For release 2
June 2021
Schroder Real
Estate Investment Trust Limited
(“SREIT”/ the
“Company” / “Group”)
FULL YEAR RESULTS
FOR THE YEAR ENDED 31 MARCH 2021
PORTFOLIO WELL
PLACED TO MEET EVOLVING OCCUPIER NEEDS WITH INCREASED EXPOSURE TO
HIGHER GROWTH SECTORS AND ACTIVE ASSET MANAGEMENT
Schroder Real Estate Investment Trust, the actively managed UK
focussed REIT, today announces its audited full year results for
the 12 months ended 31 March 2021.
Key financial highlights
· Net Asset Value (‘NAV’) of
£296.8 million or 60.4 pps (31 March
2020: 309.8 million or 59.7 pps), supported by an accretive
share buy-back programme.
· Net asset value (‘NAV’) total
return for the year to 31 March 2021
of 3.9% (31 March 2020: -1.5%).
· EPRA earnings of £11.6 million,
a decrease of 9% (31 March 2020:
£12.7 million), reflecting the impact of the pandemic on rent
collection rates and a prudent approach to recognising bad
debts.
· IFRS profit of £4.5 million
(31 March 2020: loss of £32.5
million, due to one-off refinancing costs).
· Continued outperformance of the
underlying portfolio with a total return of 4.6% vs. the MSCI
Benchmark Index at 1.8%.
· Loan to Value (‘LTV’), net of
all cash, of 32.3%, within the long-term strategic range of 25% to
35%
· £12.2 million of cash and £28
million of undrawn debt facilities provides operational and
financial flexibility.
· Dividends totalling £8 million
or 1.59 pps paid during financial year, reflecting dividend cover
of 145% based on EPRA earnings. The Company will institute a
further 5% increase in the quarterly dividend to 0.656 pps, to be
paid in the quarter ending June
2021.
· Post year end reduction in the
Investment Manager’s fees to generate an annualised saving of
approximately £600,000 per annum with effect from 1 July 2021.
Key operational highlights
· Robust collection rate of 90% of
rents due over the financial year.
· Two multi-let industrial
acquisitions in December 2020 for
£36.5 million, reflecting an above average net initial yield of
6.8%
· 80 new lettings, renewals and
reviews completed from 1st April 2020
to 2nd June 2021, which totalled £7.9
million per annum of rental income and underpinned a significant
reduction in portfolio vacancy to 4.8% (31
March 2020: 7.3%)
· 73% of the portfolio weighted to
the industrial and office sectors (31 March
2020: 68%), with a below Benchmark retail weighting and no
shopping centres
· Successful execution of
Responsible and Impact Investment strategy recognised with the
retention of a three Green Star rating in the 2020 Global Real
Estate Sustainability Benchmark (‘GRESB’) survey, with the Company
top in its GRESB peer group of UK Diversified Listed Companies.
Lorraine
Baldry, Chairman of the Board, commented:
“Despite the severe financial and societal impacts of the global
pandemic, the outlook for the Company is positive. This is due to
the UK’s faster than expected economic recovery, the underlying
quality of the portfolio and its tenant base and the steps taken to
minimise the impact of Covid-19 and maximise shareholder returns
during the financial year. This activity included a successful
share buyback programme which, combined with attractively priced
new investments, enabled dividends to be reinstated in a
progressive manner.
“Whilst the recovery from the pandemic will be uneven and have a
differential impact on sectors within the economy, the Board and
Manager expect the Company to build on the resilience of the past
year, underpinned by its strong balance sheet, exposure to higher
growth assets and balance sheet capacity to invest and deliver
attractive returns.”
Nick
Montgomery, Fund Manager, added:
“The Company has a good quality, diversified portfolio that is
weighted towards higher growth parts of the UK real estate market,
with cash and undrawn credit facilities also providing balance
sheet capacity to make further investments and deliver capital
expenditure initiatives to enhance total returns.
“Whilst the Company is therefore well placed, the pandemic has
provided an opportunity to reassess the strategy in light of the
acceleration in structural changes and emerging occupier
trends. This will lead to greater focus on the four areas of:
Environmental, Social and Governance; a hospitality mindset and
operational excellence; reinvestment into larger assets offering
more sustainable income and total returns; and leveraging
Schroders’ sector specialist resources to invest across all parts
of the UK market. These four areas highlighted represent an
evolution of the current strategy which, whilst remaining income
focussed, will place greater emphasis on the delivery of long term
sustainable total returns.”
A webcast presentation for analysts and investors will be hosted
today at 09.00 am. In order to
register, please visit:
https://registration.duuzra.com/form/feedback/SREIannualresults
For further information:
Schroder Real Estate
Investment Management
Nick Montgomery / Frank Sanderson |
020 7658 6000 |
Northern Trust
Jingjing Qi |
01481 745352 |
FTI
Consulting
Dido Laurimore / Richard Gotla / Meth Tanyanyiwa |
020 3727
1000 |
Annual Report and Consolidated Financial Statements
for the year ended 31 March 2021
Contents
Overview.. 3
Company Summary. 3
Highlights. 4
Portfolio Overview 5
Investment Philosophy. 7
Our Strategic Objectives. 8
Performance Summary. 9
Strategic Report. 11
Chairman’s Statement. 11
Investment Manager’s review... 15
Sustainability Report. 31
Task Force for Climate-Related Financial Disclosure.. 38
Business Model 41
Our Stakeholders. 44
Risk and Uncertainties. 46
Governance Report. 49
Board of Directors. 49
Report of the Directors. 51
Corporate Governance.. 59
Remuneration Report. 63
Report of the Audit Committee.. 65
Independent Auditor’s report. 68
Financial Statements. 76
Consolidated Statement of Comprehensive Income.. 76
Consolidated Statement of Financial Position.. 77
Consolidated Statement of Changes in Equity. 78
Consolidated Statement of Cash Flows. 79
Notes to the Financial Statements. 80
Other information. 101
EPRA Performance Measures (unaudited). 101
Alternative Performance Measures (unaudited) 105
AIFM disclosures (unaudited) 106
EPRA Sustainability Reporting Performance Measures (unaudited).
108
Report of the Depositary to the Shareholders. 125
Glossary 126
Notice of Annual General Meeting. 127
Corporate Information. 130
Overview
Schroder Real Estate Investment Trust
Limited aims to provide shareholders with an attractive level of
income together with the potential for income and capital growth
through investing in UK commercial property.
Company Summary
Schroder Real Estate Investment Trust Limited (the ‘Company’ and
together with its subsidiaries the ‘Group’) is a real estate
investment company with a premium listing on the Official List of
the Financial Conduct Authority and whose shares are traded on the
premium segment of the Main Market of the London Stock Exchange
(ticker: SREI).
The Company is a Real Estate Investment Trust (‘REIT’) and
benefits from the various tax advantages offered by the UK REIT
regime. The Company continues to be declared as an authorised
closed-ended investment scheme by the Guernsey Financial Services
Commission under section 8 of the Protection of Investors
(Bailiwick of Guernsey) Law, 1987,
as amended and the Authorised Closed-ended Investment Schemes Rules
2008.
Objective
The Company aims to provide shareholders with an attractive
level of income and the potential for income and capital growth as
a result of its investments in, and active management of, a
diversified portfolio of UK commercial real estate.
The portfolio is principally invested in the three main UK
commercial real estate sectors of industrial, office and retail,
and may also invest in other sectors including mixed-use,
residential, hotels, healthcare and leisure. The Company believes
that a diversified portfolio by location, sector, size and tenant
will outperform specialist strategies over the long term. Over the
duration of the property market cycle, the portfolio aims to
generate an above average income return with a diverse spread of
lease expiries.
The Board has established a gearing guideline for the Investment
Manager, which seeks to target debt, net of cash, at a level
reflecting a loan to value of between 25% to 35%. This relatively
low level of gearing is used to enhance income and total returns
for shareholders with the level dependent on the property cycle and
the outlook for future returns.
The dividend policy adopted by the Board is to pay a sustainable
level of quarterly dividends to shareholders. The Board keeps the
dividend policy under active review with a view to ensuring the
Company can deliver a sustainable level of cover whilst having due
regard to current and anticipated future market conditions. It is
intended that the successful execution of the Company’s strategy
will enable a progressive dividend policy.
Investment strategy
The Company’s strategy is to own and actively manage a
diversified portfolio of properties located in the UK’s Winning
Cities and Regions.[1] These locations are
benefitting from higher economic growth resulting from structural
changes such as urbanisation, rapid changes and growth of
technology, changing demographics and social as well as positive
impact themes. These locations have diversified local economies,
sustainable occupational demand and favourable supply and demand
characteristics. These properties offer good long-term fundamentals
in terms of location, specification and sustainability performance,
and are let at affordable rents, with the potential for income and
capital growth due to good stock selection and asset management. We
aim to grow income and enhance shareholder returns through active
management and operational excellence.
Highlights for the period to 31 March
2021
· Sustained total return
outperformance of the real estate portfolio comprising +2.8% versus
the MSCI Benchmark Index (the ‘Benchmark’) over the past 12 months,
+2.4% per annum over the past three years and +1.1% per annum since
IPO in July
2004[2]
· Net asset value (‘NAV’) total
return of 3.9%[3] for the year to
31 March 2021
· Active asset management
strategy, leveraging sector specialist capabilities, completing 80
new lettings, renewals and reviews from 1st
April 2020 to 2nd June 2021,
which totalled £7.9 million per annum of rental income
· Share buyback programme
undertaken with £9.5 million of shares purchased during the
financial year, delivering 1.3 pence
per share (‘pps’) of accretion to shareholders
· 88% of the portfolio located
in Winning Cities and
Regions[4]
· 73% of the portfolio weighted
to the industrial and office sectors (2020: 68%), with a below
Benchmark retail weighting and no shopping centres
· First in peer group of UK
Diversified Listed Companies in terms of sustainability
performance, retaining three Green Stars in the 2020 GRESB
survey
· Loan to
Value[5] (‘LTV’), net of all cash, of
32.3% at a low average cost of 2.4% per annum
Supporting Information:
· Net asset value of £296.8
million (2020: £309.8 million)
· Amount spent on shares
repurchased of £9.5 million
· Net asset value per share of
60.4 pence (2020: 59.7 pence)
· Net asset value (‘NAV’) total
return of 3.9% (2020: -1.5%[6])
· Value of property assets and
share of joint ventures £438.8[7] million
(2020: £406.2 million)
· Underlying earnings of
£11.6[8] million (2020: £12.7 million)
· Portfolio total
return1
o
One year: 4.6% SREIT vs. 1.8% MSCI Benchmark Index
o
Three years: 4.6% per annum SREIT vs. 2.2% per annum MSCI Benchmark
Index
· Portfolio income
return1
o
One year: 6.5% SREIT vs. 4.4% MSCI Benchmark Index
o
Three years: 6.1% per annum SREIT vs. 4.4% per annum MSCI Benchmark
Index
Portfolio Overview – at a glance
The investment policy of the Company
is to own a diversified portfolio of UK real estate underpinned by
good fundamental characteristics. The Group invests principally in
the industrial, office and retail sectors and will also consider
other sectors including mixed-use, residential, hotels, healthcare
and leisure.
