Last checked at 
24 Apr 2013 07:00
Schroder Real Estate Investment Trust Limited
(the 'Company' / 'Group')
INTERIM MANAGEMENT STATEMENT
Net Asset Value
Schroder Real Estate Investment Trust Limited announces an unaudited net asset value ('NAV') of £160.5 million or 45.1 pence per share ('pps') as at 31 March 2013. This reflects a decrease of 3% compared with the NAV as at 31 December 2012 of £165.6 million. A breakdown of the NAV movement over the quarter to 31 March 2013 is set out below:
£m | pps | Comments | |
NAV as at 31 December 2012 | 165.6 | 46.5 | NAV announced 24 January 2013 |
Unrealised change in valuation of direct property portfolio | (4.6) | (1.3) | Like for like decline excluding capital expenditure of 1.7% |
Capital expenditure during period | (0.5) | (0.1) | Principally relating to refurbishment works at Peterborough and Swindon |
Unrealised change in valuation of joint ventures | 0.2 | 0.1 | Increase in valuation of Crendon and Merchant |
Unrealised movement in interest rate swaps | 3.9 | 1.1 | Reduction in negative mark to market value |
Realised swap break costs | (2.8) | (0.8) | Incurred in connection with the £20 million debt repayment on 15 January 2013 |
Post-tax net revenue | 1.8 | 0.5 | Post tax dividend cover of 57% |
Dividends paid | (3.1) | (0.9) | Dividends paid during the quarter |
NAV as at 31 March 2013 | 160.5 | 45.1 |
Debt and refinance
On 16 April the Company announced the completion of a new £129.58 million loan facility with Canada Life to refinance its £114.5 million securitised loan in full. This represented the successful conclusion of a strategy of selective property disposals, where asset management initiatives had been completed, to reduce the quantum of the Company's debt and its loan to value ('LTV') ratio in order to optimise the terms of the refinancing.
As part of this strategy, following the disposal of Minerva House in London in December, a further £20 million of the securitised loan was repaid on 15 January 2013, increasing the total securitised loan repayments since April 2012 to £59 million. As with previous repayments, this required a pro-rata proportion of the interest rate swaps to be broken, crystallising a payment of £2.8 million. Details of the Company's financing arrangements as at 31 March 2013, prior to the refinancing completing on 16 April, are set out below:
As at 31/03/13 | Amount (£m) | Swap rate (%) | Margin (%) | Total interest rate (%) | Swap maturity | M2M* at 31/03/13 | M2M* at 15/01/13 (£m) | M2M* at 31/12/12 (£m) |
Loan | 36.8 | 5.099 fixed | 0.2 | 5.299 | 15/07/14 | (2.2) | (2.5) | (3.0) |
Loan | 77.7 | 5.713 fixed | 0.2 | 5.913 | 15/07/16 | (13.0) | (13.3) | (16.1) |
Loan total | 114.5 | 5.52 fixed | 0.2 | 5.72 | N/A | (15.2) | (15.8) | (19.1) |
Liquidity facility** | 11.2 | 0.5*** | 0.662 | 1.162 | N/A | N/A | N/A | N/A |
* M2M or marked to market value of interest rate swaps
** Securitised debt facility had a Liquidity Facility of £11.2 million provided by Lloyds Banking Group ('Lloyds'). This has been repaid as part of the refinancing
*** Three month Libor as at 18 April 2013
The new loan satisfies the Company's strategic objectives of achieving a long-term debt maturity, a reduction in the cost of debt and sufficient operational flexibility to permit continued active management of the portfolio. The principal terms are as follows:
·; Total fixed interest rate of 4.77%, equating to an interest cost of approximately £6.18 million per annum. This compares to an interest rate under the previous securitised loan of 5.72% or an interest cost of £6.55 million per annum
·; The new loan should also realise a reduction in loan servicer fees of approximately £0.4 million per annum
·; 80% of the loan maturing in 15 years and 20% maturing in 10 years
·; Initial loan to value ('LTV') ratio, ignoring cash held outside Canada Life's security, of 50%, calculated with reference to an independent valuation as at 15 January 2013
·; No amortisation
·; LTV covenant ratio of 65% and an interest cover ratio ('ICR') covenant of 185%
·; Flexibility to sell existing properties and acquire new properties
·; Flexibility to asset manage the portfolio including the ability to utilise cash from disposals to fund capital expenditure
·; Flexibility to make a limited number of voluntary prepayments. Fixed rate break costs are payable on any prepayment
As a condition of the refinancing the Company has broken its remaining interest rate swaps related to the securitised loan, crystallising a total swap break cost of £15.1 million. As the Canada Life loan benefits from a fixed rate, going forward there will be no requirement for the Company to reflect a mark to market value of interest rate swaps in its NAV.
