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Schroder Reit goes for long leases and top-notch tenants

Schroder is adopting a more defensive strategy given ongoing uncertainty over Brexit
November 17, 2016

Risk aversion moved up the list at Schroder Real Estate Investment Trust (SREI) in the light of ongoing uncertainty caused by the EU referendum result. In a move to improve earnings visibility through what could be years of political and economic uncertainty, Schroders is eschewing, where prudent, from securing the highest rent available in preference for maximum lease times, while at the same time seeking tenants with a strong track record.

IC TIP: Buy at 57.5p

And despite a perceived threat on rental values, Schroders saw no fall off or call for renegotiation on the 35 lettings and lease renewals completed in the six months to September, two-thirds of which were concluded after the referendum. Net asset value per share held up well, and the underlying portfolio delivered a total return of 1.8 per cent compared with a negative 1.1 per cent return for the MSCI Benchmark Index.

As management continued to invest in the existing portfolio, £5.5m was spent on refurbishment, with a further £9.3m of committed expenditure over the next 12 months. Further initiatives may cost £10m, which is expected to be financed through the sale of lower-yielding assets. The portfolio generates a net initial yield of 5.6 per cent, while the reversionary element (if all rents were marked to market) takes this up to 7.6 per cent. Schroders' portfolio is also extremely defensive, with no exposure to the City of London or Canary Wharf, and with no financial institutions among its tenants.

SCHRODER REAL ESTATE INVESTMENT TRUST (SREI)
ORD PRICE:57.5pMARKET VALUE:£298m
TOUCH:57.25-57.5p12-MONTH HIGH:61pLOW: 43p
DIVIDEND YIELD:4.3%TRADING PROPERTIES:£1.2m
DISCOUNT TO NAV:6%NET DEBT:42%
INVESTMENT PROPERTIES:£439m*

Half-year to 30 SepNet asset value (p)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201560.923.14.41.24
201661.10.60.11.24**
% change+0-97-98-

Ex-div: 24 Nov

Payment: 2 Dec

*Includes joint ventures **Dividends paid quarterly XD and payment dates refer to second-quarter payment of 0.62p