Sector weightings
Industrial – The Company owns a range of industrial
warehouses, the largest being multi-let estates in the densely
populated urban areas of Leeds,
Manchester and Milton Keynes which are positively impacted by
structural trends and where there are significant asset management
opportunities to capture rental growth.
Offices – The Company owns offices with good fundamentals
in terms of specification and location in those Winning Cities and
Regions that are attractive to a diverse occupier base. The largest
office investments are in London
(Bloomsbury and Uxbridge), Manchester and Edinburgh.
Retail – The retail assets in the portfolio are
predominantly well-managed, bulky goods retail warehouses let at
sustainable rents, and convenience retail as part of mixed-use
assets which are complementary to broader schemes and have multiple
uses such as offices and hotels. The Company does not own any
shopping centres.
Other – Other sectors are hotels and leisure properties.
At present, the apportioned value of the hotels at City Tower,
Manchester and Headingley Central,
Leeds and a leisure scheme in
Luton represent the Other
weighting in the portfolio.
Sector weightings
Sector weightings
by value |
2021
(%) |
2020
(%) |
Industrial |
38.8 |
28.6 |
Offices |
34.4 |
39.6 |
Retail
Retail warehouse
Retail part of mixed-use
Retail single use |
20.0
11.3
5.0
3.7 |
24.6
12.8
6.6
5.2 |
Other |
6.8 |
7.2 |
Top ten properties
The top ten properties, including the share of the joint venture
properties at City Tower in Manchester and Store Street in Bloomsbury, are
set out below and comprise 66% of the portfolio value:
Top ten
properties |
Sector |
Value
(£m)[9] |
(% of
portfolio) |
1 |
Milton Keynes, Stacey
Bushes Industrial Estate |
Industrial |
46.0 |
10.5 |
2 |
Leeds, Millshaw
Industrial Estate |
Industrial |
41.8 |
9.5 |
3 |
Manchester, City Tower
(25% share) |
Office/mixed-use |
40.2 |
9.2 |
4 |
London, Store Street,
Bloomsbury (50% share) |
Office |
39.4 |
9.0 |
5 |
Bedford, St. John's
Retail Park |
Retail
warehouse |
26.6 |
6.1 |
6 |
Leeds, Headingley
Central |
Mixed-use |
24.0 |
5.5 |
7 |
Chippenham, Langley
Park Industrial Estate |
Industrial |
19.8 |
4.5 |
8 |
Norwich, Union Park
Industrial Estate |
Industrial |
18.9 |
4.3 |
9 |
Cheadle, Stanley Green
Trading Estate |
Industrial |
18.0 |
4.1 |
10 |
Uxbridge, 106 Oxford
Road |
Office |
16.0 |
3.6 |
|
Total as at 31
March 2021 |
|
290.7 |
66.3 |
88% of the portfolio by value in
higher growth locations
|
SREIT[10] |
% of UK
GDP |
Fastest growing centres |
40% |
52% |
Second quartile |
48% |
22% |
Third quartile |
7% |
14% |
Slowest growing centres |
5% |
12% |
Investment Philosophy
A disciplined approach to investment
Schroder Real Estate Investment Trust aims to provide shareholders
with an attractive level of income, with the potential for income
and capital growth, from owning a diversified portfolio focused on
higher growth assets benefiting from structural changes which are
evident across the economy and real estate markets. The portfolio
is managed in accordance with an investment philosophy centred on
consistent principles which are to invest in strong asset
fundamentals and to actively manage assets in order to enhance
value.
Mega themes
Long-term performance of real estate assets will be driven by
structural changes or ‘mega themes’ arising from demographic
changes, urbanisation, technological change, environmental and
social changes and other factors that are outside of the normal
real estate market cycle. These include:
· Climate Change and
Decarbonisation: The world is not yet on course to meet the
Paris targets. The Net Zero Carbon
pathway at asset and fund level a key priority.
· Urbanisation: The decline of
retail stores will create opportunities for more mixed use
development in town and city centres.
· Demographics: The UK population
is ageing. The number of people over 80 years old will
increase by a third by 2030.
· Technology: Covid-19 will
accelerate the growth of life sciences in the UK and benefit cities
and town with strong universities and knowledge based
economies.
· Emerging markets: Beijing now has more billionaires than
New York. China forecast to be the biggest economy by
2030 with likelihood of growing demand for UK real estate.
· Impact investing: Positively
impacting the environment and society with the potential to benefit
investment returns.
High quality research
Research is focussed on cyclical and structural trends in order to
determine market strategy and exploit mispricing. In addition, to
better understand real estate fundamentals, our research focuses on
occupational demand at a town and city level and other factors such
as construction starts, infrastructure investment and pricing
relative to other assets.
Business plan-led approach
Every asset is managed as a business with a detailed plan that is
the key focal point for identifying and implementing active
management strategies that will maximise
returns.
Responsible and Positive Impact Investment
Sustainability and Environmental Social Governance (‘ESG’) and
Impact Investment considerations are integral to good investment
management and should generate better long-term returns, contribute
to our tenants’ business performance and create tangible benefits
to the communities where we are invested. The Company’s work in
this area was recognised by an EPRA Gold award for Sustainability
Best Practice Reporting in the 2020 year end accounts and retention
of Three Green Stars in the 2020 GRESB
survey.
Winning Cities and Regions
Occupier demand is increasingly concentrated in ‘Winning Cities and
Regions’, those that offer a competitive advantage in terms of
higher levels of GDP, employment and population growth;
differentiated local economies with higher value industries;
well-developed infrastructure; and places where people want to live
and work. Winning Cities and Regions will change over time and
investments will be made in other locations where we see higher
rates of future growth that could lead to mispricing
opportunities.
· Differentiated economy: Globally
facing, financial services, TMT hubs, life sciences and value add
manufacturing.
· Infrastructure improvements:
Transport, distribution, energy and technology.
· Employment growth: High value
new jobs, wealth effect and population growth.
· Environment: Live and work,
tourism and amenities, universities, cathedral cities, dominant
retail and leisure.
Our Strategic Objectives
Exposure to Winning Cities and Regions
experiencing higher levels of GDP, employment and population
growth
The strategy focuses on Winning Cities and Regions which offer a
competitive advantage in terms of higher levels of GDP per capita,
employment and population growth; differentiated local economies
with higher value industries; well developed infrastructure; and
places where people want to live and work.
Increasing net income through
transactions and asset management
Disciplined acquisition strategy focused on investing primarily
in industrial and regional office assets in Winning Cities and
Regions, combined with active asset management initiatives and
operational excellence to drive net income growth and dividend
cover. The intention is to pursue a progressive dividend
policy.
Increasing exposure to assets and
sectors with strong fundamentals
Post completion of asset business plans, the Company will seek
to dispose of assets where strong returns have been crystallised
and that are expected to underperform, in order to reinvest in
assets with stronger fundamentals. A more active approach to
selling smaller, non-core assets on completion of business plans,
with proceeds reinvested into larger, more resilient assets in
higher growth sectors which offer a high standard of operational
and sustainability performance, should deliver more sustainable
income and total returns over the long term.
Managing portfolio risk in order to
enhance the portfolio’s defensive qualities
The Company has a diversified tenant base of 299 occupiers and
an average weighted lease term of 5.3 years. Priority is given to
continue efforts to let the vacant space, improve covenants and
increase the average lease length through new lettings and lease
restructurings, alongside prudent management of our balance sheet,
targeting a Loan to Value ratio of between 25% and 35%.
The Company remains focused on
delivering sustainable and growing income and total returns
The key strategic steps are:
– Deliver a progressive
dividend policy together with attractive and sustainable total
returns;
– Maintain the long-term
track record of outperformance of the underlying portfolio;
– Increase exposure to
assets with strong fundamentals in higher growth locations;
– Provide climate change
leadership with ESG fully integrated and relevant to the
strategy;
– Actively manage the
Company and its assets to maximise shareholder returns;
– Evolve the Company’s
active asset management approach to include a hospitality mindset
and operational excellence; and
– Maintain a strong balance
sheet.
Performance Summary
Property performance
|
31
March 2021 |
31
March 2020 |
Value of Property
Assets and Joint Venture Assets [11] |
£438.8m |
£406.2m |
Annualised rental
income [12] |
£28.3m |
£24.9m |
Estimated open market
rental value [13] |
£31.2m |
£29.5m |
Underlying portfolio
total return |
4.6% |
1.9% |
MSCI Benchmark total
return [14] |
1.8% |
0.2% |
Underlying portfolio
income return |
6.5% |
6.1% |
MSCI Benchmark income
return |
4.4% |
4.4% |
Financial summary
|
31
March 2021 |
31
March 2020 |
Net Asset Value
(“NAV”) |
£296.8m |
£309.8m |
NAV per Ordinary
Share |
60.4p |
59.7p |
EPRA Net Tangible
Assets [15] |
£296.8m |
£309.8m |
Profit/(loss) for the
year |
£4.5m |
(£32.5m) |
EPRA earnings
[16] |
£11.6m |
£12.7m |
Dividend cover
[17] |
145% |
90% |
Capital values
|
31 March
2021 |
31 March
2020 |
Share price |
39.9p |
38.9p |
Share price discount
to NAV |
(33.9%) |
(34.8%) |
NAV total return
[18] |
3.9% |
(1.5%) |
FTSE All-Share
Index |
3,831.05 |
3,107.42 |
FTSE EPRA/NAREIT UK
Real Estate Index |
1,635.89 |
1,402.39 |
Earnings and dividends
|
31 March
2021 |
31 March
2020 |
EPRA
earnings[19] (pps) |
2.3 |
2.5 |
Dividends paid
(pps) |
1.59 |
2.72 |
Annualised dividend
yield on 31 March share price |
4.0% |
7.0% |
Bank borrowings
|
31 March
2021 |
31 March
2020 |
On-balance sheet
borrowings [20] |
£154.1m |
£129.6m |
Loan to Value ratio
(LTV), net of all cash [21] |
32.3% |
23.7% |
Ongoing charges
|
31 March
2021 |
31 March
2020 |
Ongoing charges
(including fund and property expenses)
[22] |
2.5% |
2.3% |
Ongoing charges
(including fund only expenses) [23] |
1.4% |
1.4% |
From 1 July 2021, the Board and
the Manager have agreed a change to the Manager’s fees which will
result in an initial saving of approximately £600,000 per annum,
with tiering providing scope for a further ad valorem fee reduction
with growth of the Company. Pro forma, this equates to a 0.2%
reduction in the ongoing charges shown above for the period to
31 March 2021.
Strategic Report
Chairman’s Statement
Overview
The past year has been a tumultuous period for the global
economy, dominated by the financial and societal impact of the
Covid-19 pandemic. In response to the pandemic, governments and
central banks have provided significant policy support together
with unprecedented levels of investment in public health and
vaccination programmes. As a result, the global economy is emerging
from a deep recession, with expectations of a strong recovery
reflected in elevated financial markets.
