Full Year 2022 Schroder European Real Estate Investment Trust PLC Earnings Presentation LONDON Dec 6, 2022 (Thomson StreetEvents) -- Edited Transcript of Schroder European Real Estate Investment Trust PLC earnings conference call or presentation Tuesday, December 6, 2022 at 9:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * James Lowe Schroders plc - Investment Trust Business Development Manager * Jeff O'Dwyer Schroder European Real Estate Investment Trust Plc - Investment Manager of Continental Europe - Schroder Real Estate Investment Management Limited * Richard Murphy ================================================================================ Presentation -------------------------------------------------------------------------------- James Lowe, Schroders plc - Investment Trust Business Development Manager [1] -------------------------------------------------------------------------------- Okay. Great. I think we've got most people who have joined on the line now, so we will kick off. So just to reiterate, good morning, ladies and gentleman, and thank you very much for joining us this morning for the Schroder European Real Estate Investment Trust Full Year Results Presentation for the Year Ended 30th of September, 2022. My name is James Lowe. I look after sales, the Schroder Investment Trust business. I'm very pleased to be joined on the call this morning by 2 members of the team, we have Jeff O'Dwyer, Fund Manager of SEREIT, and we also have Rick Murphy on the line who's the Finance Manager for the Trust. Just before we get into presentation, a couple of bits of housekeeping from myself. So if you want to ask the guys a question as we go along, please do place your questions in the Q&A panel on the right-hand side of your screen. You also have the chance to download a copy of the Annual Report. There should be a link for you to download that from -- on your screen also. And you can also download a copy of the presentation. With that brief introduction, that's all from me. I will hand you over to Jeff to start presentation. Jeff, over to you. -------------------------------------------------------------------------------- Jeff O'Dwyer, Schroder European Real Estate Investment Trust Plc - Investment Manager of Continental Europe - Schroder Real Estate Investment Management Limited [2] -------------------------------------------------------------------------------- Right. Thanks, James and good morning everyone and thanks for joining us this morning. As James introduced, I'm Jeff O'Dwyer. I'm joined by Rick Murphy. Both Rick and myself we've run European region, have done for a number of years. And today's obviously the annual results for the 12 months ending 30 September, 2022. Try and keep this for about 40 minutes then we'll sort of give plenty of time to ask some questions. So feel free to write in with those. I'll provide a short overview beforehand, until Rick talk through a bit more detail on the financial side of things and then I'll sort of conclude. Obviously, during the presentation I'll give you a pretty strong update around some of the topical points being sort of debt, inflation, our strategy, also how we're positioned to deal with sort of the current market risks that we're all dealing with. Just on risks, obviously sitting here today, it's very different to where we were 12 months ago. I think if we were very open, probably the 2 main risks that we were looking at 12 months ago were principally centered on sort of COVID and ESG. Obviously, those 2 risks still remain, but they sort of sit behind probably 4 or 5 other risks. All equally is important, but those other risks being sort of recession and how deep potentially that recession may be. Obviously the war, issues around inflation, obviously, cost of debt as well. So there's quite a lot that we're all dealing with. I think we're in a very strong position to deal with those risks, particularly given the cities that we have exposure to and the strength of our balance sheet. So just touching on results. I mean, we're really pleased with the results that we're coming out with today. And I think it's testament to not only the profile of the assets that we have, but also the quality of the team that we have managing and having that sort of local expertise across a multisector understanding as well. I'll come back to that point later, because that's going to be very key part of how one can drive returns going forward. Obviously, one of the big things that we've done over the year is not only maintain the strong dividend, that EUR 1.85 per quarter and we've actually announcing that for the most recent quarter. But also over the year we've been able to give back a significant amount of capital back to investors through not only the standard dividend, but also the special dividends through that asset management that we've talked about in Paris. And in total, we've given about EUR 25 million back to shareholders. So really positive, obviously, feedback we've had from shareholders. It has been that been hugely appreciative getting that capital back. Obviously, we've delivered a total return -- now return of around 7.3% which again in this current time is very strong results. Our profit -- IFRS profit is 13.9%. It's up 125% and Rick will touch bit more detail on that later as to how that compares to last year. The key thing being around the balance sheet as well. Obviously, it's very strong balance sheet that we have and we've been very conscious about maintaining that strength. There's lot of vehicles out there that are probably over levered, that are in very difficult and different positions to what we're in the moment. So our gearing, at the moment, is around 29%. And if you reflect the cash that we've got that falls to about 20%. So it's something that we've always been a very modest user of leverage and we'll continue to do so. Portfolio, obviously EUR 250 million, 14 assets, so well diversified. And we're in the right cities and regions in terms of -- from a growth point of view, which is one of the key parts of our story that we set out. Rent collection has been strong sort at 100%. And I think one of the other sort of points around, and one of the real positives around European investment, particularly for real estate point of view, is that our income is index linked and I'll deal a bit more detail around that later. Occupancy remains strong at around 96%. And actually on a positive note, we've really worked hard on the sustainability side and we've improved the GRESB rating over the year from 3 stars to 4 stars. And we've also sort of made a couple of acquisitions over the year as well. One being in Cannes, the other one being another logistics asset in Venray. I'll cover markets a bit more detail later. But, obviously, with increasing risks particularly around sort of debt costs, and we'll start to see yields probably move out a little across different sectors. We think this will be mitigated by the inflation side that I've touched on before were rents will be subject to that. So you'll see an increase in rents, but actually yields sort of blowing out. So, therefore, probably capital values probably being mitigated to a degree. Obviously the larger concern is more of the prime rent and obviously we don't operate in that space. But particularly around, say, prime logistics where yields were sort of heading sort of sub 3, we're very nervous about those sorts of yields and you can understand why the rerating for that type of product is probably a little bit more sort of a concern then say the logistics that we've focused on over the last couple of