencing, we are still seeing very positive levels of rental growth coming through. And Bradley later on will illustrate some of those points as we go through the presentation.

So what's the outlook? So I think it's really important to state that, again, as we thought, we are coming to the end of what has been quite significant downward correction in real estate values. And we think we are moving back into a market where we will see more capital coming into the sector. Now that's partly because certainly post-Brexit, we have seen lower levels of capital flows from international investors into particularly London, but also flows generally into the U.K. real estate market. But we think going forward, we will see that begin to change.

As I said, we have relatively low levels of development across most markets. Whilst companies, in some cases, are facing refinancing risks. We don't have the distress that we saw in the global financial crisis, where borrowers were breaching loan-to-value covenants. That isn't something that we're seeing in the market anything like the same way that we saw during that period.

So we think the backdrop and particularly when we take a view, again, I think this is right that we will -- although the pace of rate reductions are perhaps going to be slower than the market was expecting, they are, nonetheless, we believe, going to be coming down. And so alongside that rental growth that we're going to see in the sector come through increasingly, we also think that values will be supported by that reduction in interest rates.

You forecast -- you will have seen the 10-year perhaps falling somewhere between 3% and 3.5% by the end of next year compared with low 4s today. As I say, we do see average real estate values fall a little bit more, and we see average yields perhaps moving from 5%, of course, to 5.5%. At that point, we have that significant cushion that I mentioned perhaps 200 basis points between the risk-free rate and the return from the net energy [indiscernible] sector.

So for those reasons, what we're showing on this slide is how our forecasts are changing. Now the one thing I can say with certainty about these forecasts is that they will be wrong. But I think for the reasons I outlined, a combination of income return at or just above the long-term average but also those more attractive sort of supporting features of the market, supply and demand in balance, lower interest rates means that we believe we are moving towards a period in the cycle where real estate will start to deliver returns 7%, 8%, 9% per annum, which is probably slightly above where it has been on a long-term basis. And again, we are beginning to see increasing interest from investors in the sector, not just shareholders in trust, such as Schroder Real Estate Investment Trust, but also actually more broadly in some of the open-ended funds where we're starting to see international investors as I say, look again at the U.K. with more interest.

So moving forward, again, for those that don't know us quite well, just to recap. So we're showing here the 6 assets with the most recent reported values to December. For those who don't know us, and the reason we show this is actually these assets here, the 6 assets represent about 50% of our portfolio value. So it's very easy really to sort of get a view about what's under the [indiscernible], so to speak.

From the left-hand side, our investment exposure, which is 50% of portfolio value is almost exclusively now in larger multi-let industrial estates. In almost all cases, well located on the edge of density populated urban areas, really granular income, a whole mix of tenants, manufacturers, distribution, other alternative uses. And that gives a lovely sort of granularity to the underlying portfolio, but it also allows us plenty of asset management activity to refurbished units, create new rental evidence, apply that rental evidence to other units. And that's been a really key driver of performance alongside various sort of infill developments that we're doing across our industrial portfolio, where we create a really high-quality space. And Bradley will give the most recent example where we're delivering really high quality in particular assets that have a very high sustainability performance and how that's driving returns. Office portfolio, though, we're showing you our 2 biggest office exposures here. the building we own up near Crossrail or Elizabeth [indiscernible] now in Bloomsbury, which is actually [indiscernible] university or City Tower in Manchester, which is a building that sits right in the middle of the city center, which has a whole mix of different uses. Obviously, office dominating, but also hotels on the left-hand side of the image, you can see and -- it actually happens to the university as well within that building.

Retail, so our retail exposure is, as I say, really concentrated in value retail sectors actually that were much more pandemic resilient, perhaps some people expected. Our largest retail asset, you can see in the top right-hand corner is a really good quality retail part in Bedford. Lots of [indiscernible], obviously, good [indiscernible] to London, where we have tenants like Lidl, Light Home Bargains, great footfall drivers that have allowed us to drive income on those estates, including recent development that Bradley will talk to.