Levels of expected growth are predicated on the rollout of
vaccines and the UK is currently benefiting from being at a more
advanced stage compared with the majority of other economies.
Activity levels have also improved during the recent UK lockdown as
companies and households found ways of coping with restrictions,
leading to improved business confidence and household spending. As
a result, real UK Gross Domestic Product growth is forecast to be
above 5% for both 2021 and 2022, with this bounce back in stark
contrast to the period following the global financial
crisis.
Against this backdrop, our strategy over the financial year to
31 March 2021 was initially focussed
on mitigating the impact of the pandemic and improving the
portfolio’s defensive qualities. As the effects and impact of the
pandemic were better understood, the strategy focussed on selective
higher yielding acquisitions and maximising shareholder returns
through active asset management and the share buyback
programme.
The underlying property portfolio continued to deliver strong
relative performance compared with its peer group, with an
underlying portfolio total return of 4.6% for the financial year to
31 March 2021, compared with the MSCI
Benchmark Index (the ‘Benchmark) of 1.8%. The portfolio’s
performance comprised a 6.5% income return and a 1.8% decline in
capital values, with both components outperforming the Benchmark.
The portfolio is now ranked on the 13th percentile of
the Benchmark since its launch in 2004.
The outperformance was driven by an above-average income return
as result of active asset management by the Manager’s sector
specialist teams focused on rental collection and delivering
long-term sustainable income. As a result of this activity, the
Company’s void rate is at historic lows and the strongly performing
industrial sector now represents the portfolio’s largest
weighting.
The portfolio also performed best in its peer group of UK
Diversified Listed Companies in terms of sustainability
performance, retaining Three Green Stars in the 2020 GRESB
survey.
The successful delivery of the strategy resulted in a net asset
value (‘NAV’) of £296.8 million or 60.4
pence per share (‘pps’) at 31 March
2021, an increase of 1.2% compared with 59.7 pps as at
31 March 2020. This resulted in a NAV
total return, including dividends paid of 1.5 pps, of 3.9%. During
the year £9.5 million was invested in the share buyback programme
which contributed 1.3 pps to the NAV.
Strategy
The immediate focus in response to the pandemic was on the
safety and wellbeing of our occupiers, suppliers and other
stakeholders, whilst protecting shareholders’ long-term interests.
The Investment Manager worked with the Government and other
industry participants to bring forward the Covid-19 Code of
Practice for commercial property, which set out the principles of
behaviour and responses to tenant difficulties in a proportionate
and measured way. These principles have been applied consistently
and, alongside extensive occupier engagement, supported a
collection rate of 90% of rents due over the financial year, a
figure that we expect to increase in line with the roll out of the
vaccination programme and easing of lockdown restrictions. As
Government measures protecting tenants for non-payment of rent are
lifted, it is important that any further intervention fairly treats
the interests of both landlords and tenants. This is important such
that parties can work towards mutually beneficial solutions,
securing sustainable long-term income and value for all
stakeholders.
The pandemic has accelerated structural changes such as the
penetration of online retail and adoption of flexible working
practices. This has driven polarisation in performance across real
estate sectors, with strong demand for warehousing during lockdowns
contrasting with a challenging environment for high street retail
and shopping centres. Whilst the rate of this polarisation will
slow down as the economy opens up and social distancing
restrictions ease, continued divergence in returns is expected. At
the same time, cities and regions with knowledge-based economies,
which has been a central component of our strategy, will benefit
disproportionally from stronger occupational demand. These Winning
Cities and Regions should also benefit from the Governments
‘levelling up’ strategy and increased fiscal spending to boost
growth.
The steps taken by the Company during the past few years mean
that the underlying portfolio is well positioned to benefit from
these structural changes, with an above average and growing
exposure to the industrial sector, and significant office holdings
in Winning Cities such as London
and Manchester. In addition, the
portfolio has a below average weighting to retail, with the
majority of our retail weighting comprised of retail warehousing,
which has proven to be a more resilient retail format during the
pandemic. The Company also has no exposure to shopping centres, the
most challenging part of the retail market. Overall, the portfolio
comprises high quality, multi-let assets which, together with a
strong income return, offer scope to add value through asset
management and capital expenditure.
Whilst it is too early to make accurate predictions regarding
the long term impact of the pandemic on occupational demand, we
retain a strong conviction that physical offices will remain core
to future plans of businesses of all shapes and sizes. However, it
is clear that occupiers require greater levels of flexibility in
terms of service levels and contract terms. This means that real
estate will become increasingly operational. Landlords will
therefore be required to think innovatively around services to be
offered within the assets, invest in new technologies to reduce
energy consumption and deliver operational excellence. Schroders,
as Manager, is increasing investment in these areas and has
specialist asset management teams focused on delivering increased
service levels to occupiers. An example of this is City Tower in
Manchester, where fitted out
office space is being leased on flexible terms to drive higher
revenue growth compared with more traditional office
lettings.
More broadly, the most significant structural change that the
pandemic serves to highlight is the required level of global
co-ordination to address climate change and the transition to net
zero. This presents both a significant challenge and an opportunity
for the real estate industry, which is widely considered to be
responsible for approximately 40% of global carbon emissions. The
Company’s approach to sustainability is outlined below.
Sustainability
The Board and Manager believe that focusing on sustainability
throughout the real estate lifecycle will deliver enhanced
long-term returns for shareholders as well as a positive impact to
the environment and the communities where the Company is investing.
As a result, key sustainability objectives have been agreed for the
current financial year, which include the Company issuing its own
Net Zero Carbon Pathway. Work has already begun in this area with a
proposed operational net zero carbon industrial development at
Stanley Green, Manchester, the
first of its type in the North West. Further detail is contained
within the Manager’s report.
During the current financial year the Board and Manager also
intend to align the Company’s sustainability objectives with the
principles contained within the EU Sustainable Finance Disclosure
Regulation, or ‘SFDR’. This is a new investment disclosure standard
applying in the European Union which is expected to be replicated
in the UK by the FCA, during 2021 or 2022. SFDR requires complying
companies to report on the extent to which sustainability risk is
part of the investment considerations. The reporting is intended to
include both the considered risk of climate change on the portfolio
itself as well the intended impact of the investment strategy. The
Board and Manager expect to be able to demonstrate, based on
current activity, that these considerations are fully integrated
and relevant to the Company’s strategy. This will include binding
commitments relating to the portfolio’s environmental and social
characteristics, as well as demonstrating good governance.
Share buybacks
In September 2020 the Company
announced a share buyback due to the prevailing share price
offering attractive value for shareholders. During the financial
year, 27.1 million shares were acquired for £9.5 million, which
reflected an average price of 35.1 pps and an average discount to
the last prior financial year end NAV of -41%. This resulted in NAV
accretion of 1.3 pps. Since the financial year end a further
340,000 shares have been acquired at an average discount to the
March 2021 NAV of -33%.
Since the start of the buyback in September, the share price has
increased by 53% to 46.15 pps as at 28 May
2021, which now reflects a discount of 24% to the latest
reported NAV. The share buyback is one of a range of measures that
the Board has undertaken to address the share price discount to
NAV, with others including the major refinancing in 2019 which
reduced the average financing costs by £2.5 million. The Board will
review the potential for further buybacks in the future depending
on movements in the share price and alternative uses for the
Company’s investment capacity.
Dividend
In April 2020, due to uncertainty
relating to the pandemic, the Board withheld the dividend payment
originally due to be paid in June
2020. We are pleased that progress with rent collection and
implementing the strategy enabled dividends to be reinstated and
progressively increased to 0.625 pps for the dividend paid in the
quarter ended 31 March 2021. As a
result, during the financial year, dividends totalling £8 million
or 1.59 pps were paid, reflecting dividend cover of 145% based on
EPRA earnings.
The Board and Manager have prudently considered both EPRA and
cash earnings as part of determining dividend payments, with the
latter impacted as a result of tenant incentives and arrears.
The Board’s objective is to deliver a sustainable and progressive
dividend policy and therefore, adopting this approach, the Company
has today announced a further 5% increase in the dividend to 0.656
pps, to be paid in the quarter ending 30
June 2021.
Debt
The Company has two loan facilities, a £129.6 million term loan
with Canada Life and a £52.5 million revolving credit facility
(‘RCF’) with Royal Bank of Scotland International (‘RBSI’) of which
£24.5 million was drawn at 31 March
2021. These facilities provide a low all-in average cost of
debt of 2.4% and a blend of maturities in 2023, 2032 and 2039,
reducing refinancing risk.
In addition to the properties secured against the Canada Life
and RBSI loan facilities, the Company has unsecured properties with
a value of £39.4 million and cash and undrawn debt of approximately
£40 million. The Company has significant headroom on all debt
covenants. The Company’s Loan to Value ratio, net of cash, is 32%,
within the long term strategic range of 25% to 35%.
The Investment Manager
The Board and the Manager have agreed a change to the Manager’s
fees which will result in an initial saving of approximately
£600,000 per annum, with tiering providing scope for a further ad
valorem fee reduction with growth of the Company. This is in the
process of being documented and will take effect from 1 July 2021. The Board are pleased with the
performance of the management team over the financial year and are
satisfied that they have the necessary skills and resources to
deliver the future strategy.
Nick Montgomery is the Fund
Manager of the Company, supported by the Manager’s specialist asset
management teams and Group infrastructure. In July 2020, the Company announced that
Duncan Owen had decided to step down
from his role as Joint Fund Manager of the Company and Global Head
of Real Estate at Schroder Real Estate. Since 1 January 2021, Sophie
van Oosterom has been appointed as Global Head of Real
Estate of Schroder Real Estate, and Duncan
Owen has acted as Special Advisor to the Board.
Outlook
Despite the severe financial and societal impacts of the global
pandemic, the outlook for the Company is positive. This is due to
the UK’s faster than expected economic recovery, the underlying
quality of the portfolio and its tenant base, and the steps taken
to minimise the impact of Covid-19 and maximise shareholder returns
during the financial year. This activity included a successful
share buyback programme which, combined with attractively priced
new investments, enabled dividends to be reinstated in a
progressive manner. Looking forward, the objective is to deliver a
progressive dividend policy together with attractive and
sustainable total returns supported by asset management.
Whilst the recovery from the pandemic will be uneven and have a
differential impact on sectors within the economy, the Board and
Manager expect the Company to build on the resilience of the past
year, underpinned by its strong balance sheet, exposure to higher
growth assets and balance sheet capacity to invest and deliver
attractive returns. Furthermore, the Company is well placed to
capitalise on the trends that have accelerated as a result of the
pandemic, including responding to changes in occupier demand, a
focus on operational excellence and ensuring that sustainability
priorities are fully integrated within the Company’s investment
process.
