Schroder’s diversified portfolio may withstand market volatility

Schroder's Saint Cloud office asset in Paris.
Schroder's Saint Cloud office asset in Paris.

Schroder European Real Estate Investment Trust has announced its half year results for the six months ended on the 31st of March 2020.

Well-positioned with a diversified portfolio and pipeline of value-enhancing asset management initiatives, the Company is actively managing the impact of Covid-19 with contracted rent collection of 80% for April, May, and June 2020.  

Schroder’s diversified portfolio consists of thirteen investments with approximately 100 tenants. 75% of the portfolio is invested in business space assets (office, industrial and a mixed-use data centre) in cities including Paris, Berlin, Stuttgart, and Hamburg.

The Company also recorded good progress with key asset management initiatives at Paris Boulogne-Billancourt and Hamburg office assets. The ‘Loan to Value’ of 30% / 27% net of cash (30th September 2019: 28% / 25% net of cash) at a weighted average total interest rate of 1.4%.

Each loan has separate ‘Loan to Value’ and income covenants with a range of headroom against covenants:

  • ‘Loan to Value’ default covenant average headroom approximately 27% across the portfolio. This ranges between 17% (Seville) and 37% (Hamburg and Stuttgart).
  • Income default covenant average headroom approximately 34% across the portfolio. This ranges between 15% (Hamburg and Stuttgart) and 73% (Rennes). For the Company’s sole shopping centre in Seville, there is no default income covenant for the loan, however there is currently a cash trap of net income from the property due to reduced rental income.
  • Next quarterly dividend reduced to 0.925 euro cents per share, equating to 50% of the target dividend level, in light of market uncertainty.

The Company’s key financial highlights include:

  • A portfolio valued at €247.3 million (Note 1), reflecting a 1.9% uplift during the period and an uplift of 11.1% on purchase price.
  • Net Asset Value (‘NAV’) of €182.1 million or 136.2 cps, reflecting no change compared to 30 September 2019 – NAV total return of 2.7% (31 March 2019: 1.7%).
  • Profit for the six months of €4.9 million (31 March 2019: €3.2 million) driven primarily by the portfolio valuation uplift.
  • Underlying EPRA earnings of €4.3 million (31 March 2019: €5.4 million), with the 2019 earnings having included receipt of a one-off surrender premium of €1.5 million.
  • Total dividends declared relating to the six months of 2.775 cps (31 March 2019: 3.7 cps).
  • Dividend cover for the six months of 116% (31 March 2019: 108%).

Operational highlights:

Schroder maintained high portfolio occupancy of 95% (30 September 2019: 94%) with a 6.0 years average lease term to expiry (30 September 2019: 6.4 years). Successful execution of the Company’s asset management initiatives across the portfolio includes a converted heads of terms to a signed conditional lease with Alten for a ten year commitment at the Company’s largest asset at Boulogne-Billancourt in Paris and an advanced planning, detailed design and construction tender and financing of the Alten refurbishment.

Excluding Alten, Schroder concluded a further five new leases and re-gears, generating a 16% increase in annualised income relative to previous rent of those leases at a weighted lease term of 4.4 years.

Reflecting its increasing focus on ESG considerations, Schroder secured its first GRESB Benchmark Green Star in recognition of the portfolio’s sustainability performance while improving the sustainability rating at the Company’s Hamburg office asset with the certification of BREEAM in use.

The Company’s underlying property portfolio’s total return is 4.0% for the six-month period.

Schroder continues to support its tenants, service providers and consumers. It is expected that the Seville Shopping Centre will face the most challenges due to Covid-19.

(Note 1: Includes the Group’s share of the Seville property proportionally valued at €22.8 million).

Dividend update

In light of the ongoing market uncertainty, the Board has reduced the next quarterly dividend to 0.925 euro cents per share, equating to 50% of the target dividend level.

In implementing the dividend strategy, the Board considered the rent collection and cash position of the Company, alongside market conditions, current asset management activity and the longer term sustainable rental income from the portfolio.

By retaining additional cash at this time, the Company will be better positioned to withstand the impact of Covid-19 on the portfolio.

The dividend will be kept under close review as clarity improves around the extent of the impacts of Covid-19, including on future rental receipts, property values and asset management initiatives.

Sir Julian Berney, Chairman of the Board, commented:

“During the first half of the year the Company has made good progress with key asset management initiatives, but we enter the second half of the year against an uncertain economic backdrop. We believe the diversification of the portfolio across different countries, sectors and tenants positions it well to withstand a period of market volatility. By reducing the dividend and retaining earnings, we have sought to strengthen the ability of the Company to mitigate the impact of Covid-19 and improve our flexibility to be able to capitalise on asset management opportunities going forward.”

Jeff O’Dwyer, Fund Manager for Schroder Real Estate Investment Management Limited, added:

“The impacts of Covid-19 have yet to fully play out and the depth and recovery of global GDP cannot be predicted with any confidence. Over the period, the SEREIT portfolio has stood up well, underpinned by our tenant and sector diversity that has led to favourable rent collection rates and valuation resilience. Whilst early indicators are that the easing of the lockdown in our key markets is having a positive impact on our tenants’ operations, we remain alert to the near-term challenges facing all our stakeholders. Longer term, we continue to believe that the portfolio’s weighting towards Continental European ‘Winning Cities’ like Paris, Berlin, Frankfurt and Hamburg will be beneficial to its future performance and liquidity.”

Salient features

  • IFRS profit increased by 53% to €4.9million, from €3.2 million in the prior corresponding period.
  • Earnings per share (“EPS”) increased by 54% to 3.7 euro cents per share, from 2.4 euro cents per share in the prior corresponding period.
  • Headline earnings per share (“HEPS”) decreased by 20% to 3.2 euro cents per share, from 4.0 cents per share in the prior corresponding period.
  • Dividends per share (“DPS”) decreased by 25% to 2.8 euro cents per share, from 3.7 euro cents per share in the prior corresponding period.
  • Net asset value per share (“NAVPS”) remained the same at 136.2 euro cents per share compared to 30 September 2019.