But finally, along [indiscernible] retail warehousing sort of convenience retail in density populated areas and the asset you can see there is a fantastic asset that sits just north of Leeds, anchored by Sainsbury's, Premier Inn Virgin in the upper floors. And interestingly, this is the only asset where we've had any material retail failure over the course of last [indiscernible] where we had a Wilko. Interestingly, that unit was immediately occupied by Poundland who you may know taken out a number of the Wilko units on a license basis. But actually, our preference clearly is for long-term lease commitments, and we've recently agreed terms to let that from McDonald's, 30% ahead of the rent that Wilko was paying previously. So where you do have these very densely populated areas where you have the high frequency of basket shops, high frequency of footfall, occupational demand actually is pretty resilient.

So that's an overview of the portfolio. I guess just to recap on the key reasons why we think SREIT is an attractive proposition today. Well, Bradley will give a bit more color on this, but really good quality, diversified portfolio with a very significant reversionary potential. So the difference between the rents we're receiving today and the potential rents that we can receive from crystallizing rent reviews and other activity.

We have a very attractive dividend yield, and I'll give you a comparison to the peer group shortly. But really importantly, that 8.1% dividend yield give or take because obviously, the share price is being around a touch was actually 98% covered over the 9-month period to the end of December and we expect a similar level, obviously, for the full financial year with potential upside risk as we continue to deliver the asset management in the portfolio.

We have a very robust balance sheet, really probably the most attractive within the peer group, but again, more on that later. And again, understanding all of those points, the shares are still trading at a discount in sort of mid- to high 20s. And again, when you step back from it and look at the potential outlook for the U.K. market, our view is we are potentially approaching a tipping point where we will begin to see share price ratings start to reflect more of that potential upside risk as we see values bottom out. And interestingly, obviously not directly comparable with our portfolio, but some of you may have seen that one of the bigger internally managed REITs [indiscernible], which is obviously [indiscernible] in the industrial sector actually conducted an oversubscribed equity issuance last week, raising almost GBP 1 billion at around 10% discount to NAV.

And I think that's yet not directly relevant, but I think it's an interesting signal perhaps, the public markets are looking forward at the potential upside coming forward, and we think we'll begin to see that played out also within the direct markets as we move into the second half of this year.

Final point to note is we, alongside all the things that we've done in terms of refinancings, asset management, we have taken the advantage and this is really capitalizing on what we believe is a differentiating factor for Schroder more broadly, but for this trust is be more upfront about how sustainability characteristics and how they drive the way that we actively manage the portfolio will, in our view, allow us to more quickly capture the green premiums or the higher rents that occupiers are prepared to pay for the most sustainable, highest quality space. And again, more on that later. So very briefly, again, just sort of a snapshot of where we think we sit within our peer group, and we've anonymized these to protect the innocent, but the names of the peers are shown in the notes. But we're just sort of drawing out why we think for different reasons, SREIT really is the most attractive currently in its peer group. I guess just starting from the top in terms of our dividend yield, our dividend yield is the second highest in the peer group, but very importantly, it's 98% covered. And as you'll hear shortly, significant upside, we think, to come from the portfolio in terms of income as we deliver the asset management.

Notwithstanding that, you can see our discounts, I've mentioned it, but [indiscernible] when we produced these slides a few days ago, was trending at 29%, notwithstanding the high dividend yield. And again, also, really importantly, and going back to my comments about debt, the issue really for a lot of owners is refinancing risk in terms of income and interest cover rather than loan to value, but you can see there, average duration of our debt, 10 years with an average cost of 3.5. So when you weight those two factors, we would argue strongly that we have the most attractive debt structure in the peer group.

So with that brief overview, I will hand over to Bradley to give you a bit more color on the quarterly results. Bradley?

[Bradley Biggins, executive]

Right. Good to be talking to you all today. We've got some really interesting activity to go through. And in terms of key highlights, well, a very busy period for us over the last few months. We've got shareholder approval to evolve the investment strategy of the fund. We've completed a number of developments and major refurbishments, which have increased our annual rent. So you'll know our annual rent is higher than the previous quarter. And also the reversionary potential, which is again higher than the previous quarter.