Lorraine Baldry
Chairman
Schroder Real Estate Investment Trust Limited
1 June 2021
Investment Manager’s review
Investment Manager’s report
Good progress has been made during the financial year to
31 March 2021 delivering on the
strategy against the backdrop of significant volatility and
uncertainty caused by the Covid-19 pandemic. At the outset of the
pandemic, and across the first half of the financial year, our
efforts were focussed on mitigating the effects of the pandemic on
our portfolio, tenants and wider stakeholders. The second half of
the financial year has been characterised by a high level of
positive activity including new investments, active asset
management and evolving the strategy to deliver sustainable
outperformance as the economy reopens and real estate markets
adjust to a new normal.
The Company’s Net Asset Value (‘NAV’) as at 31 March 2021 was £296.8 million or 60.4 pence per share (‘pps’), which reflects an
increase over the financial year of 0.7 pps or 1.2%, and a NAV
total return of 3.9%. A detailed analysis of the NAV is set
out below:
|
£m |
pps |
NAV as at 31 March
2020 |
309.8 |
59.7 |
Unrealised change in
valuation of direct real estate portfolio and Joint
Ventures[24] |
2.5 |
0.5 |
Capital
expenditure[25] |
(7.1) |
(1.4) |
Acquisition costs |
(2.3) |
(0.4) |
Realised gains on
disposals |
0.1 |
- |
Net revenue/EPRA
earnings |
11.6[26] |
2.3 |
Dividends paid |
(8.0) |
(1.5) |
Others |
(0.3) |
(0.1) |
NAV as at 31 March
2021 (excluding the share buyback) |
306.3 |
59.1[27] |
Share buyback |
(9.5) |
1.3 |
NAV as at 31 March
2021 |
296.8 |
60.4[28] |
The underlying portfolio, including joint ventures and the
impact of capital expenditure, decreased in value by -1.8% over the
12 months to March 2021, which
compared favourably with the MSCI Benchmark (the ‘Benchmark’) of
-2.5%. The pandemic had a negative impact on values during the
first half of the financial year, with a capital value decline of
-3.4% (Benchmark -3.4%) comparing with a capital value increase of
1.7% over the second half (Benchmark +1.0%).
This capital value movement includes the dilutive impact of
acquisitions costs, totalling £2.3 million, associated with the
purchase of two industrial estates in Manchester and Chippenham in December for
£36.5 million. These acquisitions reflected an above average
net initial yield of 6.8% and were revalued to £37.8 million as at
March 2021, an uplift of £1.3 million
or 4%.
Net revenue for the year totalled £11.6 million, or 2.3 pps,
which was 8% below the previous financial year and due to the
impact of the pandemic on rent collection rates, which were 90% of
rents due for the financial year. This figure also reflects
what we believe was a prudent approach to recognising bad debt
provisions, which totalled £1.1 million at the year end.
Dividends totalled £8 million for the financial year comprising
of three payments, with the first interim dividend withheld due to
pandemic related uncertainty. The subsequent payments comprised £2
million (0.39 pps) for the quarter ended September 2020, £2.9 million (0.575 pps) for the
quarter ended December 2020 and £3.1
million (0.625 pps) for the quarter ended March 2021. This reflected dividend cover of 145%
based on EPRA earnings.
As part of determining dividend payments, the Board and Manager
prudently considered both EPRA and cash earnings, with the latter
lower as a result of smoothing tenant incentives and arrears. On a
cash basis, the dividend cover over the financial year was fully
covered. Cash dividend cover over the next financial year should be
boosted by the recovery of arrears and the potential reversal of
bad debt provisions.
During the year £9.5 million was invested buying back shares at
an average discount to the 31 March
2020 NAV of 41.2%. This added 1.3 pps to the NAV as well as
enhancing the dividend cover by reducing the number of shares in
issue (excluding shares held in treasury) from 518.5 million to
491.4 million.
Review of strategy and activity during
the financial year
The strategy and activity over the financial year focused on
delivering the following key objectives:
– Mitigating the impact of
the Covid-19 pandemic on the portfolio, tenants and wider
stakeholders;
– Delivering attractive and
sustainable shareholder income and total returns;
– Outperforming the MSCI
Benchmark Index at an underlying portfolio level over one and three
years, including generating an above average income return;
– Increasing exposure to
higher growth sectors in Winning Cities and Regions;
– Delivering best-in-class
Environmental, Social and Governance (‘ESG’) performance; and
– Maintaining a strong
balance sheet with significant headroom on loan covenants.
Good progress has been made executing this strategy, reflected
in the highlights below:
– High level of occupier
engagement resulted in robust rent collection rates and new lease
agreements, with a small number of tenants most adversely impacted
by the pandemic;
– NAV total return of 3.9%
supported by a high level of activity across the portfolio as well
as share buybacks and efficient balance sheet management. A
recovery in capital values contributed to a NAV total return of
3.8% for the quarter to March 2021,
with acquisitions and improving rent collection rates supporting a
further 5% increase in the dividend to be paid in the quarter
ending June 2021;
– The underlying portfolio
delivered a total return of 4.6% over the financial year compared
with the Benchmark of 1.8%. Over three years the portfolio also
delivered a total return of 4.6% per annum compared with the
Benchmark of 2.2% per annum. The outperformance over the year was
driven by an income return of 6.5% (Benchmark 4.4%), an above
average weighting to the industrial sector and active management
across the portfolio;
– During the financial year
steps were taken to increase exposure to higher growth
sectors. This is reflected in an increase in the portfolio’s
industrial weighting, now the highest sector exposure, to 38.8%
(March 2020 28.6%), a reduction in
the single use retail weighting to 15% (March 2020: 18%) and a reduction in the void rate
to 4.8% (March 2020: 7.3%);
– The Company achieved a
three star rating in the GRESB sustainability survey and was top of
its peer group of UK Diversified Listed Companies. The
Company also achieved a GRESB Public Disclosure A Rating and the
EPRA Best Practice Sustainability Reporting Gold Award for the
third consecutive year; and
– The Company has a strong
and stable balance sheet with a net loan to value of 32%, an
average interest cost of 2.4%, and a long weighted maturity profile
of 13 years. The Company, factoring in cash and unsecured
properties, could withstand a valuation decline in the underlying
portfolio of approximately 42% before breaching covenants.
This activity means the Company is well positioned to continue
delivering attractive returns for shareholders whilst evolving the
strategy in response to the structural changes and occupier trends
emerging following the pandemic. These are outlined in more
detail following the market overview below.
Market overview
The impact of the pandemic has been polarised across the real
estate sectors, with an average capital value decline of -2.5% for
the MSCI Benchmark over the year to March
2021 masking a historically high divergence between the
three main sectors of offices, industrial and retail. This is
illustrated by the best performing subsector, south east
industrial, enjoying a capital value increase of 10.9%, compared
with shopping centres as the worst sub-sector which experienced a
-9.8% capital value decline. Whilst polarisation in performance is
expected to continue, the divergence is likely to narrow and
capital values are starting to recover. By the end of September 2020, overall UK commercial real estate
had seen negative capital growth for 23 consecutive months. Since
then, the market has seen positive capital growth for seven
consecutive months. By the end of April
2021 (the latest available data point) the rolling
three-month capital growth of 1.5% was the highest the market had
seen since February 2018. All three
main sectors of offices, industrial and retail delivered a positive
total return during the quarter to March 2021.
Whilst unprecedented Government and central bank policy support
has kept interest rates low and supported real estate values and
asset prices more generally, Government intervention has enabled
tenants to withhold rental payments and diluted income returns.
This has been accompanied by corporate insolvency measures enabling
tenants to restructure landlord liabilities. The retail and leisure
sectors have been most adversely impacted by the pandemic, to which
the Company has a low weighting. It is important that as measures
to protect tenants are lifted, any proposals relating to the
treatment of historic arrears fairly treats the interests of both
landlords and tenants.
Assuming the successful completion of the vaccine rollout
programme and a reopening of the economy, UK GDP should return to
its pre-virus level in the second half of 2022. The main driver
will be consumer spending, with consumers accumulating an extra
£150 billion in savings during lockdown. In addition, 2021 should
see a recovery in business investment and the Chancellor has
postponed tax rises until 2022. The rebound in energy and food
prices means that inflation is likely to accelerate to 2.5% in the
next few months, before easing to 1.5% next year. Higher
unemployment as the furlough scheme ends should limit inflationary
pressures, with base rates remaining at 0.1% until the end of
2022.
The pandemic response will change Government policy in a number
of areas, notably with greater emphasis on ‘levelling up’, which
came to prominence after the 2019 general election. In its broadest
terms, levelling up is a commitment to address regional
inequalities with a focus on visible infrastructure projects such
as road-building and high-street regeneration. Whilst this will
benefit poorer areas of the UK, the £4.8 billion fund will also be
targeted at higher multiplier industries which is likely to benefit
stronger regional cities such as Manchester and Leeds, where the Company has significant
investments.
The biggest beneficiary of the acceleration in structural trends
during the pandemic was the industrial sector, with record demand
for warehousing due to on-line sales growth and stockpiling ahead
of a possible no-deal Brexit. While the latter will unwind, demand
from Amazon, traditional retailers and parcels companies has
remained strong in 2021. This year should see a recovery in demand
from manufacturers as the economy improves and the Government’s
announcement of eight new freeports could attract more inward
investment over the long term. We expect industrial rental growth
to average 2% per annum over the next three years, with multi-let
estates seeing faster growth than regional distribution and big box
warehouses, because of more constraints on new development.
Following recent acquisitions in Manchester and Chippenham, the Company’s
largest sector exposure is to multi-let industrial estates, which
offer significant potential for income and capital growth from
asset management, refurbishment and development.
The shift to online retailing during the pandemic means that
in-store retail sales are unlikely to return to pre-virus levels.
At the same time, retailer insolvencies and the closure of stores
by John Lewis, banks and restaurant
chains have reduced the attractiveness of many retail destinations.
15% of retail units across the UK were empty at the end of 2020,
and vacancy in many less affluent towns was over 20%, reflecting
fewer independent retailers and the fact that house prices and
commercial values are too low to make redevelopment viable.
Shopping centre rental values could fall by a further 20% over the
next three years, and the Company will continue to benefit from
having no exposure to this segment of the market. More
interestingly, sentiment towards retail warehousing is improving,
particularly bulky goods retail parks that have been preferred by
shoppers during the pandemic. These parks are expected to be more
resilient due to lower rental levels and the ability to support
multi-channel retailing through click and collect as well as last
mile delivery. The majority of the Company’s remaining single use
retail exposure comprises retail warehousing with these
characteristics in good locations such as Bedford, Salisbury and
Chester.
The office market continues to assess the relative merits of
being in the office and working from home with little consensus.