years. And sort of the portfolio is valued at net maturity of around 6%. So that's also a profile that is -- remains accretive in terms of where costs of debts have moved to. But I'll talk through a bit more detail around that. So I might stop there. I'll hand over to Rick to through a bit more on the financials. -------------------------------------------------------------------------------- Richard Murphy, [3] -------------------------------------------------------------------------------- Thanks Jeff, and good morning everybody. So turning to the financial highlights for the financial year '22 and beginning first of all with the balance sheet. We can see that at the financial year-end SEREITs has strong cash reserves of around EUR 34 million. This was predominantly driven by the seats from the full sale and developments of the office assets in Paris, Boulogne-Billancourt. And that EUR 34 million, together with a further EUR 16 million of debt, which could be taken on in 2023 means that the funds got an attractive level of investment capacity of circa EUR 50 million as we head in towards next year for income enhancing acquisitions and as a fund looks to return to full dividend coverage next year. Just with regard to dividends and it's really pleasing to be able to say that each of the ordinary interim dividends that was declared for the financial year were at the pre-pandemic level of EUR 1.85 per share and all in all dividends of EUR 18.85 per share, EUR 25.2 million of dividend to be paid to investors during the financial year '22. With regard to inflation, obviously, high inflationary environments both in U.K. and across Europe at the moment. We can see here that all of the SEREIT income is inflation-linked. 80% of that income being annually indexed and remaining 20% being linked to hurdles. Just from a performance perspective, and NAV total return is 7.3% for '22. We can see in the comparison there on the screen that last year for '21 it's 3.2%. And just to draw people's attention against the fact that in the prior financial year the funds wrote off all of its equity, investments and exposure and it's 50% ownership of its and Metromar Shopping Centre in Seville in '21. With regard to LTV at 29% and 20% net of cash which remains comfortably within the range of 35% for the Investment Trust. And then on the next slide we can see that rent collection, again very pleased to be able to say that leaving Seville to one side, rents have been almost fully collected across the whole portfolio during the financial year 2022. Just a final point on the highlight slide. So IFRS earnings of EUR 13.9 million were achieved in '22, and this compares favorably to EUR 6.2 million in '21. And again, we can see on the screen there that in the prior financial year SEREITs are wrote down EUR 8.5 million with regard to its investments in its shopping center in Seville. Into the next slide. Here we can see the NAV bridge over the financial year. So we opened up at EUR 199.5 million at 30th of September, 2021 and closed at EUR 188.2 million. The main item we just want to draw out here is that, whilst the NAV has fallen over the financial year, in that penultimate line we can see dividends paid were EUR 25.2 million, and in particular EUR 12.8 million of special dividends were paid off the back of exceptional capital profits achieved from developments of Paris BB. So taking those out, actually the NAV would have increased to EUR 201 million over the financial year. So just wanted to draw that out at the start. So just going back to the starting point. So NAV stay at EUR 199.5 million at the beginning financial year. And on top line we can then see the unrealized movements in valuations across the portfolio was EUR 7.6 million, driven predominantly by French industrial assets and those assets held in Winning Cities in Germany or Hamburg, Berlin, Stuttgart and Frankfurt. On the next line we can see transaction costs invested, and as Jeff mentioned, the car showroom in Cannes acquired during the financial year together with an additional interest in Venray in Netherlands. A small amounts of EUR 0.4 million was invested in CapEx over the financial year. And then next line, we can see that a further EUR 1.9 million of Boulogne-Billancourt Paris development profits was recognized in '22. So that's a further 45% of the total development profit which can be achieved. And I think the important item here is that, going in to '23 there still remains a potential EUR 1.2 million of post-tax profits which we're expecting to achieve next year. On the next line, again we can see no movement in Seville, so full impairments in '21 as our exposure to that shopping center was written through the books and now reversed to the back payment in '22. Our EPRA earnings, IFRS earnings, excluding capital items were EUR 6.1 million, a small amount of non-cash capital items of EUR 0.2 million, and then finally those dividends paid of EUR 25.2 million. And just splitting out there there's ordinary interim dividends paid to investors of EUR 12.4 million in the financial year, especially dividends in Paris BB of EUR 12.8 million. Moving on to the next slide. Here I think that the key item I want to draw out on EPRA earnings and dividend coverage is really that bottom line. So we can see that for financial year '22, dividend cover was 61%. In the first half of the year, say for March 2022 we announced back in June dividend cover of 50%, due in parts for higher cost base in the first 6 months. But in the second half of the financial year, so 30th of September, '22, so second column from the left. We can see here that dividend covers now 72% and we feel that's much more reflective of where the fund currently is. Both the dividend cover for the last 2 quarters has been around that low 70s mark and we can now start to see that trending back to 100% as acquisitions are made and some of that indexation of the rents starts to come through. Moving to the next slide. Here this is just to set out the dividend trajectory. So you can see that going into COVID back in Q4 2019, the Investment Trust declared dividend of EUR 1.85 per share. Then there were 4 quarters where the dividends was reduced and then step back up again at 50%, 75% and to 85% respectively. And then we can really see then in the right-hand side of that graph, 7 quarters now where the dividend has been EUR 1.85 per share. And that's really indicative of 2 reasons. The first is the financial strength of SEREITs, in particular, its cash balance over the last couple of years. And the second is its financial performance, the robustness of its income and tenants for Seville that continue to pay rents over the COVID period. And then just on the next slide with regard to performance. This is slide we usually have people take away, but just -- probably just to draw out in that middle line the net total return just over last couple of years. We can see that for the financial year 2020, a very positive NAV total of 16.2%, driven by strong asset management initiatives of Paris Boulogne-Billancourt and other assets. We can see a fall in NAV total return to 3.2% last year, say, again, just to emphasize the fact that that's exposure to the retail shopping centers to build essentially work through the numbers. And as Jeff mentioned, a NAV total return for '22 of 7.3%. And on that I will pass back to Jeff. -------------------------------------------------------------------------------- Jeff O'Dwyer, Schroder European Real Estate Investment Trust Plc - Investment Manager of Continental Europe - Schroder Real Estate Investment Management Limited [4] -------------------------------------------------------------------------------- Thanks Rick. Just to sort of, I guess, cover one of the most topical points that we're all dealing with is around debt and the cost of debt and what our strategy is around that. Obviously, as a house we've always been a modest user of leverage and this vehicle when we first set this up. Really the maximum leverage that we can go to is 35%. At the moment we've been running this with a bit of headroom, so the 29% LTV that we have. Obviously, not all assets are levered. And one of the key things is our debt is really non -- is non-recourse. So it's only linked to asset or the SPV holding entity and that's the strategy that we've always put in place across the portfolio. Obviously, cost of debt we have, including the caps that we have in place, and the swaps that we have in terms of fixing the debt and maximum exposure into the cost is 1.9% with a duration of just under 2 years. And obviously with this, we've got about a 1/3 of our debt that's expiring over 2023 and I'll come on to that a little bit more. But just to sort of highlight also some of the headroom that we have. We still got plenty of headroom from a LTV point of view in terms of values falling and also secondly, in terms of -- from an ICR and income perspective, you can see here the different headwinds that we have. Now just sort of talking through sort of the debt for next year, we've had some really positive discussions with lenders today that, I think, something that gives a bit of a steer on what's happening on the debt side. Banks are definitely looking at the type of counterparty that they're lending to and they're really focusing on wanting to lend to a manager that can and have -- has a strong understanding of managing real estate. I mean, gone are the days of just relying on yields falling to see values increase. It's more about asset management. And I think banks are being much clearer on who they want to lend to. And also being much more, I guess, discerning on LTVs and probably looking at reducing LTVs at the moment. So wanting to lend to parties like us who typically use modest leverage. One of the sort of the key discussions that will probably come out sort of later this month and early January is around the regearing of the Hamburg/Stuttgart loan. On positive note, the margin on that today is around 85 basis points. The discussions that we're having is actually to replace that with similar margin. So you can see that there is sort of strong demand from banks to lend on the quality of the assets that we have. We had about 6 banks who are willing to lend on that -- those 2 assets. So that's we feel comfortable about replacing the debt that we have expiring over 2023 at the similar margins that we have in place. Yes, cost to debt will increase. Obviously the 5 years swap has moved around and has been pretty volatile over the last year. I think we cast our mind back a year ago, the 5 year swap was sort of 0 or slightly negative. Today it's around 250, 260 basis points and did get as high as sort of early 300 basis points about 6 weeks ago, so that has been pretty volatile. We've done a little bit of a sensitivity around there just to give you a bit a steer both in terms of LTV and just sort of working through that in sort of a scenario where values were to fall anywhere from sort of 5% to 25%, you can see the headroom and the LTV that we have in place there. So we actually know we'd breach that 35% until values were the full 25%. And actually it's a bit of a conservative way that we've presented this as well, because it has Seville in there which is an asset, given the comment I've made earlier about the recourse and the non-recourse we are in the process of working with bank about moving that asset on. But we could actually eliminate this asset out of those numbers. We elected not to. But you can see there that LTVs that still remain pretty manageable even with a pretty significant fall in value. In terms of cost of debt, and again, sort of if we were to overlay the debt that's expiring over 2023 and put in place the swap rates that I touched on before, sort of 1.9, would increase to -- by that additional circa 2.5%. That would mean about 600,000 increase in interest expense for the portfolio. And sort of how do we cover that? And, obviously, one of the benefits of European sort of markets and real estate is the fact that we have added indexation for the majority of the portfolio. And therefore, if you just applied say that 6% to the current rents, you can more than cover that cost of debt that we may be incurring over the 2023. So that was just a bit of a sensitivity that we wanted to share with you and hopefully covers one of the key sort of items that we're dealing with. Second point is on inflation. I know Rick sort of highlighted this. But again, one of the real sort of differences relative to the U.K. in terms of investing is that European real estate has a natural sort of hedge in place whereby rents are typically indexed to CPI, so that's domestic CPI. So you can see here, depending on which jurisdiction you're in, you're really up for anywhere between a 6% and a 12% sort of increase. Actually that 12% in the Netherlands is coming through little bit higher at the moment and we're in the process of actually issuing some letters, slightly higher indexation than that with some of the tenants. So hence you can see overall with that 80%, and obviously with weighting 40% of our income in France, 30% in Germany and 30% in the Netherlands, you can see why that sort of blend in the 6% that I've touched on before. It is not an unreasonable number to use it from a sensitivity point of view. We do think inflation will come back, obviously with sort of Central Banks is moving to increasing and using monetary policy to try and to sort of taper and move inflation back. We're starting to see early signs of that. I mean, the U.S. is certainly, probably 6 months ahead of where Europe is. But there is sort of recent evidence that maybe we have potentially reached a bit of a peak in inflation, but let's see. But we do think that inflation will sort of return sort of post 2024 back to more manageable levels. I think the other point that we get a lot of comfort or I get a lot of comfort around the portfolio and thinking about -- well, the capacity to pay for moving and putting in place this indexation. You then got to say, well, actually can our tenants pay for this index? And where I get comfort is the fact that we have or are coming off very affordable rates. If you look across our portfolio it was one of the key metrics in terms of -- as a strategy of really focusing on assets that were leased of affordable and sustainable rents. So we're not the buyer of the best asset in the best area. We're buying in good location, we're buying sensible real estate, leased at affordable, sustainable rents. It's a bit more palatable to apply an 8% or 10% indexation to a rent that's off sort of EUR 45, a major indicator of logistics asset then it is applying that same index to a sort of prime logistics asset which might be leased at EUR 80 or EUR 90. So I feel pretty comfortable about our ability to sort of push forward this indexation. I'll talk in little bit more detail later about how diversified we are in terms of sort of tenants and sectors. But in terms of just to sort of cover off the inflationary side, we feel pretty relaxed about where we are in terms of pushing these increases through. In terms of strategy, obviously, we're going to continue to be diversified. I mean, this is something that has