There's been huge letting activity. So 32 new lettings, rent reviews and renewals, and that covers over [ GBP 5 million ] of income. And importantly, it's ahead of the opening ERV. So it shows that, that reversionary number is achievable or In fact, we've outperformed it in the last few months.

And the final point to note is that we did dispose of one asset. We sold an office in Leeds for GBP 3.8 million, and that was a 16% premium to the independent valuation. And bear in mind, our shares are obviously trade in at a discount to that NAV, which embeds that independent valuation, and we're outperforming on this side at 16%.

Moving on to the NAV. So as Nick says, high interest rates, uncertainty around when cuts are coming and a volatile [indiscernible] market have continued to impact on real estate value. So you saw the markets of our benchmark declined by 2.3% in value and in turn, our portfolio declined by 1.6%. So outperformance, but still negative. And that is the main driver in our NAV decline of 3% during the quarter. If we include our dividend, which is very attractive, then the NAV total return is minus 1.6% for the quarter. Final point to note on here is that looking at our EPRA earnings and our dividend paid. For many years, we've been fully covered. This quarter, we're slightly uncovered, and we did incur some costs in relation to that strategy change, which has impact of the divi cover there. But as Nick says, we think we'll be at least 98% hopefully covered for the full year.

Now moving on to the strategy. So what we've done is we've embedded some sustainability objectives and KPIs in our investment objectives and in our investment policy. In addition, we've got some really clear governance in place. So you can be confident that we're doing what we're saying we're doing and we will provide transparent reporting in our annual reports.

Underlying our strategy and delivery of that is our proprietary ESG scorecard, which we've developed to help us analyze the sustainability performance of our assets and importantly, how we're improving that over time.

Now the reasons for doing this, the absolute key reason is we believe this will enhance our long-term total returns for shareholders. But in addition, we think this will differentiate us from peers. There are a number of peers that are fairly similar and we want to stand out from those. We think it will attract new investors and marginal investors who are specific sustainability objectives. So if we can attract those marginal investors, we think that would improve the liquidity and share price rating of the company's shares.

Now I said the key reason for implementing this strategic change is to enhance total returns for our shareholders, and how is that going to happen? Well, what we're seeing in the market is that for buildings that exhibit some or all of the characteristics shown in blue at the top of this slide, so these sustainable characteristics. Well, they higher rents and are valued at higher values compared to buildings in a similar location and of a similar age that don't have these characteristics. And that difference is being referred to in the market as a green premium.

Now the question is why would an occupier be happy to pay more rent for a building that exhibits some or all of these characteristics? Where they want to attract and retain the best staff, they want to bring them into the office and compel them to come into the office, they want to control their utility bills, and they also have their own corporate targets to meet now because as these new laws and regulations come in and the U.K. net zero carbon pathway is trying to be met by 2050 is impacting the behavior of occupiers but also investors.

So why would investors want to pay more money for a building that exhibit some or all of these characteristics. Well, they rent the high rents, they rent more quickly, they suffer less void, there's less CapEx required in the medium and longer term, and there's also less risk of obsolescence as more stringent regulation comes into place.

And in terms of the quantum. Well, there's really clear empirical evidence that for London offices, there's a 20% valuation premium for assets that exhibit some or all of these characteristics.

In regional offices, we've undertaken an analysis of our own portfolio and also work with the PMA independently to see what the regional office premium is. And what that shows is that it's around 8% and we believe that 8% will trend more closely to the 20% in London over time. And then finally, for multi-let industrial estates, it's difficult to put empirical evidence on this because of the nature of these assets. So they're very varied, often have 60-plus units of varying quality and age. Well, we estimate it's 5% to 10%, and that's a conservative estimate in our view and at Stanley Green, we see a 21% premium on the rents for the sustainable units versus the older less sustainable units.