While occupiers such as BP and HSBC have decided to cut their
office space, others such as BT, Goldman Sachs, Google and major
law firms have signed new leases or re-affirmed their commitment to
their existing offices. In the short-term, demand will remain
subdued with an increase in sub-let space suppressing rental
values. However, demand is polarising and we expect rents on well
specified, modern offices in city centres and close to leading
universities to recover from 2022 onwards. The key driver will be
an increase in employment in IT, life sciences, media and
professional services. A low volume of new office buildings will
also be supportive but we expect tenants to require greater
flexibility as the economy recovers. By contrast, rents on older,
out of town offices and back office space will continue to decline
as administrative functions such as call centres are disrupted by
changing working patterns and technology. The Company’s office
weighting now represents 34.4% of portfolio value with a focus on
assets offering the above mentioned strong fundamentals in
London and stronger regional
centres including, Manchester,
Edinburgh and
Leeds.
Future strategy
Whilst there remain risks and uncertainties relating to the
pandemic, the Company has a good quality, diversified portfolio
that is weighted towards higher growth parts of the UK real estate
market. The Company’s cash and undrawn credit facilities also
provide balance sheet capacity to make further investments and
deliver capital expenditure initiatives to enhance total
returns.
Whilst the Company is therefore well placed, the pandemic has
provided an opportunity to reassess the strategy in light of the
acceleration in structural changes and emerging occupier trends.
This will lead to greater focus on the four areas below:
1.
Environmental, Social and Governance (‘ESG’) leadership
While the Company has made significant progress delivering
sustainability performance over recent years, the pandemic has
increased focus on climate change and the requirement to act on net
zero commitments and evidence positive social impact. The Company
came first in its peer group of UK Diversified Listed Companies in
the 2020 GRESB rating and has an opportunity to consolidate its
leadership in this area which should enhance long-term returns for
shareholders, and deliver a positive impact to the environment and
the communities where the Company is investing. Alongside continued
participation in GRESB, a range of ESG-related objectives have been
agreed with the Board which include the Company issuing its own net
zero pathway and alignment with more demanding regulations that are
set out in more detail below. The Company benefits from the
Manager’s dedicated Sustainability team and broader Schroders Group
infrastructure and will continue to leverage this resource and
thought-leadership to support the management and sector specialist
teams.
2.
Hospitality mindset and operational excellence
The pandemic has accelerated pre-existing trends such as the
growth of e-commerce and changed occupier behaviour. Examples
include altered working habits driving growth in flexible working
concepts, changing health considerations affecting user-density and
ESG regulation impacting building development, operation and
reporting requirements. In response to these trends, real estate
owners must adapt and innovate in order to attract and retain
tenants. An active management approach has driven the Company’s
long-term outperformance but, looking forward, an increasingly
hospitality-driven approach will be required which optimises the
building services to cater to the tenant’s business model and
sustainability objectives. The level of flexibility and services
required will, in turn, govern the contractual terms between
landlord and tenant.
The sharing of cost and data with tenants will be key to
delivering operational excellence and facilitate improvements such
as ensuring the optimal usage of space and minimising the scarce
use of resources like electricity and water. This will require more
specialist real estate resource to drive operational performance,
closer management of supply chains and investment in new
technologies. Schroders as Manager is increasing investment in
these areas and adapting business plans to provide greater levels
of flexibility and service, best illustrated by the Elevate concept
at City Tower in Manchester,
explained in more detail in the case study
below.
3.
Reinvestment into larger assets offering more sustainable income
and total returns
The Company’s top ten assets represent 66% of portfolio value
and offer strong fundamentals in terms of location and
specification, with opportunities to add value through active
management. The balance of the portfolio comprises 29 assets, of
which 15 are valued at below £5 million.
Whilst these smaller assets provide diversification benefits,
the Company’s larger assets, often with multiple competing uses,
typically offer higher returns from active management due to being
multi-let with a range of lease expiries. These assets are more
likely to include corporate occupiers demanding higher service
levels and sustainability performance, creating more opportunities
to improve assets and deliver sustainable earnings growth.
For example, during the financial year the Company sold two
office and retail assets for £6.6 million and increased its
industrial weighting through two attractively priced acquisitions
totalling £36.5 million in the multi-let industrial sector with
significant asset management potential. The Company delivered
outperformance from its larger multi-let estates by implementing
phased refurbishments and new developments. This is reflected in
the performance of the Company’s industrial assets over the
financial year which generated a total return of 14.9%, including
the dilutive impact of acquisition costs, compared with the
Benchmark’s industrial average of 14.2%.
A more active approach to selling smaller, non-core assets on
completion of business plans, with proceeds reinvested into larger,
more resilient assets in higher growth sectors which offer a high
standard of operational and sustainability performance, should
deliver more sustainable income and total returns over the long
term.
4. Balanced
portfolio, specialist capabilities
Looking forward, whilst the industrial portfolio should continue
to deliver attractive returns, the divergence in performance
between the main sectors is expected to narrow and create
opportunities to invest in sectors that are currently out of
favour. This should present an opportunity for the Company which,
as a diversified strategy, can invest across all parts of the UK
market to maximise returns through the cycle. Applying Schroders’
sector specialist resources, who have a deep understanding of their
respective investment and occupier markets to larger assets has,
and should continue to, drive the long term outperformance of the
underlying portfolio.
These four areas highlighted represent an evolution of the
current strategy which, whilst remaining income focussed, will
place greater emphasis on sustainable total returns. This, together
with the Company’s other strategy objectives, are set out
below:
– Deliver a progressive
dividend policy together with attractive and sustainable total
returns;
– Maintain the long-term
track record of outperformance of the underlying portfolio;
– Increase exposure to
assets with strong fundamentals in higher growth locations;
– Actively manage the
Company and its assets to maximise shareholder returns;
– Provide climate change
leadership with ESG fully integrated and relevant to the
strategy;
– Evolve the Company’s
active asset management approach to include a hospitality mindset
and operational excellence; and
– Maintain a strong balance
sheet.
Real estate portfolio
As at 31 March 2021 the portfolio
comprised 39 properties valued at £438.8 million. This includes the
Company’s share of joint venture properties at City Tower in
Manchester (25% share) and Store
Street in Bloomsbury, London (50%
share).
The portfolio produces an annualised rental income of £28.3
million per annum, reflecting a net initial income yield of 6.0%
which compares with the MSCI Benchmark (the ‘Benchmark’) at 4.4%.
The portfolio also benefits from fixed contractual annual rental
uplifts of £1.8 million over the next 24 months. The independent
valuers’ estimate that the current rental value of the portfolio is
£31.2 million per annum, reflecting a reversionary income yield of
7.1%, which compares with the Benchmark at 5.2%. The Company’s void
rate is 4.8%, calculated as a percentage on estimated rental value,
with a weighted average lease length to the earlier of lease expiry
or break of 5.3 years.
The data tables below summarise the portfolio information as at
31 March 2021:
|
Weighting (% of portfolio) |
Sector weightings by
value |
SREIT |
Benchmark |
South Eastern |
11.3 |
17.9 |
Industrial Rest of UK |
27.5 |
10.2 |
Industrial |
38.8 |
28.1 |
City |
0.0 |
3.7 |
Mid-town and West End |
9.0 |
7.2 |
Rest South East |
6.2 |
8.7 |
Office Rest of UK |
19.2 |
7.7 |
Offices |
34.4 |
27.3 |
South East |
0.9 |
7.9 |
Rest of UK |
7.8 |
4.3 |
Shopping centres |
0.0 |
3.2 |
Retail warehouse |
11.3 |
9.2 |
Retail |
20.0 |
24.6 |
Other |
6.8 |
20.0 |
|
Weighting (% of portfolio) |
Regional weightings by
value |
SREIT |
Benchmark |
Central
London[29] |
9.0 |
21.1 |
South East excluding Central
London |
20.3 |
33.3 |
Rest of South |
11.8 |
14.5 |
Midlands and Wales |
23.7 |
12.4 |
North |
32.6 |
13.8 |
Scotland |
2.6 |
4.5 |
Northern Ireland |
0.0 |
0.2 |
The top ten properties, including the share of the joint venture
properties at City Tower in Manchester and Store Street in Bloomsbury, are
set out below and comprise 66% of the portfolio value:
Top ten
properties |
Sector |
Value
(£m) |
(% of
portfolio) |
1 |
Milton Keynes, Stacey
Bushes Industrial Estate |
Industrial |
46.0 |
10.5 |
2 |
Leeds, Millshaw
Industrial Estate |
Industrial |
41.8 |
9.5 |
3 |
Manchester, City Tower
(25% share) |
Office/mixed-use |
40.2 |
9.2 |
4 |
London, Store Street,
Bloomsbury (50% share) |
Office |
39.4 |
9.0 |
5 |
Bedford, St. John's
Retail Park |
Retail
warehouse |
26.6 |
6.1 |
6 |
Leeds, Headingley
Central |
Mixed-use |
24.0 |
5.5 |
7 |
Chippenham, Langley
Park Industrial Estate |
Industrial |
19.8 |
4.5 |
8 |
Norwich, Union Park
Industrial Estate |
Industrial |
18.9 |
4.3 |
9 |
Cheadle, Stanley Green
Trading Estate |
Industrial |
18.0 |
4.1 |
10 |
Uxbridge, 106 Oxford
Road |
Office |
16.0 |
3.6 |
|
Total as at 31
March 2021 |
|
290.7 |
66.3 |
The Company’s income is diverse with 299 tenants of which the
top twenty tenants represent 41.2% of the portfolio as a percentage
of annual rent:
Top
twenty tenants |
Rent
p.a. (£m) |
(% of
portfolio) |
1 |
University of Law
Limited |
2.00 |
7.1 |
2 |
Buckinghamshire New
University |
1.15 |
4.1 |
3 |
Siemens Mobility
Limited |
0.97 |
3.4 |
4 |
The Secretary of
State |
0.88 |
3.1 |
5 |
Matalan Retail
Limited |
0.57 |
2.0 |
6 |
Express Bi Folding
Doors Limited |
0.53 |
1.9 |
7 |
TJX UK Limited (T/A
Homesense) |
0.51 |
1.8 |
8 |
Jupiter Hotels Limited
(T/A Mercure) |
0.46 |
1.6 |
9 |
Premier Inn Hotels
Limited |
0.42 |
1.5 |
10 |
Lidl |
0.42 |
1.5 |
11 |
Geldards LLP |
0.41 |
1.5 |
12 |
Schneider Electric
Limited |
0.41 |
1.4 |
13 |
Wickes Building
Supplies Limited |
0.40 |
1.4 |
14 |
Sportsdirect.Com
Retail Limited |
0.40 |
1.4 |
15 |
Morgan Sindall
Construction & Infrastructure Limited |
0.38 |
1.3 |
16 |
Cineworld Cinema
Properties Limited |
0.37 |
1.3 |
17 |
The Gym Limited |
0.36 |
1.3 |
18 |
IXYS UK Limited |
0.36 |
1.3 |
19 |
Lloyds Banking
Group |
0.35 |
1.2 |
20 |
Pilgrim’s Pride
Limited |
0.34 |
1.2 |
|
Total as at 31
March 2021 |
11.69 |
41.2 |
Portfolio performance
A high level of asset management has led to continued
outperformance of the underlying property portfolio compared with
the MSCI Benchmark Index. The table below shows the performance to
31 March 2021 with the portfolio
ranked on the 13th percentile of the Benchmark since IPO
in 2004:
|
SREIT total return p.a. (%) |
MSCI Benchmark Index total return p.a. (%) |
Relative p.a. (%) |
Period to 31 March
2021 |
One
year |
Three
years |
Since
IPO [30] |
One year |
Three
years |
Since IPO |
One
year |
Three
years |
Since
IPO |
Office |
3.6 |
5.2 |
7.8 |
-0.5 |
3.0 |
7.1 |
4.1 |
2.2 |
0.6 |
Industrial |
14.9 |
14.0 |
9.9 |
14.2 |
11.1 |
9.0 |
0.6 |
2.6 |
0.8 |
Retail |
-5.1 |
-5.7 |
3.8 |
-6.7 |
-6.0 |
3.2 |
1.7 |
0.3 |
0.6 |
Other |
-11.8 |
-5.0 |
1.9 |
-0.6 |
3.1 |
7.3 |
-11.2 |
-7.9 |
-5.1 |
All sectors |
4.6 |
4.6 |
7.2 |
1.8 |
2.2 |
6.0 |
2.8 |
2.4 |
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Transactions
During the financial year the Company sold two non-core assets
for £6.6 million which generated a small profit of £0.1 million,
after adjusting for disposals costs. Following a more cautious
investment approach during the initial stage of the pandemic, two
significant new industrial acquisitions were completed in
December 2020 that are summarised
below. Over the next twelve to twenty-four months the Company
intends to continue to actively recycle smaller non-core assets
into larger assets in growth sectors and regions with strong
sustainability credentials.