Having paid swap break costs and after total re-finance fees estimated at £2.1 million, the Company has cash outside Canada Life's security of approximately £27 million. This results in a net LTV, on the basis of the portfolio valuation as at 31 March 2013, of approximately 39%.
Dividend policy
Post-tax dividend cover over the quarter to 31 March 2013 was 57% which compared with dividend cover for the year to 31 March 2013 of 60%. Dividend cover over this period has been supressed partly as a result of property disposals in order to optimise the refinance terms.
Following the completion of the refinancing, the Board and its advisors have undertaken a review of the longer term sustainability of the dividend, currently 0.88 pence per share per quarter. Considerations have included current and anticipated future market conditions, on-going capital requirements and property specific factors such as the recent planning refusal at Reynards Trading Estate in Brentford.
Following this review the Board has concluded that a sustainable dividend, based on the Company's portfolio and business plans, is 0.62 pence per share per quarter, representing a reduction of 30% from the current level of dividend. Coupled with the new financing arrangements, the new dividend policy is intended to put the Company on a stronger financial footing in an economic and market environment which remains challenging.
The Company announces an interim dividend of 0.88 pps for the period 1 January 2013 to 31 March 2013. The dividend payment will be made on 24 May 2013 to shareholders on the register on 3 May 2013. The ex-dividend date will be 1 May 2013. The adjustment to the reduced level of dividend will take effect from the quarter ending 30 June 2013.
Market Background
The latest Investment Property Data ('IPD') Monthly Index to 31 March 2013 confirmed a quarterly total return for all commercial property of 1.1% (quarter to 31 December 2012 0.5%) with an average income return of 1.7% (1.7%) and a capital value decline of -0.7% (-1.1%). This resulted in a total return for the year to 31 March 2013 of 2.6%, with an average income return of 6.8% off-set by a capital value decline of -4%.
Retail continues to be the worst performing sector, producing a total return of 0.25% and 0.7% over three months and one year respectively, albeit with the margin of underperformance narrowing slightly. Industrial was the best performing sector over three months, producing a total return of 1.5% supported by the highest quarterly income return of 1.95%. Offices continue to be the best performing sector over 12 months, producing a total return of 4.3%.
Performance versus Investment Property Databank ('IPD') Index
The latest IPD performance data for the quarter to 31 December 2012 confirmed that the Company's property portfolio produced a total return of -0.6%. This compared with 0.2% for the IPD peer group Quarterly Version of Balanced Monthly Index Funds (the "IPD Index") on a like-for-like basis. Over the 2012 calendar year the Company's property portfolio produced a total return of 2.4% compared with the IPD Index of 1.4% on a like-for-like basis.