put us in a very strong position to-date. And you have seen over the year a big move away from sector specialists. And I think it's very, very clear, as long as you can manage real estate and have sort of multi-sector expertise on the ground, and that's something that we can do certainly in the jurisdictions that we have exposure to in France, Germany and the Netherlands. We think that's the -- continue to be the right strategy. Obviously, sustainability, I talked about before and some of the sort of work that we've done over the year has been very strong in moving that GRESB rating from 3 stars to 4. We're starting to look at each asset from a net-zero pathway point of view and seeing how we can move sort of the operational side and how we can improve that sort of data collection as well and understanding of sustainability for each of the assets. One of the other key sort of areas that we think is going to be increasingly more important is this sort of operational hospitality mindset and something that we've sort of been leveraging off the hotels team that we're having in Europe Schroders. That's again about sort of trying to sort of manage each asset as an operating asset itself and very much working with, and getting a lot closer to our tenants and understanding their businesses as well. And that's something that COVID has made us do and has brought us a lot closer to understanding the strengths and weaknesses and some of the sort of the issues that tenants have in trying to be very much more flexible with them and having a common understanding, particularly around sustainability as well and working together about trying to reduce operating costs and understanding how we work the buildings and being a bit more flexible around leases, for instance. And I think that sort of mindset is going to put us in sort of strong stead in terms of when we're regearing leases with tenants. And actually they feel as though they're working with an operator that understands their plight and what they're dealing with. So I think that's going to be an increasingly part of real estate investment management. In terms of acquisitions, obviously, we're going to continue to be prudent. We're going to invest in the same manner that we have today. So again, that Winning City, and then at the micro level using our teams on the ground to pick submarkets that will benefit from transport infrastructure changes, where there's going to be sort of competing demands for uses, where there's supply constraints and above all coming off this affordability and buying assets that are least of affordable rents. And again as we're seeing sort of operating costs increasing, that's going to be a key part of how tenants will look at affordability as well as wanting to look at assets that are much more manageable from an overall operating cost perspective. And obviously, leverage we've talked about before where we will continue to run this vehicle with a modest leverage, we won't be moving away from that maximum 35%. We've got some sort of capital to reinvest and we'll probably raise a little bit of debt on the back of that if we see the right opportunity. But, certainly, the big focus is maintaining that balance sheet and ensuring that we're regearing the debt that we have over 2023 and ensuring that the company is in strongest position as possible from a balance sheet perspective. So I get a bit of comfort in terms of having that cash and we are looking at new investments, but we're weighing that up against making sure that we have the strongest balance sheet possible to deal with the risk that we're starting to manage. Just on the portfolio, I did sort of highlight before about this diversification. Not only are we well diversified in terms of cities and very much focused on those growth cities. So you can see they are having exposure to sort of Paris and Berlin, Hamburg, Stuttgart, Frankfurt very much sort of Tier 1 growth cities. Equally being diversified in terms of sectors and you see here that our office allocation being around 35%, our industrial in the mid-20s, the intention is to try and increase that weighting with the capital that we have to redeploy and targeting that sector to move that to maybe 1/3. And then the retail being at around 20%. And the top of retail we have, and I'll talk a bit later about why we're so pleased and would like to actually add potentially the same retail that we've got. But that's more on the DIY and grocery side to sort of subsectors that can perform and have performed exceptionally well during the pandemic and then finally exposure that we have in the data center. And then across different sectors, you can see here that we're very well diversified and whether that be across telecommunications, through manufacturing, distribution, education, government, that there's a really strong diversification there across different sectors. Just on the income, I won't talk too much in detail on this slide. But just to sort of highlight a couple of points. Obviously, we have sort of invested at fairly attractive net initial yields and that portfolio is valued off just under a 6% net initial yield. Obviously, that still remains accretive in terms of looking at new sort of cost of debt. Our unexpired lease term is around 5 years. I mean, that's part in just a general asset management play that we're working towards, trying to sort of strengthen and secure that income and try and see if we can regear leases where we can and bring forward discussions today. We've recently done that in-house where we regeared that lease on another 7.5 year basis. So that's something I'm working with the teams around, trying to make sure that we can really secure and be a bit more defensive around managing the portfolio. Obviously, occupancy remained strong. So again, limited vacancy around 4% and most of that sits in the Saint-Cloud office building. We've made some good progress in leasing a couple of floors there. But again, being very active about trying to sort of secure and reduce that vacancy that we have there. But overall, very pleased with how the portfolio is shaped in terms of not only sort of income and how we can strengthen that, but also that diversification that I touched on earlier. Next slide, just sort of highlighting really the strength and of the returns, and Rick touched on it earlier. This looks more -- at more of the direct real estate side and not the NAV return that deals with sort of debt and other costs. But this just at the real estate level, so you can highlight here that really strong performance over the last 3 years. I think going forward it's fair to say that the income portion is going to be a very much a stronger part of overall total return and that really the capital side, we'll probably see a bit of a negative fall, particularly as we come to December values or sort of Q1 next year. Obviously, we think value, as I've sort of highlighted earlier, will be mitigated, so we'll see yields sort of decompressed, but that will be mitigated by the fact that we got that indexation coming forward. Just to sort of again reiterate this diversification. So I mean, we were I guess being pretty high earlier in the year where, the winners were typically sort of the bed, sheds and meds. And we were sort of saying actually, having a diversified portfolio, we were still seeing very, very strong performance. And you can see here and actually it's not just industrial sector in our portfolio that's performed well, we've actually had some really very strong performance out of the offices. And if you've got an office that is in an accessible location