Manchester, Cheadle, Stanley Green Trading
Estate (Industrial)
On 17 December 2020 the Company
acquired Stanley Green Trading Estate (‘the Estate’) together with
an adjoining development site (‘the Site’) in Cheadle, South Manchester, for a total consideration of
£17.25 million, reflecting a blended net initial yield of 5.2%. As
at 31 March 2021 the asset is
independently valued at £18 million.
Asset overview
The freehold Estate and Site are located in a prime South Manchester location at the junction of
the A34 and the A555 which is the recently upgraded Manchester
Airport Eastern Link Road (Ringway Road). This provides a direct
link to Manchester city centre,
Manchester Airport, and the M60 orbital motorway. The local road
network also connects to affluent suburbs such as Cheadle,
Bramhall, Wilmslow and Alderley Edge. The Estate is located close
to established major grocery stores and retail parks.
The Estate comprises approximately 150,000 sq ft of warehouse
accommodation across 14 units on a nine acre site and is fully let
to thirteen tenants generating a total contracted rent of £960,000
per annum or an average rent of £6.55 per sq ft. The estimated
market rental value (‘ERV’) is approximately £1.1 million per
annum. The average unexpired lease term, assuming all tenant breaks
are exercised, is three years. 100% of the rent due during the
financial year has been collected reflecting the resilience of the
occupier base. The apportioned price for the Estate of £14.4
million reflected a net initial yield of 6.3% and a reversionary
yield, based on the acquisition ERV, of 7.1%.
The Estate has a strong tenant line up of local, regional and
national trade occupiers including Apex Self Storage Limited (19%
of rental income), Howden Joinery Properties Limited (9.4% of
rental income), Screwfix Direct Limited (7.3% of rental income) and
Toolstation Limited (7.1% of rental income).
The site comprises a 3.4 acre, regular shaped and serviced plot
which is currently non-income producing. The apportioned site price
was £2.85 million. The site has a historic planning consent for
48,000 sq ft of trade counter and warehouse space and is allocated
for industrial development in the local development plan.
Asset strategy
The strategy identified on acquisition for the existing Estate
was to work closely with the occupiers to align their occupation
with various estate management improvements. The strategy for the
site is to obtain an improved planning consent and develop a high
quality trade centre and warehouse units during 2021.
Key activity
– Submitted a planning
application for a reconfigured, 85,000 sq ft operational net zero
carbon (‘NZC’) warehouse scheme with a decision expected in
July 2021. This will be the first
operational NZC in the north west.
– Scheme fully designed and
tendered with estimated construction costs of approximately £8
million.
– Subject to planning
consent being achieved, the intention is to start on site in the
summer and deliver a completed scheme during mid-2022.
– Target rent for the new
scheme of approximately £950,000 per annum with marketing to
commence for pre-lets once work starts on site. This could generate
an attractive yield on cost, including the apportioned site price,
of approximately 7.5%.
– Progressing re-gear
discussions on the existing Estate which may lead to phased
refurbishments to deliver higher rents.
Chippenham, Langley Park Industrial
Estate (Industrial)
On 18 December 2020 the Company
acquired Langley Park Industrial Estate in Chippenham for £19.25
million, reflecting an attractive net initial yield of 8.2%. As at
31 March 2021 the asset is
independently valued at £19.75 million.
Asset overview
The asset is located in Chippenham town centre close to the
railway station and four miles south of junction 17 of the M4
motorway. It is near to the cities of Bristol and Bath and serves both metropolitan areas. The
estate comprises approximately 400,000 sq ft of warehouse and
ancillary office accommodation on a 28 acre site, equating to a low
site cover of approximately 30%. Langley Park is let to five
tenants generating a total net rent of £1.68 million per annum or
an average rent of £4.21 per sq ft. 100% of the rent due during the
Covid-19 pandemic has been collected. The estimated market rental
value is approximately £1.8 million per annum. The average
unexpired lease term, assuming all tenant breaks are exercised, is
four years.
The largest tenant is Siemens Mobility Limited, representing 53%
of the rental income, which employs approximately 800 people at the
site. Langley Park is the global headquarters for Siemens Mobility
who, through corporate acquisitions, have occupied the site for
over 85 years as a facility for manufacturing and servicing rail
technology and traffic systems. Siemens pays a net rent of £965,000
per annum with a lease expiry in June
2026. Other tenants include a UK subsidiary of Littlefuse
Inc., a global manufacturer of power systems for the transport
industry (20% of rental income), Schneider Electric Limited (11% of
rental income) and NHS Property Services Limited (8% of rental
income).
Asset strategy
The strategy identified on acquisition was to work closely with
the occupiers to align their occupation with various estate
management improvements. The current low site density also
supported the creation of new accommodation. Longer term, it was
considered that several large-scale infrastructure and related
investments in Chippenham, including rail improvements and
additional housing allocations, should support alternative use
values and improve the desirability of the surrounding area.
Key activity
– Targeting lease re-gear
opportunities to rationalise investment and improvements to the
existing quality of accommodation.
– Ongoing discussions with Siemens
and Littlefuse regarding lease re-gears in return for carrying out
building and energy efficiency improvements.
– Carrying out initial viability
studies of development options to increase massing and potentially
provide a small unit warehouse scheme. Part of the site could also
be reconfigured for alternative uses.
– Exploring the installation of
additional photo-voltaic (‘PV’) panels and electric vehicle
charging points to enhance the overall quality of the estate from a
sustainability perspective.
Asset Management
Leeds, Millshaw Industrial Estate
(Industrial)
Asset strategy
The strategy over the year was to refurbish units to drive a
higher rental income return and explore the potential for acquiring
adjoining interests and change of use over the longer
term.
Asset overview and performance
463,400 sq ft multi-let industrial estate in a prominent
location comprising 27 units strategically located south of
Leeds city centre close to the M62
and M621 motorways. The estate is the largest, single-owned
industrial estate in Leeds with a
range of unit sizes from 2,000 to 50,000 sq ft and a low site cover
of only 37%. As at 31 March 2021, the
asset was valued at £41.8 million reflecting a net initial income
yield of 5.1% and a reversionary yield of 5.5%. During the
year to 31 March 2021, the property
delivered a 24.5% total return comprising an income return of 5.7%
and capital growth of 17.9%.
Key activity
– Re-letting of the
refurbished units to set a higher rental tone has boosted returns
and ensured Millshaw remains the dominant multi-let industrial
estate in Leeds.
– 8 leasing transactions
completed since March 2020 at rents
up to £7 per sq ft, which compares with the average rent and rental
value as at March 2021 of £4.92 psf
and £5.25 per sq ft respectively. This contributed to strong rental
growth of 18.7% over the financial year which compared with the
MSCI Benchmark industrial average of 9.6%.
– 34,446 sq ft unit under
refurbishment and being marketed. There is strong interest and
targeting a rent of £207,000 per annum which compares with the
March 2021 rental value of £155,000
per annum.
– LED lighting has been
incorporated into refurbishments and there is potential to increase
the number of EV charging points across the estate.
London, University of Law (Office, 50%
share)
Asset strategy
The strategy over the year was to agree the outstanding rent
review from December 2019 and develop
a feasibility study for a future redevelopment.
Asset overview and performance
86,000 sq ft of educational space across two freehold buildings
that are let to The University of Law on a lease expiring
December 2026. The buildings are
located in an area of Central
London benefitting from Crossrail and surrounding
developments at Tottenham Court
Road, as well as public realm improvements as part of the West End
Project. As at 31 March 2021, the
Company’s share of the asset was valued at £39.4 million reflecting
a net initial income yield of 4.4% and a reversionary yield of
4.7%. During the year to 31 March
2021, the property delivered an 11.6% total return
comprising an income return of 4.8% and capital growth of 6.5%.
Key activity
– The rent review with the
University of Law completed at a new rent of £1.85 million per
annum or £42 per sq ft delivering a £415,500 or 30% increase (the
Company’s 50% share); and
– The feasibility study also
commenced with the appointment of a design team. There is also
continued engagement with the adjoining building owners to explore
the opportunities for a wider site assembly.
Manchester, City Tower (Office and Mixed-Use,
25% share)
Asset strategy
The office strategy over the year was to refurbish and re-let
vacant office space on conventional leases as well as explore a
more flexible, hybrid leasing strategy. The retail, hotel and
leisure strategy remains focussed on repositioning the ground floor
space to attract more complementary operators.
Asset overview and performance
City Tower comprises a 610,000 sq ft mixed-use office,
convenience retail and hotel asset on a three-acre site in the
Manchester city centre. As at
31 March 2021, the Company’s share of
the asset was valued at £40.2 million reflecting a net initial
income yield of 5.5% and a reversionary yield of 7.0%. During the
year to 31 March 2021 the property
delivered a 2.8% total return comprising an income return of 5.9%
and capital growth of -2.9%.