Now moving on to the portfolio. On the left-hand side chart, we've set out some important metrics of the overall portfolio. And we just like to draw out a couple of points that we've highlighted in green. So we've got 39 assets at the moment. We've got more than 300 tenants and that really reflects the diverse and granular nature of the portfolio, which we think makes it more resilient. And then we've highlighted the [indiscernible] that speak to the higher-yielding nature of the portfolio. So our net initial yield is 6%, and that compares to the benchmark of 5.2%. So already we're yielding more than the benchmark.

But we've also got an astonishing reversion yield of 8.4%. Now that 8.4% represents an additional GBP 10 million of revenue on our current annual rent. And to put that into context, our annual dividend at the moment is GBP 16.4 million. So clearly, if we're able to capture some of that GBP 10 million reversion, it shows there should be really good opportunities to move the dividend on.

And looking at the right-hand side chart, we set out the structure of the portfolio in terms of the sector weightings. And the clear overweight sectors are industrial, which is almost entirely multi industrial estates where we see really favorable supply-demand dynamics and retail warehousing. Other point to note is that whilst 25% of our portfolio is offices, 10% of that, so 10 out of 25 is actually left to universities and [ users ] university campuses.

Moving on to our tenant base. Here, we show our 15 largest tenants by passing rent as at December 31. Some points to note here are that there's only 2 tenants that represent more than 4% of the current book, which again shows that the portfolio is very resilient, and the risk is well spread. And those 2 tenants, one is Siemens Mobility, which is part of global [indiscernible] Siemens, and the other is the University of Law, which is the largest private provider of legal education in the U.K. and it's a growing business. So we're really comfortable with those 2 tenants. And if you look down the list, we see household names, we are really comfortable with this list and this represents 34% of our rent. So we feel really positive about this.

Let me take you through Stanley Green because it has been a really significant initiatives that we've undertaken in the last few years, and it's a really successful one and some really good proof and concept of that green premium in action. So just to recap, we acquired this asset in December 2020, we paid GBP 17.25 million and since then, we've spent GBP 9 million in CapEx to build the new estate, which is shown in the 2 photos. So when we acquired the asset, there was an existing estate with about GBP 1 million of [indiscernible] income. And there's also a 3.4-acre development site. And in the photos, you can see what we've turned that into.

When we were planning this development, we took a conscious decision to spend around 20% more on the CapEx to generate really sustainable accommodation. So we've got PVs on the roof, EV charging, really good insulation source, [indiscernible] pumps, there's planting and we try to use recycled materials where possible. And all of that, whilst it costs more, has resulted in really strong demand for the units. And as I said, what we found is for equivalent size units, we're getting 21% higher rents. We've achieved an EPC A+ on these units, which are the first A+ EPCs in the portfolio and also BREEAM Excellent.

And in terms of was it worthwhile spending that extra CapEx to get a higher rent? Well, we think the returns are really good evidence that it was. So since acquisition, the annualized total return for the asset is more than 20% per annum, whereas the MSCI or industrial sort of equivalent benchmark is only 7.1%. So really strong outperformance for this asset and a really good proofing concept for the slight pivot in strategy.

Moving on to the next slide. Here, we've got an example of a recent sort of deal we've done. So this is the University of Law campus located on Store Street in Bloomsbury in the West End of London. So a really interesting location got [indiscernible] Road, new Crossrail station recently opened, which has really transformed the London landscape, which is a really fantastic piece of infrastructure.

This is the knowledge quarter, so you've got universities here, so there's a UCL, British Museum and lots of life science occupiers as well, so often known as the knowledge quarter. And this is our largest office exposure, and it's a single lent asset in 2 freehold buildings, we lent this to the University of Law. Now we had an expiry coming up in December '26. So we took the opportunity to regear the lease, push the expiry out by 3 years and also push the rents on, and by December '28, the rents will be 39% higher than they are today. So it's a really accretive deal added GBP 5.6 million to the total valuation and has boosted our performance in the quarter.