that it's leased off affordable rents, that's going to continue to remain relevant and again it will continue to see success and that's something we have delivered here. There is a 2 very good examples, one in Hamburg, one in Stuttgart where we are off relatively low rents, both of them are 100% leased. And the one in Hamburg, actually leading into the pandemic we had 5 vacant floors and we've leased every one of those floors. So both buildings that will continue to perform well and both probably have a little bit of upside in terms of where rents are. In terms on the retail side, again those who have listened to me talk before about the portfolio will understand my, sort of, love for the asset in Berlin and the fact that we're sitting on 4 hectares of land. For me, it is the best asset and the most exciting asset going forward. Yes, it's a longer-term play. We're happy to take the income out of this, but really the ability to use that land to a higher use and put in place a mixed use scheme, that's what excites me. Obviously, the tenant is Hornbach, a DIY specialists that are performing exceptionally well. They'll probably sit here for and exercise their options for a number of years. But this is a real sort of land banking play with the other added advantage of income. So we'll continue to be a strong performer. And then on the grocery side, again having a long lease Lidl in a very strong urban location, I'd love to add to the portfolio with either of these 2 assets if I have the chance again. And obviously, logistics has been a very strong performer and will continue to benefit from the changes that the COVID has brought. And as we've seen sort of demand on logistics side sort of strengthen owing the fact that these were off relatively modest rents. And we think there's going to be sort of strong growth associated with these. Just on rent collection, and really positive to say that we're at 100%, and have been for some time. I mean, this is really the direct portfolio, excludes Seville from this. It is an asset being the shopping center that has suffered. But across the rest of the portfolio, we're at 100% rent collection. That's been one of the key benefits of being us, being able to move that dividend and maintain that dividend. But Board has announced that EUR 1.85 per quarter. Just to touch on -- obviously this is the repositioning that we did and what went behind the special dividends that Rick touched on. There's about another EUR 1.5 million of pretax profit that still is to come through the NAV. We're finalizing some snagging as a bit of capital still to come from the purchase price. But certainly, over 2023 the rest of that profit will be potentially released into the NAV. But the point here is, actually as sort of operators of real estate, this is the best example of how we can create value. So we've got the expertise to derisk and manage and take an office building to make Grade C fairly poor from a sustainability perspective asset and turn that into a Grade A BREEAM rated investment that not only could we increase the rents on the back of, but we turn into a very strong institution quality building, and that's what allowed us to tap into that excellent exit value and deliver that profit. So again, we think there's really, really strong opportunity and that's some of the office investments that we are starting to look at the moment of how we can use our local expertise and ability to derisk refurbishment to create that value. So going forward, where do we see value in the portfolio going forward? I think initially it's around really maximizing some of the vacancy that we have there and working the Saint-Cloud office asset. Obviously, it's an investment that will also benefit from transport infrastructure changes over the longer term. There's going to be a train station coming outside this building in 2030. So there's a little bit of time to wait. That's going to be an asset, it will probably continue to be bumpy from an income point of view. It's an asset that is leased off of a very low rent. So rents of early EUR 200 a meter. So I think, again, the type of tenant that's in here is more SME businesses that don't necessarily want to be in the best building and as long as it's accessible and as a back-office location, this shall continue to do well. Obviously, we'll finalize the refurbishment and we've actually handed over the refurbishment in Paris, but there's been a snag that I touched on earlier that we need to finish. Medium term it's more around sort of smaller asset management in Frankfurt with extending the Lidl lease, maybe looking at some tinkering of some of the specialties. We are -- and I touched on earlier about how do we strengthen the income profile. We don't have a lot of expiry happening over 2023. I think it's about 1% of our leases expire. So how do we actually bring forward some of that regearing? And we did that with the Houten lease that I touched on earlier where we were able to regear that on a 7.5 year basis. So again, working with the teams, how we connectively try and strengthen that unexpired lease term that I touched on that's about 5 years, how do we lengthen that out? And then again, the sustainability. Yes, we've done well over the years. We've been able to improve the GRESB rating, but that's only part of where we want to get to. We want to move this to 5 stars. We want to really continue to work with our tenants about improving their understanding of sustainability in trying to sort of reduce sort of the operating costs and sort of a lot of work around, not only in terms of smart metering, but also around how do we actually improve the certification of our buildings. Medium-term, it really centers on Apeldoorn. And for me this is the mini below in Boulogne-Billancourt, so we're looking to do exactly the same thing that we did in Paris with Apeldoorn, and KPN is the tenant here. They're still to make their decision as to what they want to do from a long-term perspective. But really what we're trying to present to them is to turn this facility into not just a data center, but to make it into more of a hub location where it's a call center and office building. And they have some high security part of their business there as well. Now we would have to invest in the asset because it's a Grade C building, not the most sustainable building. But we have the ability to do that given it's relatively low value. And if we were to regear the lease with KPN, that would be an opportunity to create some value there. But that decision will probably be made over the next sort of 12 to 18 months. We just got about 4 years left on that lease to KPN. So enjoying that income on the back of that. And then longer term, it's really around sort of Berlin that I touched on before about how do we actually use that site and that's going to be dependent on getting back in the session and also then some of the transport infrastructure changes, whether that be in Stuttgart or in Saint-Cloud. So that's sort of how we can sort of see value and value creation at sort of short, medium and longer term. Just a little bit on markets. I know sort of the office debate continues and certainly some larger occupiers still haven't made their sort of post COVID decisions about what they want to do. But this really is just some mobility data that sort of highlights. And certainly what we've been seeing across Europe where the return to the office in Europe has been a lot stronger than say relative to London or the U.S. And I think a key part of that is really centered on accessibility, and I guess with people not having to