Key activity
– Launch of Elevate, a
Schroder-managed ‘plug-and-play’ flexible office strategy, which
includes a tenant lounge, event space and meeting rooms on the
28th floor. The first phase of Elevate has been
completed with 12,400 sq ft delivered and 8,400 sq ft let or under
offer;
– Ground floor retail line-up
being improved to provide mix of leisure and retail operators more
suited to the current office tenant requirements;
– Negotiations underway with
Jupiter Hotels for a lease extension which may support a
refurbishment programme and hotel rebrand. A lease extension could
involve Jupiter taking additional space on the ground floor for a
new reception and the basement to create a new wellness
facility;
– As the largest energy consuming
asset in the Company’s portfolio, sustainability objectives are
focussed on identifying ways to save energy. This is done by
ensuring refurbishment works fully incorporate energy saving
technologies, continued engagement with tenants and ongoing upgrade
of energy metering infrastructure;
– Tenants are encouraged to travel
in a green and active way. A new cycle facility was recently opened
which provides upgraded cycle storage, showers and changing
facilities; and
– City Tower achieved a BREEAM
In-Use certification of Good for Part 2 Building Management and is
rated Wiredscore Platinum.
Bedford, St. John’s Retail Park
Asset strategy
The strategy over the year was to improve the retailer mix and
to negotiate new longer leases in order to preserve the rental
income and manage void risk. A key element of the continuing
strategy was to work with existing tenants to minimise the impact
of Covid-19 and to ensure continued income generation.
Asset overview and performance
St. John's Retail Park comprises a 130,000 sq ft retail
warehouse park 1.5 miles from the town centre underpinned by income
from strong covenants including Lidl, Home Bargains, Costa and TK
Maxx. As at 31 March 2021, the asset
was valued at £26.6 million reflecting a net initial income yield
of 5.1% and a reversionary yield of 6.6%. During the year to
31 March 2021, the property delivered
a -3.7% total return comprising an income return of 5.3% and
capital growth of -8.5%.
Key activity
– Completed new 15 year
leases with Lidl (£335,000 per annum/£15.50 per sq ft) and Home
Bargains (£190,000 per annum or £13.62 per sq ft) in September 2020. Sustainability factors were
included in the Landlord’s shell works for these tenants’ units;
and
– Simultaneously surrendered
the Majestic Wine lease and completed a new 10 year letting to Easy
Bathrooms at the existing passing rent of £64,200 per annum or
£22.00 per sq ft.
Sustainability and Responsible
Investment
Sustainability and responsible investment are integral to
Schroder Real Estate Investment Management’s investment process. We
believe that by understanding, managing and measuring the impact of
Environmental, Social and Governance (‘ESG’) considerations, we
will deliver enhanced long term returns for shareholders as well as
deliver a positive impact to the environment and the communities
where the Company is investing.
In November 2020, the Company
issued a Sustainability Guide which sets out how sustainability
considerations, risks and opportunities are integrated within the
investment process. This was followed in December 2020 by Schroders publishing its own
Pathway to Net Zero Carbon by 2050.
Good progress has been made during the financial year with the
Company achieving a three star rating in the GRESB sustainability
survey, which placed it top in its GRESB peer group of UK
Diversified Listed Companies. The Company also achieved a
GRESB Public Disclosure A Rating and the EPRA Best Practice
Sustainability Reporting Gold Award for the third consecutive
year.
The Board and Manager have agreed updated sustainability
objectives for the Company during the current financial year, which
are set out in the table below. These are summarised below together
with the strategy for delivering the objectives and details of how
performance will be monitored.
Objective |
Management Strategy |
Initial Reporting
Metrics |
Governance and Oversight |
The Manager’s process
includes oversight on sustainability by its Investment Committee
and Group Investment Risk Committee.
The Board reviews the objectives and progress of the sustainability
programme at least annually.
This includes maintaining good health & safety and managing
compliance with regulations. |
- Manager’s Investment
Risk Report
- Annual Report
- Number of assets where health & safety impacts
assessed/reviewed/improved
- Number of incidents of non-compliance with regulations and/or
voluntary codes identified
- Compliance assurance from Property Managers at building
level |
Net Zero Carbon (‘NZC’) |
Determine portfolio
alignment with NZC and Paris Agreement to limit climate change to
1.5C. Asset analysis to determine energy/carbon targets and
offsetting.
Determine new energy and carbon targets to 2022, 2025 and 2030
through Impact and Sustainability Action Plans (ISAPs) for
buildings to assess understanding of improvement and opportunities
and Net Zero analysis to enable target setting.
Improve collaboration with occupiers to support whole building
performance.
Assess ‘whole life carbon’ on major projects. Use Schroders
Refurbishment and Development brief on projects to set and manage
ambitions. Use NABERS UK Design for Performance to support improved
operational in-use outcomes.
Procure 100% landlord-controlled electricity on certified green
tariffs by 2022 (December 2020 at 97%).
Assess potential for onsite renewable energy generation.
Purchase independently verified offsets that align with best
practice industry guidance. Reduce the use of offsets to zero over
appropriate time frame. |
- % of assets under
management Paris Aligned
- Energy and carbon targets set for assets and portfolio
- Investment in energy efficiency initiatives
- Energy intensity (kWh/m2/yr)
- Carbon intensity (CO2e/m2/yr)
- % of occupied occupier space with green lease clauses (by floor
area)
- % of occupied occupier space with data
- kgCO2e/m2/year modelled during design
- kWh/m2/year modelled during design
- kgCO2e/m2/year achieved during early operation
- kWh/m2/year achieved during early operation
- % kWh landlord-procured electricity from green tariff
- kWh onsite renewable energy generated
- tCO2e offset
- £ or €/tCO2e unit cost per offset |
Third Party Verification |
GRESB – Continue to
target opportunities to improve the GRESB score year on year.
Data Assurance – Continue to obtain third party assurance of
sustainability data in line with the independent assurance
process.
Asset Certification – Obtain third party certification to validate
Net Zero Carbon or related energy/carbon efficiency claims or
health and wellbeing.
EPRA Reporting – Maintain EPRA Gold Sustainability Best Practice
Reporting Award.
SDG alignment - Integrate into annual reporting for 2022 by mapping
social and environmental contributions to the Schroder Real Estate
Investment Management Limited (‘SREIM’) Pillars of Impact and UN
SDGs and set targets for improvement. |
- GRESB star rating and
% score achieved
- % data assured
- % portfolio certified through third party scheme
- EPRA Gold Award
- Annual report SDG aligned |
Climate Risk and TCFD |
Determine a climate risk profile,
adaptation strategy and reporting in line with TCFD through asset
and portfolio scenario analysis. |
- Portfolio climate risk
profile |
Operational excellence |
Set standards for
operational excellence for managed assets incorporating the
hospitality mindset in our strategy at each asset.
Improve BREEAM In-Use (‘BIU’) certification across the portfolio to
support improvement across nine aspects: Management, Health and
Wellbeing, Energy, Transport, Water Resources, Resilience, Land Use
and Ecology and Pollution.
Improve the EPC profile of the portfolio through asset management
including refurbishment. Potential to adopt NABERS Energy for
Offices which rates base building actual energy efficiency.
Assess the approach to monitor indoor environment quality (IEQ) and
set new standard.
Promote and facilitate our occupiers’ use of bicycles, buses and
electric vehicles as transport methods to our assets.
Minimise water demand in line with best practice industry
benchmarks.
Provide dedicated space for waste/recycling segregation and
storage.
Integrate biophilic design into assets. |
- Net Promoter
Score
- Occupier satisfaction surveys
- % assets with BIU certification
- % assets with Good/Very Good/Excellent ratings
- % assets with EPCs
- % assets with A to E ratings
- % assets where IEQ assessed
- % assets with good bicycle provisions (storage, repair stations,
electric charging)
- % assets with electric vehicle charging
- % assets with green travel plan
- Water consumed by assets managed by the Company m3 per year
- Tonnes waste produced per year
- % waste recycled per year
- % of schemes with waste management plans
- % of schemes with waste storage and separation site
- % of schemes with green space available to occupiers, on site and
in close proximity
- % of schemes with green space available to occupiers, on site and
in close proximity |
Finance
The Company has two loan facilities, a £129.6 million term loan
with Canada Life and a £52.5 million revolving credit facility
(‘RCF’) with Royal Bank of Scotland International (‘RBSI’), of
which £24.5 million was drawn at 31 March
2021. In addition to the properties secured against the
Canada Life and RBSI loan facilities, the Company has unsecured
properties with a value of £39.4 million and cash at 31 March 2021 of £12.2 million. This results in a
Loan to Value ratio, net of cash, of 32.3% at an average interest
cost of 2.4%, and a long weighted maturity profile of 13 years.
£129.6 million term loan with Canada Life
The loan is fully compliant with all covenants as summarised
below:
Lender |
Loan (£m) |
Maturity |
Total Interest
rate
(%) |
Asset Value
(£m) |
Loan to Value
(‘LTV’) ratio[1]
(%) |
LTV ratio
covenant
(%) |
Interest cover
ratio (‘ICR’)
(%)[2] |
ICR ratio
covenant
(%) |
Projected
Interest
cover ratio
(%)[3] |
Projected ICR
ratio covenant
(%) |
Canada
Life |
129.6 |
50%:
15/10/2032
50%:
15/10/2039 |
2.5[4] |
273.6 |
47.4
(47.4 net of cash
in facility) |
65 |
562 |
185 |
423 |
185 |
[1] Loan balance divided by property value as at 31 March 2021.
[2] For the quarter preceding the Interest Payment Date (‘IPD’),
((rental income received – void rates, void service charge and void
insurance)/interest paid).
[3] The projected ICR covenant for contracted the four quarters
following the IPD deducting assumed non-recoverable costs (void
rates, void service charge and void insurance)/interest paid) based
on average of the past four quarters
[4] Fixed total interest rate for the loan term.
The Company has significant headroom with its LTV and ICR
covenants summarised below:
· The net Loan to Value on the
secured assets against this loan is 47.4%. On this basis the
properties charged to Canada Life could fall in value by 27% prior
to the 65% LTV covenant being reached;
· The interest cover ratio is 562%
based on actual net rents for the quarter to March 2021. A 67% fall in net income could be
sustained prior to the loan covenant of 185% being breached;
and
· After utilising available cash
and uncharged properties, the valuation and actual net rents could
fall by 42% and 74% respectively prior to either the LTV or
interest cover ratio covenants being breached.
£52.5 million RCF with RBSI
The RCF is an efficient source of funding that can be repaid and
redrawn as often as required. At 31 March
2021, £24.5 million was drawn of the £52.5 million RCF. The
loan is fully compliant with its covenants as summarised below:
Lender |
Loan (£m) |
Maturity |
Total Interest
rate
(%) |
Asset Value
(£m) |
Loan to Value
(‘LTV’) ratio[1]
(%) |
LTV ratio
covenant
(%) |
Interest cover
ratio (‘ICR’)
(%)[2] |
ICR ratio
covenant
(%) |
Projected
Interest
cover ratio
(%)[3] |
Projected ICR
ratio covenant
(%) |
RBS RCF |
24.5[4] |
03/07/2023 |
1.7[5] |
125.9 |
19.5 |
65[6] |
1,151 |
185 |
864 |
250 |
[1] Loan balance divided by property value as at 31 March 2021.