Property Portfolio
As at 31 March 2013, the Company's direct property portfolio comprised 53 properties independently valued at £258.58 million. At the same date the direct property portfolio produced a rent of £18.8 million per annum which, based on the Knight Frank independent valuation, reflected a net initial yield of 6.9%. The portfolio's rental value is £21.2 million per annum, resulting in a reversionary yield of 7.7%. The portfolio benefits from fixed rental uplifts due by March 2015 of £1.31 million. The portfolio void rate is currently 14.4% and the average unexpired lease term, assuming all tenants vacate at the earliest opportunity, is seven years. The tables below summarise the key portfolio information as at 31 March 2013:
Sector weightings | Weighting % | |
SREIT | IPD Index* | |
Retail | 25.8 | 44.3 |
Offices | 40.6 | 28.7 |
Industrial | 25.1 | 17.5 |
Other | 8.5 | 9.5 |
* Latest available IPD data as at 31 December 2012
Regional weightings | Weighting % | |
SREIT | IPD Index* | |
Central London | 0 | 17.4 |
South East excl. Central London | 54.1 | 32.3 |
Rest of South | 11.6 | 6.8 |
Midlands and Wales | 18.6 | 27.6 |
North and Scotland | 15.7 | 15.8 |
* Latest available IPD data as at 31 December 2012
Top ten properties | Value (£) | (%) | |
1 | Brighton, Victory House | 24,500,000 | 9.5 |
2 | Brentford, Reynards Business Park | 16,000,000 | 6.2 |
3 | Uxbridge, 106 Oxford Road | 14,800,000 | 5.7 |
4 | Salisbury, Churchill Way West | 13,100,000 | 5.1 |
5 | Wembley, Olympic Office Centre | 12,500,000 | 4.8 |
6 | Luton, The Galaxy | 12,350,000 | 4.8 |
7 | Basingstoke, Churchill Way | 10,650,000 | 4.1 |
9 | Norwich, Union Park | 9,000,000 | 3.5 |
8 | Alfreton, Recticel Unit | 8,800,000 | 3.4 |
10 | Sheffield, The Portergate | 8,500,000 | 3.3 |
Total as at 31 March 2013 | 132,000,000 | 50.4 | |
Top ten tenants | Rent p.a. (£) | % of portfolio | |
1 | Wickes Building Supplies Limited | 1,092,250 | 5.8 |
2 | Norwich Union Life and Pensions Ltd | 1,039,191 | 5.5 |
3 | Lloyds TSB Bank PLC | 1,028,900 | 5.5 |
4 | BUPA Insurance Services Limited | 960,755 | 5.1 |
5 | The Buckinghamshire New University1 | 900,000 | 4.8 |
6 | Mott MacDonald Ltd2 | 790,000 | 4.2 |
7 | Recticel SA3 | 731,038 | 3.9 |
8 | Irwin Mitchell LLP | 555,000 | 3.0 |
9 | Booker Limited | 550,000 | 2.9 |
10 | Network Housing Group Limited | 539,386 | 2.9 |
Total as at 31 March 2013 | 8,186,523 | 43.6 | |
1 Fixed uplift to £1.02 million per annum in May 2014
2 Mott MacDonald Group Limited are Guarantor
3 The tenant is currently benefiting from a half rent period equating to £365,519 per annum which will increase to £731,038 per annum in January 2014
Asset management
As noted above, following the planning appeal inquiry in November 2012, the application for a 275 unit, 220,000 sq ft residential scheme at Reynards Business Park in Brentford has been refused by the Secretary of State. The main reason given for the refusal was overdevelopment of the site. Importantly, the Secretary of State agreed with the Planning Inspectors conclusions that re-use of the Reynards site for residential development would in principle be acceptable in policy terms.
The Company has a separate planning application pending for a lower density residential scheme comprising 229 units or 189,000 sq ft. This is still to be determined and the Company is reviewing this application in light of the detailed comments received from the Secretary of State. If changes are now required to this separate application then the planning process is likely to be delayed until late 2013 or early 2014.
Reynards Trading Estate comprises a 170,000 sq ft, un-refurbished secondary industrial estate on a six acre site in a predominantly residential and mixed use location. The site produces £0.2 million per annum of short term income and as at 31 March 2013 was independently valued at £16 million. The Company intends to sell the property in due course with the benefit of a residential planning consent, with proceeds reinvested to improve net income.
Since the quarter end a resolution to grant planning consent for 122 houses totalling 100,000 sq ft has been received at the Company's 9.4 acre development site at Coventry Road in Hinckley. The site is non-income producing and will be marketed for disposal in due course.
-ENDS-
For further information:
Schroder Property Investment Management Limited:Duncan Owen / Nick Montgomery | 020 7658 6000 |
Northern Trust: David Sauvarin | 01481 745529 |
FTI Consulting: Dido Laurimore / Daniel O'Donnell | 020 7831 3113 |