Schroder European Real Estate (SERE)
24/06/2024
Results analysis from Kepler Trust
Intelligence
Over the six months to
31/03/2024, Schroder European Real Estate (SERE) produced an NAV
total return of -1.3%. The main contributors to this were a 4.6cps
reduction in property valuations, and 3.2cps of rental income.
After paying dividends, the closing NAV per share was 123.6cps, and
overall NAV was €165.3m. The trust paid two quarterly dividends of
1.48cps, for a total of 2.96cps. Dividends were 109% covered by
EPRA earnings. SERE currently yields c. 9% (as at 20/06/2024).
SERE's EPRA earnings increased 3% to €4.3 million compared to the
previous six months, primarily due to rental growth offsetting the
impact of higher interest costs.
Post results the ECB cut
interest rates for the first time in five years, so it's fair to
ask how Schroder European Real Estate's (SERE) yield stacks up
against relevant bond yields. SERE's dividend yield is hovering
around its lifetime high in absolute terms, c. 8%, and the spread
over 10-year German government bonds, yielding c. 2.5%, is
therefore c. 5.5 percentage points, above the five-year average.
This covers the pandemic period and so arguably the average is
skewed higher than it might otherwise be. Either way, SERE's
dividend yield, which is fully covered, is in the territory where,
in our view, a discount recovery looks plausible with further rate
cuts.
In our view the final piece
in the puzzle for investors will be a stabilisation of capital
values. SERE saw a 3% drop in the portfolio valuation over the six
months, with the positive total return made up by the income
return. With the market currently pricing further rate cuts this
year, this point may not be too far away, which puts the spotlight
firmly on SERE's discount to net asset value of c. 40%, a level
that is as wide as it has ever been aside from some brief one-day
volatility during the pandemic. SERE's net gearing, 24% LTV, (32%
of net assets), is about average for listed REITs and there are no
further refinancings until 2026. There is also enough cash for the
team to consider either earnings-enhancing initiatives within the
existing portfolio, or to acquire further assets, which could
further enhance earnings. Thus, we think the recovery potential is
strong and the macro factors that could drive that are starting to
fall into place.
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