commute the same distances as what often happens in London or certain U.S. cities. And recent examples here where it was very quick Europe to move back to sort of people moving back into the offices. Some of those sort of full, certainly the most recent over October is really to do with school holidays. So that's why that fell in. But we certainly are seeing certainly a movement to how offices are utilized. But on a hybrid basis there's also a push for better quality offices and that's probably an area where we're going to see stronger rental growth and stronger demand. There's also, I think it's more sort of concerns around sort of recession and therefore people sort of coming into the office as well. There's occupiers wanting to get their teams back in, so as they're not losing their sort of culture. And obviously there's different concerns around sort of cost in terms of heating and the like. Obviously, on the occupation side and demand side, we're still sort of seeing some pretty strong sort of take up. Vacancy rates, yes, have moved out a little bit, but we still think they're in a very strong position. Particularly leading into COVID, banks weren't lending on speculative development. So the whole sort of demand/supply equilibrium was in a much, much stronger position than where we were, say [pre-GFC]. So we feel a bit -- a lot more comfortable about where the vacancy rates. In particular where you've got sort of Grade A and better space as well, I mean, you just don't really have any choice in certain cities if you want sort of Grade A space. It's just no availability. I want to just touch on where we have exposure, and obviously I did sort of talk about Hamburg and Stuttgart. And I look at Stuttgart, it's got the record lowest level of vacancy in the whole of Europe, sort of about just over 1%. So there's just no options for tenants to go to. We've got a government tenant in our building. Obviously, they are VAT sensitive as well, so they couldn't go to a new building. So I feel very relaxed about being able to maintain that occupation. We're also leased off affordable modest rents. So we're were leased off rents of around EUR 14, EUR 14.50 which when you think about sort of where prime rents are in Stuttgart at around EUR 30, you can understand why we feel comfortable if that was ever to be vacant. I feel we could lease out relatively quickly. Equally in Hamburg, we're off rents there of around EUR 13.50 a meter, that's per square meter per month. And again, prime rents in Central Hamburg, one stop away, are in sort of the low 30s, heading to mid-30s. So again, that's a back office location. This particular areas in the city center location, very strong mixed-use area where people can walk to work, they can ride their bike to work. So again, that accessibility and affordability is what's been a real key benefit for why I feel comfortable about having this exposure and how the offices and why I think we'll continue to do well out of this. Obviously, Saint-Cloud, there is a little bit increasing in vacancy. I think it's an area that we are looking and there may be a bit of bumpiness around that particular asset. But it's certainly, again, at this point about affordability and coming off low rents which is in strong stead to be able to maintain that occupation that we have. And yes, we've got a bit of vacancy in there and we're working hard at trying to derisk that. Just on the logistics side, and I'm conscious on taking probably a bit more time. But again, we I think there's probably stronger rental growth still on the continent relative to the U.K. You look through most of those cities there that really the bulk of those are in Europe where we see rental growth. There's been a big change in certainly demand and vacancy rates for logistics have fallen aggressively. There's been a real change in how logistics companies are looking at their supply chains and moving away from just in time mindset, so storing goods a longer. And obviously the trade issues that we've had with China and getting access to goods has meant that really goods are being stored domestically for a lot longer. Obviously, the e-commerce side as well has been a very big driver as well when Europe has come off relatively sort of low levels in terms of online penetration. That will continue and we'll see stronger growth and therefore, distribution in terms of retail and online retail will benefit logistics going forward as well. I think the other part that we're starting to see is on the manufacturing side and that Europe may benefit in terms of a movement away from China. And actually, this diversification you may have sort of seen with China Plus One where manufacturers are starting to think about, well, actually, I can't get my goods out of China or there's concerns around trade and concerns around COVID and restrictions, well, then I need to be manufacturing in other locations as well, parts of Europe may benefit from that. So just on little bit on and sort of the investment markets. Obviously, things have moved pretty quickly. We are seeing yields moving. There's not a lot of activity happening. I think that's one of the difficultly in terms of values have at the moment where certainly over the last few months deals have either been pulled or deferred. We certainly at the prime rent have seen yields starting to move out and I've touched before about being pretty nervous about where logistics yields -- prime and logistics yields got to, where they were sort of sub-3% in certain markets. So you can understand why they're starting to sort of move anywhere from 50 to 100 basis points and why that's having a pretty big impact on capital values. Thankfully, we don't have any exposure to prime. We've always been a house that is focused on, I guess, that mid-market. But again, really in strong winning of growth cities and coming off that affordable rent side. And I touched on earlier that although we may see a bit of deterioration in yield, over probably Q4, Q1 next year, we think that's going to be mitigated by this indexation that I touched on earlier and we're seeing anywhere from sort of 6% to 12% or even slightly higher in terms of the Netherlands indexation that's applying to rent. So you're going to get an increase in rent, but equally you may see that sort of shift in the yield. But the overall capital value remaining pretty well similar or potentially coming off somewhere around that sort of 5% level. So this focuses a little bit more on prime where we think actually it's probably going to be a bit slightly sort of stronger capital movement at the primary. So just to finish off, I mean, we feel it's a very compelling investment case. I mean, if you are an investor looking at the European REIT today and off current share price rate, which is reflecting about a 35% discount, you're getting north of an 8% dividend yield. And particularly when you think about the cities that we have exposure to, the quality of multi-sector expertise that we have on the ground in the countries that we're operating. The fact that we have a very strong balance sheet, the cash reserves that we have in place, the ability to manage real estate and the historic performance that we've delivered and certainly that operational mindset which I think will be a really strong part of driving returns going forward rather than relying on sort of yields and cheap debt, those days have gone. There's going to be more around active management and how can you align yourself with a manager that can create those returns going forward. We think we are that manager and we believe that we can sort of drive returns out of this portfolio. And certainly with the capital that we have to redeploy, we'll be looking at investments of a similar nature and with that same mindset of being diversified and really focusing on submarkets that are going to benefit from that transport infrastructure, supply constraints, competing demands for users and above all coming off rents that are affordable and sustainable. And again, being focused on being a modestly levered vehicle as well. So I'll stop there. I'm happy to answer any questions. James, I'm not sure if there are any that have come through. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- James Lowe, Schroders plc - Investment Trust Business Development Manager [1] -------------------------------------------------------------------------------- Plenty of questions, Jeff. Thanks, everyone for sending in the questions. If you do have any others as we go through this, then please send them in. I will ask Jeff and Rick. Jeff just sort of touch -- there's been a couple of questions on valuations. I know you sort of touched on it within the presentation. I think it'd just be useful context for a number of sort of bundling a number of these questions into one. If you could just expand a little bit on your views about where values are expected to go in Europe. I think sort of paraphrasing some of the questions here, we've seen a lot of the U.K. diversified commercial REITs coming out with quite negative sort of projections on whether expecting values to go in the next 2 quarters. Clearly, there's different dynamics playing out in Europe with the indexation, et cetera, that you get in the leases. But can you just give a bit more sort of color on where we think values might go and how that differs to the U.K. market? -------------------------------------------------------------------------------- Jeff O'Dwyer, Schroder European Real Estate Investment Trust Plc - Investment Manager of Continental Europe - Schroder Real Estate Investment Management Limited [2] -------------------------------------------------------------------------------- Yes. Look I think -- obviously, the listed side is giving that direction and has for some time. We think probably the listed side is reflecting probably too big of a value change for Europe, particularly for the type of real estate that we have in the European REIT. I think the prime rents, that's probably the area where values are going to move probably the most and that's probably not surprising, particularly if you've seen yields at 2.5% to 3%, whether it be for offices or logistics. We've got pretty concerned around that sort of pricing and never participated in that. Now yes, there's going to be some rental growth that will probably continue to go with prime logistics and potentially some prime offices. But we still felt that that sort of yield profile is probably a bit too aggressive. So that sort of space, will probably see the biggest movement in terms of capital value change. If you think about the portfolio we have in terms of the roughly net yield of around 6%, it's still accretive in terms of where cost of debt is and debt is -- and that cost is moving around quite -- and it's been quite volatile as I touched on with 5 year swap rate. I do think it's going to be certainly the -- probably the secondary, tertiary real estate that will be potentially hit hard. And again when we come into a downturn, it's a sort of flight to quality and again whether that's quality into the sort of real estate or cities. And I think being in the exposure that we have in the cities, that I touched on earlier, being sort of Paris, Frankfurt, Hamburg, Stuttgart, Berlin, I feel really comfortable, particularly as we come out of and depending on how deep that recession may be, we're going to return to growth for those cities. And that's certainly something where, again liquidity being in those cities is a much stronger position as well. So I think overall the value, it's hard to sort of give a very -- sort of overall shift in what will happen to value. I think, going to be much stronger at the prime rents. But I think for the sort of the average quality asset in a very strong city which is probably what we typically have, you may see yields falling anywhere from sort of 15% to potentially 25 to 50 basis points. But that's going to be mitigated by the fact that you've got sort of increases on the indexation side that I elaborated on. So overall, capital values may not fall as extensively as what you've probably seen here in U.K. -------------------------------------------------------------------------------- James Lowe, Schroders plc - Investment Trust Business Development Manager [3] -------------------------------------------------------------------------------- Great. Thanks. And just on the back of valuations falling, sort of leads nicely on to my next question. We've had a couple of questions come in about what the expectation is in terms of deploying the sort of the dry powder that you have available? And could you just give a bit more color about the types of assets you're seeing coming across the desk. Anything that you've been bidding on recently? -------------------------------------------------------------------------------- Jeff O'Dwyer, Schroder European Real Estate Investment Trust Plc - Investment Manager of Continental Europe - Schroder Real Estate Investment Management Limited [4] -------------------------------------------------------------------------------- Yes, happy to. I mean, we've been pretty conservative or might say prudent actually with that capital. We've had the ability to invest for a little while, but we certainly wasn't seeing too much value and we've, obviously, made 2 acquisitions. The Cannes acquisition which is a alternative sort of car showroom with a very strong alternative use angle and we acquired that around 5.5 net initial yield with some reversion. We did a small logistics asset in Venray that sat next to our existing exposure. We think now that, obviously, it's going to be a better buying opportunity and actually having that capital at the moment, I'm pretty pleased to have rather than have chased sort of real estate 6 to 9 months ago. We're going to continue with the same mindset and I would like to probably add a little bit more on the industrial side and have been participating in a couple of investments in France over the last few weeks. It's about price discovery as well at the moment. So really trying to understand where is the line of land going. So we continue to be conservative in how we're looking at real estate. We're conscious of the debt that we have expiring as well, so we don't want to be -- is in a position where we can't sort of regear that debt and we will make sure that we've got our sort of enough power to do that. And I did allude to that we're making really strong progress on the Hamburg/Stuttgart loan that's expiring and hopefully come out later this month with some positive news around that. So we've also got out just sort of one eye on the balance sheet side, but also I think that we will see better buying opportunity. I did touch on earlier that there's probably not a lot happening on the investment side and most vendors have either pulled their disposal strategy. But I think what will happen next year is particularly is if you've got debt expiring next year, there's going to be a lot of landlords out there that are going to get a big shock about refinancing and they're probably going to be forced to sell. So I think there is going to be much more opportunity for us to get set and focus again on