Schroder Real Estate focuses on 'winning cities' in first half

(Sharecast News) - Schroder Real Estate Investment Trust announced its unaudited half-year results for the six months ended 30 September on Tuesday, reporting a net asset value of £354.3m, or 68.3p per share at period end, reflecting a decrease of 0.6% since the start of the period.
The London-listed real estate investment trust said its net asset value total return, including dividends paid, was 0.5%, compared to 3.0% a year earlier.

Profit for the six months totalled £4.6m, down from £10.6m, which the board said reflected lower valuation gains on investment properties.

Adjusted EPRA earnings totalled £6.7m, compared to £7.1m a year earlier.

The firm said it had dividend cover of 99%, down from 107% year-on-year, while its loan-to-value, net of all cash, was 23.1%, up from 22.1% at the start of the period, although adjusted for post-period end refinancing and disposals that decreased to about 22%.

Schroder Real Estate reported £45m of disposals during and since the period end, reflecting a 15% net premium to the valuation at the start of the period, and taking total disposals since 1 January to £95m at an average net initial yield of 3.0%.

It said its post-period end refinancing capitalised on low long-term interest rates, reducing the cost of the long term debt from 4.4% to 2.5% and extending the term from 8.5 years to an average 16.5 years.

The interest saving of £2.5m per annum would be paid to shareholders by way of an approximate 19% dividend increase from 1 October.

Following the cost of the refinancing and on completion of contracted disposals, the company said it had funding capacity of approximately £90m, providing the potential for delivery of further sustainable net income growth.

It also said it had sustained its outperformance with the real estate portfolio, with a total return of 2.5% over the period compared to the MSCI/IPD Benchmark Index of 1.0%.

The company said 96% of the portfolio was now located in 'winning cities', with increased exposure to higher performing regional offices and the industrial sector.

It said active management of its portfolio provided visibility of new long leases on completion of refurbishments at St John's Retail Park in Bedford, Headingley Central in Leeds and City Tower in Manchester.

A total of 26 new lettings, rent reviews and renewals were completed during the period, for an additional £1.1m of rent above the previous level.

That activity, as well as disposals during and post the period end, had maintained a stable void rate of 7.3%, up marginally from 7.2% at the start of the period.

Schroder Real Estate reported a reversionary income yield of 7.2%, compared with the MSCI benchmark of 5.3%, which it said supported income growth against a backdrop of slowing capital growth.

"This has been another busy period for the company with a focus on activity that has improved shareholder total returns and strengthened the balance sheet," said chairman Lorraine Baldry.

"This should support future returns during a period of greater market uncertainty.

"Whilst the disposals of lower yielding assets will result in a temporary decline in net income prior to reinvestment, the board is comfortable with this approach as the company has approximately £90 million of funding to take advantage of more attractively priced investment opportunities supporting the delivery of a fully covered, sustainable and growing dividend policy."

Duncan Owen, global head of Schroder Real Estate, added that the activity during the interim period left the company in a "strong position", with a low borrowing ratio and operational flexibility.

"There is additional investment capacity of approximately £90m ahead of an expected market correction," Owen explained.

"Selectively deploying this capital over the course of 2020 into winning cities at higher yields should mean the company is well placed to deliver continued, sustainable growth in net income."

At 1122 GMT, shares in Schroder Real Estate were up 1.5% at 54.2p.