Now in terms of asset management initiatives we have underway or close to completion. And I mentioned these -- the last quarter, we presented here. So we've got 3 examples. And between them, they add up to almost GBP 1 million in rent. There's 2 Starbucks that we discussed before. While Starbucks have completed building those and as seen as they deliver us the warranties, we'll hand them GBP 1.7 million for that. The yield on cost at Bedford is 8%, and the yield on cost of [indiscernible] is more than 12%. These are 15-year leases to Starbucks, so a really strong covenant and they're inflation-linked. So a really good outcome.

At the [indiscernible], we've undertaken a GBP 2 million refurbishment. There were 3 vacant units, but all of them -- what 2 of them were let and 1 of them is in advanced some legal negotiations, and we hope to be able to announce completion soon. And importantly, that last deal is ahead of ERV, so sort of 19% ahead of ERV for parts of the space are taken on.

And then finally, we show [indiscernible] in Swindon. This is 3 industrial units on an established estate. We've got GBP 450,000 rents coming from 2 units were recently refurbed. We brought them up to EPC B. We listened them at GBP 750 per square foot, which is already 25% higher than the previous passing rent. But actually, we got one under offer, GBP 8, which is 1/3 higher than the previous passing rent. So it shows what you can do with the right refurb.

Now in terms of the reversion, our annual rent at 31st of December was GBP 29.2 million. And as I mentioned, that reversional income is almost GBP 10 million higher, so it's GBP 38.5 million. And what we set out here are steps in terms of that show how we're going to get there. So even since the year-end, we've increased our rent by GBP 700,000 through contractual fixed uplifts in existing leases. And by the end of 2025, there will be an additional GBP 2.5 million of contractual fixed uplifts effective. So in total, there's GBP 3.2 million of additional rents just if we do nothing.

At Stanley Green, we've got some void space remaining, and that is around GBP 600,000 of additional rent. We've got really good interest there. And then the final 2 steps, well, there are some units that we're letting at the moment for rents that are below the market level. So when we get around to rent reviews and lease expiries we'll be able to achieve higher rents and capture that GBP 1.9 million. And then finally, there's vacant space, and we're making good progress bringing that down. So it's currently 12%. And we believe we can get that down to around 9% by the financial year-end.

Now the final slide for me, just touch on the balance sheet, which we think is a real competitive advantage. And it's really underpinned by the term loan from Canad Life. So that's GBP 129.6 million that we have drawn. The average fixed interest cost on that GBP 129 million is 2.5%, so extremely low in the current environment. And the average maturity of that loan is more than 12 years. and that really underpins the strength of the balance sheet.

In terms of the remainder of our drawn debt. Well, there's GBP 46 million drawn on an RCF, GBP 30.5 million of that is subject to a cap of 4.25% and the remainder is floating. And our strategy at the moment is to sell some of our smaller assets to pay down that GBP 15.5 billion of floating RCF, which will be accretive to our earnings, given where interest rates are at the moment. Overall, the net lines of value is 36.6%. And as we sell down those smaller assets, we expect the 36.6% to decline to less than 35% over time.

So I'll pause there. And it would be great to take any questions, and I'll hand back to Nick.

[Nick Montgomery, executive]

That's great. Thanks, Bradley. So I guess just to briefly summarize on this slide before I hand back to Jake and then questions. I think the first point, again, as we hopefully have been guiding, we think the U.K. real estate market is now stabilizing. And that's been in a positive way, supported by good fundamentals in terms of a low level of supply, positive rental value growth, particularly when you compare it to coming out of previous market downturns, and we hope, believe we will see more investor support coming into the sector when we see rates trend down back in line with where we were expecting earlier in the year. Our underlying portfolio, we think, is really well positioned. We think we've got the sector allocation right, 50% allocation to the multi industrial sector. And that's really evidenced by the outperformance when you compare our underlying portfolio with peers, significant outperformance over all time periods.

Importantly, from a dividend perspective, we think there is a real potential to drive earnings growth, as Bradley said, that GBP 10 million delta between the current rent we're receiving and the values view of market rents. We're not going to get all of that, but we will get a significant amount there. And that GBP 10 million sits in contrast with the dividend today of GBP 16 million. And finally, again, and about the income, we really do believe that by placing sustainability right at the center of our investments and asset management strategies means we will be able to drive more sustainable long-term income growth and also importantly, differentiate ourselves from our peers because we do believe we're doing things a bit differently. So Jake, I will hand back to you before we get our questions.

