- Net asset value (NAV) total return of 30.9 per cent in financial year
- Industrial assets deliver 38 per cent total return
- Dividend restated to pre-pandemic levels and covered 113 per cent by earnings
Schroder Real Estate Investment Trust (SREI:57.2p) has delivered a thumping 25 per cent increase in NAV to £372mn (75.8p a share), buoyed by an overweight exposure to the hot industrial sector and strong rental growth across the portfolio. The industrial segment accounted for 47.6 per cent of the £523mn portfolio valuation at 31 March 2022, having produced a 38 per cent total return in the 12-month period.
The astute acquisitions of the 400,000 square foot (sq ft) Langley Park multi-let industrial estate in Chippenham and 150,000 sq ft Stanley Green Trading Estate in Cheadle have not only proved well timed, but increased exposure to a segment that is delivering bumper rental growth in a tight market. Having spent £36.5mn acquiring the two industrial assets in December 2020, they have since been revalued at £52.2mn and now account for 10 per cent of the portfolio. Langley Park’s valuation is based on a net initial yield (NIY) of 5.7 per cent, but has a reversionary yield of 6.9 per cent as open market rents are significantly above contracted rents. For example, recent rent reviews resulted in 27 per cent plus rental uplifts for two major tenants.
The same is true at Stanley Green where negotiations are progressing with several occupiers on the trading estate to re-gear their leases which will support rental growth. A recent lease renewal resulted in a 60 per cent uplift. There is development upside, too, as the group is progressing the 80,000 sq ft construction of 11 warehouses on an adjoining 3.4 acre site at a cost of £8.5mn. Targeted rental income of £1.1mn more than supports the £8.5mn development cost with pre-lets being targeted ahead of project completion early next year.
The high reversionary yield of 6.4 per cent across the portfolio means that annual rental income of £30.1mn can be expected to rise towards open market rent of £33.8mn as leases come up for review or expiry, the weighted average lease length to break or expiry being relatively short at 5.4 years. Moreover, Schroder REIT has a lowly geared balance sheet – loan-to-value ratio of 28.6 per cent – and has secured funding at an average annual interest cost of 2.5 per cent and a long maturity profile of 10.4 years.
Investment manager Nick Montgomery is exploiting the low-cost funding, having acquired a portfolio of four industrial assets in north-west England for £19.9mn in late 2021. A low capital value of £53 per sq ft, reversionary yield of 8.2 per cent and NIY of 6.9 per cent suggests potential for both capital growth and income growth. Post the financial year-end, a mixed-use office and retail asset in Manchester City Centre has been acquired for £14.7mn on a NIY of 7.8 per cent and reversionary yield of 9.1 per cent.
Schroder REIT's shares have produced a 10.7 per cent total return since I initiated coverage (Alpha Research: ‘Targeting high yield property to out-run inflation’, 4 March 2022), but still trade on a 25 per cent discount to NAV and offer a 5.6 per cent dividend yield. Such a low valuation is unwarranted given that industrial and retail warehouses account for 58.1 per cent of the portfolio weighting, and the group also offers a play on the recovering regional office market. Buy.
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