France, Germany and the Netherlands. And ideally, it will be sort of bolstering that logistics exposure that I touched on moving that from the early 20s to somewhere around 1/3 in the portfolio and then looking at select offices. And again, on the retail side, I'd love to get some more exposure on the DIY and to strengthen the grocery side as well which are both subsectors of retail that have performed exceptionally well. -------------------------------------------------------------------------------- James Lowe, Schroders plc - Investment Trust Business Development Manager [5] -------------------------------------------------------------------------------- And so with that sort of -- well, maybe all or part of that cash deployed at what stage are we now anticipating to get back to full dividend coverage? -------------------------------------------------------------------------------- Jeff O'Dwyer, Schroder European Real Estate Investment Trust Plc - Investment Manager of Continental Europe - Schroder Real Estate Investment Management Limited [6] -------------------------------------------------------------------------------- Yes. So the sort of direction we've given is really that it's by the end of next year that we've moved -- did cover back to 100%. So at the moment we are -- for the most recent quarter that early '70s. So that's with the income of the new acquisitions that we've made. And as we deploy that second EUR 50 million of capacity that we have including about EUR 25 million of debt, we can replace lost income from Houten which is the Paris BB refurbishment we did and investing that at roughly net initial yields of around 5.5%. I think that's where we think the ability to redeploy that capital and again investing in areas where there's going to be growth as well. -------------------------------------------------------------------------------- James Lowe, Schroders plc - Investment Trust Business Development Manager [7] -------------------------------------------------------------------------------- Great. Just moving -- there's been a couple of questions. Just following up on your point on Saint-Cloud vacancy and you touched on you're working very hard to try and sort of fill that. Could you just give a bit more color as to some of the steps that you're taking to try and fill that vacancy? -------------------------------------------------------------------------------- Jeff O'Dwyer, Schroder European Real Estate Investment Trust Plc - Investment Manager of Continental Europe - Schroder Real Estate Investment Management Limited [8] -------------------------------------------------------------------------------- Yes. I mean, one of the most recent initiatives that we did actually which sort of plays into that operational understanding as well. Actually, we've just done a lease to a service office operator. So again, trying to take a bit more of a performance basis with that and give a different service to the building. So they've just started their operation. We've got effectively 2.5 floors that are vacant. Now one of those stores is fully fitted out. So an operator can walk in them, plug and play and can see what it is they're getting. The building from the outside is not the most, I guess, prime less asset. I mean it's -- its day it was probably a phenomenal office development. It was built in the '70s. But one of the big pluses that you have with this building, you get inside and you have these most amazing views over the river towards Paris and to (inaudible) as well. So again this point about not every occupier wants to be in a prime asset and this is typically SME businesses, it's in a back office location, a very wealthy part of Paris. It will be bumpy and I think I'll be very, very open about that. The vacancy will continue to sort of move around being the nature of the tenants that we have in there. But we're very focused from an asset management point of view. We've got the right leasing teams in place and we're open to being fairly flexible in the type of leases that we do here. Again, that's sort of operational, having to be flexible and being a bit more creative. That's how we're looking at this from an asset management point of view. And just think about where rents are, we're at low EUR 200 a meter prime rents in this submarket of EUR 450. Prime rents in Paris are now north of EUR 900. So again, as occupiers start to think about their overall occupancy cost, it's going to be really those buildings that are affordable, that are accessible, that should hold up well. But it will be an asset that will be bumping. There's not a lot that we can do from a sustainability point of view because we are part of a broader condominium. But it's -- it is an asset that probably over the longer term as we see that transport infrastructure come and the train station coming in 2030 where we're going to see some stronger benefit. But certainly, over the medium term it will be a bumpy asset from an occupation point of view. -------------------------------------------------------------------------------- James Lowe, Schroders plc - Investment Trust Business Development Manager [9] -------------------------------------------------------------------------------- Right. Thanks Jeff. So we got a couple of minutes left, so probably time for one last question. One of our listeners has asked whether there is scope for any further special dividends next year? -------------------------------------------------------------------------------- Jeff O'Dwyer, Schroder European Real Estate Investment Trust Plc - Investment Manager of Continental Europe - Schroder Real Estate Investment Management Limited [10] -------------------------------------------------------------------------------- Look, it's sort of the Board will dictate that. But I think really the driver for special dividends has really been around the asset management and the fact that we did so well in repositioning Paris and derisking that. And I think looking back now to, I guess, secure that exit value that we did at that pricing that we did, well that be achieved that in today's market. So I think that's been one of the reasons why we were so in a strong position to return to capital. And also to -- when we did cut the dividend in the early part of the pandemic we were conscious that our underlying investors took a bit of a hit and actually, this was a way to compensate them as well, so. But going forward, I think it's unlikely. There's no real sort of asset management angle of the sort of similar size. Probably the next one is more about what we do with Apeldoorn that we've delivered some sort of stronger alpha, but that's some time away. So unlikely chance. -------------------------------------------------------------------------------- James Lowe, Schroders plc - Investment Trust Business Development Manager [11] -------------------------------------------------------------------------------- Great. Thanks, Jeff. We're coming up to the hour, so we will call it a day. So just to wrap up, thank you very much to Jeff and Rick for the presentation. Thanks to all your questions and to those of you who are listening, thanks for dialing in as well and taking your time to listen to us this morning. If you do have time, there should be some feedback forms that will appear on your screen shortly, if you do have time to fill those in, we do read them, so I appreciate if you could provide us with some feedback. And if you want any more information on the Trust, then please do head to the website or get in contact with your normal Schroders representative. That's all we have time.