[Operator]

[Operator Instructions] Bradley and Nick, as you can see there in the Q&A tab, we have received a number of questions throughout your presentation this afternoon. And thank you to all of those on the call for taking the time to submit their questions. But Nick, Bradley, if I may, just hand back to you just to read out those questions and give your responses where it's appropriate to do so. And then I'll pick up from you at the end.

[Nick Montgomery, executive]

Fantastic. So thank you very much. And thank you all so -- for all the questions. So I'll just recap on a couple of these because we may have covered them. But I guess the first point -- the first question is what percentage of Stanley Green trading estate is now contractually let? And what percentage is in negotiations or advanced negotiations?

So the first point to note is the new developments is now 60% contractually let. And we have space under active negotiations, which we believe will take us up to about 80% let, and we have an objective ideally that when we come to present our final year-end results to you, which will probably be at some point in June or July, that we will be fully let. Now as I say, that will be an outstanding result. And it may be we have a bit left when we come to do the results because we're obviously balancing getting income in, but equally, we're balancing that with maximizing the rents. For those of you that read the release that we made recently with the NAV, the deals that we did with Siemens, for example, at Stanley Green trading estate that was 30% ahead of our original underwriting. So we really are doing very well on the rents that we're agreeing.

The next question talks to the loan to value.

So the net loan to value remains about 35%. [indiscernible] disposals over and above a couple [indiscernible] on track to reduce that.

And then a linked question, which is, is any uplift in the dividend dependent upon that net LTV being below the 35% level?

Now first one to note is that 35% is the upper limit of our own internal guidance that we agree with the Board. We have significant cover against our actual banking covenants. I think it's just important to note. There are disposals planned. We have assets in the market. And if we get prices that are acceptable, then we will sell those and we will look to repay the floating portion of the RCF and therefore, bring us back in line with that long-term internal range. The second leg of that question is getting back into that range isn't a trigger on its own for whether we have a further increase in the dividend. Obviously, it's one of a number of considerations. And of course, the relatively high cost of that floating portion of the revolving credit facility [indiscernible] is that we are selling assets, it's likely that the yield on the assets that we're selling will be below the yield on the debt, so it will be accretive to openings. But we're hoping to do all of the above. We're hoping to undertake these small sales, repay the RCF, but really importantly, continue to drive that net income growth, which will obviously have a positive effect on value.

And that really is a key driver in terms of the decision making on a quarterly basis with the Board to determine what level of dividend we can pay. But as I say, we are positive about the activity in the portfolio and how that will lead to a further increase in earnings, and hopefully, in due course, a progressive dividend policy.

And that really sort of links into the second question. There's another question about what's progressive dividend policy mean? And then essentially, when we get to a point when we've crystallize that extra income, when we have confidence that, that level can be maintained, we will be recommending to the Board that we continue to increase the dividends.

Just to recap, we are 9% above the pre-pandemic level. We're the only company in [indiscernible] that is paying the dividend just above that pre-pandemic level. A quick question just on timing of the dividends as to why the most recent dividend was slightly later in the month?

That was simply due to the Board cycle in terms of the meeting. We also had a pretty busy time with the Board and you run up to the end of last year in terms of approving [indiscernible]. It just meant that actually when we came to this board meeting on the dividend, it just ended up thing slightly later. So we don't expect to change the timetable significantly. Obviously, we will continue paying those dividends on a quarterly basis. I'll hand over to Bradley in a moment. There's a question here about -- and I'll address it because I made the point about why do we think international investors will likely return?

I mean the first point to note is the U.K. and obviously, particularly London has always been one of the most liquid real estate markets globally. We obviously did see, as I said, international flows full. Now that's partly following Brexit and obviously currency volatility, but actually also practically as we went into the pandemic, having had a huge amount in particular, of Asian capital flowing into the U.K. and particularly London, obviously, people can travel. And therefore, we did see international volume slow.

I think we're sterling more stable. But I think importantly, and if you compare how property values have fallen versus other European markets. The U.K. has corrected ahead of the other big European countries like Germany, for example. And so that's why we think we will see international investors coming back to London before perhaps they look at some of the other larger continental European markets. So for those reasons, I think we feel optimistic. I also think it's worth noting that we have seen relatively limited activity from U.S. private equity investors so far at least. And I think that's partly because the office sector in the U.S. is in a very different position to the U.K. And I think there's a risk that people have conflated the 2. The work from home rates in the U.S. are much lower, there's a much bigger supply issue in some of the bigger -- particular coastal markets. But actually, we're beginning to see U.S. private equity show a bit more interest in the U.K. market. Blackstone, as an example, one of the biggest if not the biggest, they've begun to make some positive statements about how they are looking more closely at the Continental European and particularly the U.K. as a market. So I hope that gives a flavor for why we think that actually going forward, we will see more international interest.

Just so I can hand over to Bradley. There's a question that you might want to take just in relation to voids.

[Bradley Biggins, executive]

Yes, sure. Thanks, Nick. So the question reads that the voids increased to 12% at the end of the quarter and can we advise all major voids and expectations of lettings?

Well, we think that by the financial year-end, we'll be back down at 9% and the reason for that is the increase in voids is a result of those developments. I mentioned finishing. So Stanley Green, Hollin Lane at Stacey Bushes also the major refurbs at [ Sterling Coal ] and the [indiscernible] that we spoke through. So now those developments and refurbishments are finished, we can let the space and we've made really good progress.

As Nick outlined about Stanley Green in response to another question, so we do see a reduction in that void coming.

[Nick Montgomery, executive]

Great. Thanks, Bradley. And that's great. So just moving back, I guess, more to sort of corporate matters. There's a question just in relation to the discounts. And comment about the size of the trust and the extent to which we are too small for some of the wealth managers.

I think this is an interesting debate. And of course, a lot of the wealth managers have been consolidating, not least, obviously, Investec Rathbones. And there's no doubt that some of those large wealth managers do want bigger companies. I think equally, there are still a lot of smaller wealth managers, some of whom are coming out of those consolidation activities to set up on their own in fact, I saw one just yesterday up in York. So there are -- I'm pleased to say a number of smaller wealth managers who are still interested in buying our shares. In fact, we had one that we met, Bradley and I, a few months ago who now owns approaching 2%.

So I think whilst there is consolidation happening in the sector, where that is happening, the combined entities in most cases, simply aren't able to produce the same sort of dividend yield that we are. And so I think that yield, we believe strongly will remain attractive to a diverse spread of wealth managers. Now of course, one of the reasons for doing investor meet company is because we do also want to increase the proportion of investors that are coming through platforms. And I'm really pleased to say that even during the relatively short period of time, we've been using this platform. We have seen a notable uptick investors coming through the likes of [indiscernible], et cetera.

What we want ultimately clearly is a diverse range of shareholders that support liquidity and in time, hopefully, obviously, support the discounts. And I think one of the -- another area of interest that we're finding off the back of our strategic evolution, particularly with the sustainability focuses. There are a number of smaller wealth managers who are specifically looking for strategies where there is a real focus on sustainability in particular, where those good governance and where the sustainability improvements can be clearly communicated to investors.

So I think whilst there is consolidation happening amongst those wealth managers, we think we continue to offer something, which should remain attractive.

I'm just continuing to look through. Bradley, there's a question. Just provide a bit more color on the Starbucks deals, which I think are interesting, just to give a bit more color on. Do you want to just address that question?

[Bradley Biggins, executive]

Yes, sure. So do we target a minimum IRR when we're doing looking at CapEx and looking at acquisitions?

Yes, we do think about yield on cost and profit on cost. So that the main metrics we look at because with IRR, you obviously need to assume an exit at some point. And sometimes, we don't know the timing for that. So in terms of profit and costs, actually retail park where we put a Starbucks driver in the car park where the yield on cost there was more than 12%, which is really attractive if you think about an average sort of [indiscernible] acquisition might be around 6.5% net for yield. So pretty much getting double the yield there.

And the Bedford Starbucks was at a yield on cost of around 8%. The reason it was lower than [indiscernible] is simply because the land was worth more. So we are -- even though we're not spending money to get the land, we're obviously kind of using up the land. So we do take account of that on yield on cost, and that's why the Bedford one was slightly below 8%, but still attractive 8%.

In terms of how we're able to get that yield on cost, drive-thrus are really popular. You probably notice yourself. There's all sorts of drive-thrus in retail parks at the moment. And if you think about St. John's Retail Park in Bedford, the average rent for the retail park before we did Starbucks was GBP 20 a square foot, which is right where you want to be in the retail park. If you don't want to be overrented. [indiscernible] Starbucks are paying GBP 86 per square foot. So it just shows how accretive that can be. But as I mentioned in the presentation, not only are we getting that income, but it's also locked in for 15 years, there's inflation in [indiscernible] and Starbucks, we think are a really attractive covenant.

So it adds value because we want to maintain a really attractive dividend yield for our shareholders. So it means we can't go out and buy that long-term inflation-linked income, but we can create it for active asset management and Starbucks are a really good example of that.

[Nick Montgomery, executive]

Excellent. Thanks, Bradley. That's clear. I guess the last question is in connection with M&A more broadly and pertaining to obviously, the sector that also ourselves. A number of you will be aware, obviously, that there have been a number of M&A transactions in a sector, both within our direct peer group, but also M&A or at least discussions of M&A more broadly.

In terms of how it relates to us, I think what I'd say first and foremost is we have a very clear strategy that we think is the right one that is income focused and that we believe should deliver a really attractive long-term income return and the announcement we made in relation to how sustainability plays a part of that is obviously, we think, the right thing to be doing.

We do have the capacity within the team at Schroder to manage a much bigger company. We have a large team. We have a very large portfolio of assets more broadly. That gives us fantastic operational leverage, operational excellence sustainability resources, we would say, is genuinely market-leading.

So we are open-minded to M&A activity, but only if it is in shareholders' interests and in a way that means that we're not distracted from the principal job in hand. So as I say, we're open-minded. There's been a lot of discussion about M&A more broadly across the peer group. There have been some fairly interesting share price reactions as a result. So it's something we discuss with the Board on a regular basis. But as I say, our priority at the moment is to continue driving net income and deliver that attractive dividend that we all hold the shares for.

So with that, Jake, I will pass back to you.

[Operator]

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

[Nick Montgomery, executive]

No. Thank you. Well, firstly, most importantly, I'll say thank you, everybody, for joining the call for those who have bought shares for being shareholders and for engaging. We do genuinely get some really great questions coming through these platforms that are thought provoking. Again, for those of you that have joined us over the course of the last 12 months, hopefully, you'll see that, firstly, what we have been saying in terms of the market direction of travel towards a recovery. We've been broadly speaking, right about the direction of travel. And also, hopefully, again, those people have seen us last some months or so, the activity that we've been talking about, we are executing.

So again, hopefully, over the course of the next few months, you'll see further updates from us in terms of activity, again, Bradley, spoken about potentially about GBP 1 million of income that we're in the process of realizing we will continue via [ RNS ] to provide shareholders with updates on that activity. And obviously, we have our year-end results to March, which we'll be announcing in June where we'll be providing a further detailed update on activity, but also providing a lot more color on the work we've been doing to provide that baseline from which we will then monitor and track our performance, both from a sustainability perspective, most importantly, how that is helping us drive additional income.

So thanks for your time, everybody. And Jake, I'll pass back to you.

[Operator]

That's great, Nick. Bradley. Thank you once again for updating investors this afternoon. Could I please ask investors not to close this session as will now be automatically redirected for the opportunity to provide your feedback in order for the management team can really better understand your views and expectations. This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company.

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