[2] For the quarter preceding the Interest Payment Date (‘IPD’),
((rental income received – void rates, void service charge and void
insurance)/interest paid).
[3] The projected ICR covenant for contracted the four quarters
following the IPD deducting assumed non-recoverable costs (void
rates, void service charge and void insurance)/interest paid) based
on average of the past four quarters
[4] Facility drawn at 31 March
2021 from a total available facility of £52.5 million.
[5] Total interest rate as at 31 March
2021 comprising 3 months LIBOR of 0.09% and the margin of
1.6% at an LTV below 60% and a margin of 1.90% above 60% LTV.
[6] This covenant drops to 60% after year three of the five-year
term.
The Company has significant headroom within its LTV and ICR
covenants. This is summarised below:
· Net Loan to Value on the secured
assets against this loan is 19.5%. On this basis the properties
charged to RBSI could fall in value by 70% prior to the 65% LTV
covenant being reached; and
· The interest cover ratio is
1,151% based on actual net rents for the quarter to March 2021. A 78% fall in net income could be
sustained prior to the loan covenant of 185% being breached.
Outlook
Whilst uncertainty relating to the pandemic will continue, the
efficient vaccine programme in the UK should lead to the economy
successfully reopening during 2021. This should lead to a surge in
consumer spending and business investment which will support a
strong economic recovery. Whilst inflationary pressures are
building, fiscal and monetary policy should support real asset
prices and we expect average real estate values to continue their
current trajectory and increase over the current financial
year.
Other trends include real estate becoming increasingly
operational, with technology arguably increasing a building’s
physical life whilst limiting its economic life. This could
increase obsolescence and therefore favour buildings in mixed-use,
densely populated urban areas that can be adapted to new
technologies and changing occupier trends. Occupiers will also
require more personalised service levels and increased engagement
with landlords so that both can deliver their sustainability
objectives. The Manager is seeking to further position the
Company’s portfolio to benefit from these trends.
Performance between the main sectors is likely to remain
polarised over the short term, with industrial expected to be the
best performing of the three main sectors and retail the weakest.
However, the divergence will narrow. Regional offices are
benefiting from a phased return to work and Government policy
seeking to address imbalances through the levelling up agenda.
There is also a nascent recovery in more resilient parts of the
retail market, most notably retail warehousing. The Company is
therefore well positioned in this context and further recycling of
smaller properties into larger, mixed-use assets in Winning Cities
and Regions will further support the resilience of the
portfolio.
Nick
Montgomery
Fund Manager
Schroder Real Estate Investment Management Limited
1 June 2021
Sustainability Report
The Board and the Investment Manager believe that corporate
social responsibility is key to long-term future business success
and that a successful sustainable investment programme should
deliver enhanced returns to investors, improved business
performance to tenants and tangible positive impacts to local
communities, the environment and wider society.
The importance of environmental and social changes are
investment factors that the Board and Investment Manager must
understand to protect Company assets from depreciation and optimise
the portfolio’s value potential.
Offering occupiers resource-efficient and flexible space is
critical to ensure our investments are fit for purpose and sustain
their value over the long term. As a landlord, we have the
opportunity to help reduce running costs for our occupiers,
increase employee productivity and wellbeing, and contribute to the
prosperity of a location through building design and public
realm. Ignoring these issues when considering asset
management and investments would risk the erosion of income and
value as well as missing opportunities to enhance investment
returns.
Through its construction, use and demolition, the built
environment accounts for more than one-third of global energy use
and is the single largest source of greenhouse gas emissions in
many countries.
The industry’s potential to cost-efficiently reduce emissions
and the consumption of depleting resources, combined with the
political imperative to tackle issues such as climate change, means
the property sector will remain a prime target for policy
action. This presents new challenges and opportunities for
the real estate industry with profound implications for both owners
and occupiers.
The national lockdowns have had a direct impact on energy use
and greenhouse gas (‘GHG’) emissions, water consumption and waste
performance, and has resulted in significant reductions. Therefore
2020 environmental performance should be evaluated in the context
of the pandemic.
The Investment Manager has evolved its investment philosophy to
incorporate “positive impact” investing, which aims to proactively
take action to improve social and environment outcomes. Its
four pillars of impact are referenced to the UN Sustainable
Development Goals and used to consider impacts for funds and
assets.
A good investment strategy must incorporate environmental,
social and governance factors alongside traditional economic
considerations. The Board and the Investment Manager believe
a complete approach should be rewarded by improved investment
decisions and performance.
Further information on the Investment Manager’s Sustainable
Investment Real Estate with Impact approach and its
Sustainability Policy: Real Estate with Impact can be found
here:
https://www.schroders.com/en/uk/realestate/products--services/sustainability/
Environmental Management System
The Investment Manager operates an Environmental Management
System (‘EMS’) which in January 2021
achieved external certification in accordance with ISO 14001 for
the asset management of direct real estate investments in the UK
and across Europe.
The EMS provides the framework for how sustainability principles
(environmental and social) are managed throughout all stages of its
investment process including acquisition due diligence, asset
management, property management provided by third parties,
refurbishments and developments.
The Investment Manager reviews its Sustainability Policy
annually and which is approved by the Investment Committee. Key
aspects of the Policy and its objectives, and progress during 2020,
as well as objectives and targets for the year ahead, are set out
below.
Schroders’ investment management process requires annual fund
strategy statements and business plans to include sustainability
considerations and an Impact and Sustainability Action Plan to be
prepared for all acquisitions.
Property Manager Sustainability
Requirements
Property Managers play an integral role in supporting the
sustainability program. The Investment Manager has established a
set of Sustainability Requirements for Property Managers to adhere
to in the course of delivering their property management services.
This includes a set of key performance indicators (KPIs) to help
improve the Property Manager’s sustainability related services to
the Company and which are assessed on a six-monthly and annual
basis.
The Investment Manager is pleased to report that MAPP, its
principal property manager, performed well against the targets set
for both the six-monthly and annual indicators.
Objectives and Targets
Net Zero Carbon
Recognising the need for the real estate industry to address its
carbon impact, the Investment Manager joined other members of the
Better Buildings Partnership (BBP) in September 2019 to sign the Member Climate Change
Commitment, and in December 2020,
published its ‘Pathway to Net Zero Carbon’ – which can be found
here:
https://www.schroders.com/en/sysglobalassets/email/uk/realestate/2020/schroder-real-estate-net-zero-carbon-pathway-december-2020_1621372_v1.pdf
The Investment Manager’s ‘Pathway to Net Zero Carbon’ includes a
commitment to net zero carbon by 2050 or sooner, in line with The
Paris Agreement – to pursue efforts to limit global warming to
1.5°C. The Pathway involves beginning to set new energy and carbon
targets during 2021 to include interim milestones, and to replace
existing targets which come to an end in March 2021. The pathway will evolve over time as
the Investment Manager and the wider industry develops its
understanding of how to address the carbon impact of real estate
activities and as regulatory initiatives develop. It is widely
expected that policy requirements will become more stringent and
society will increasingly demand all market participants to
actively demonstrate their carbon responsibility to support the
delivery of a low carbon society.
Schroders Plc, in recognition of the importance of climate
change and its responsibilities as a global asset manager, became a
founding member of the Net Zero Asset Managers Initiative in
December 2020. The initiative commits
us to working with asset owner clients, setting and regularly
reviewing targets for assets aligned with and ultimately achieving
the goal of net zero greenhouse gas emissions by 2050 or sooner, in
line with global efforts to limit warming to 1.5°C.
Impact Assessment
The Investment Manager evolved its investment philosophy to
incorporate “positive impact” investing, with the aim to
proactively take action to improve social and environmental
outcomes, and established four pillars of impact: people, place,
planet and prosperity with key performance indicators for each
pillar. The pillars are referenced to the UN Sustainable
Development Goals: 8 Decent work and Economic Growth, 11
Sustainable Cities and Communities and 13 Climate Action.
The Investment Manager has developed an impact measurement
framework to assess impacts within portfolios. This framework
supports analysis of social aspects for which examples include
tenant satisfaction, selection of suppliers, enhancements to
amenities at and around buildings and community support and
involvement together with environmental aspects for example energy
reduction and use of renewables. This initial baselining exercise
was completed in 2020 and the results reviewed to identify risks
and opportunities in order to set improvement targets for the
Company. Progress against these targets will be reviewed in
2021.
Energy and Greenhouse Gas
Emissions
Active management of energy consumption and greenhouse gas
emissions is a key component of responsible asset and building
management. Improving energy efficiency and reducing energy
consumption will benefit tenants’ occupational costs and may
support tenant retention and attraction, in addition to mitigating
environmental impacts and helping to futureproof the portfolio
against future legislation. Therefore, where the landlord retains
operational control responsibilities, the Investment Manager
monitors the Company’s energy usage and efficiency on a
quarterly basis.
The Investment Manager has an energy and greenhouse gas
emissions performance reduction target to achieve an 18% reduction
in landlord-controlled energy consumption by 2020/21 (2015/16
baseline) across all UK-managed assets. This is accompanied by a
target of a 32% reduction in landlord-controlled greenhouse gas
(GHG) emissions by 2020/21 (2015/16 baseline); this target is
inclusive of decarbonisation of the UK electricity grid over recent
years.
In support of achieving these targets and improving the
efficiency of the portfolio, the Investment Manager has continued
to work with sustainability consultants Evora Global and property
manager MAPP to identify and deliver energy and greenhouse gas
emissions’ reductions on a cost-effective basis. The programme
involves reviewing all managed assets within the Company and
identifying and implementing improvement initiatives, where
viable.
The Investment Manager can report for the 2020 calendar year for
the managed assets held within the Company a reduction in
landlord-procured energy consumption of 20% on a like-for-like
basis. This translates to a Scope 1 and Scope 2 GHG emissions
reduction of 26% on a like-for-like basis. Please note, changes in
occupancy and building operations during the COVID-19 period will
have had an impact on performance and so the 2020 reporting year is
not directly comparable to 2019. Energy performance improvement
initiatives continued to be considered across the portfolio.
Initiatives undertaken during the reporting year include
replacement and upgrades to boilers and hot water systems, wall and
roof insulation upgrades, upgrades to Automatic Meter Readers for
improved energy monitoring, LED lighting upgrades and the
installation of lighting and ventilation occupancy sensors.
For detailed energy performance data covering the reporting
period and the prior year, please see the EPRA Sustainability
Reporting Performance Measures.
Net Zero Carbon is a natural next step to our energy and carbon
programme. The Investment Manager’s targets expired in March 2021 and new energy and carbon targets will
be set for the Company in the context of Net Zero Carbon.
The Investment Manager also has an objective to procure 100%
renewable electricity for landlord-controlled supplies by 2025. At
December 2020, 97% of the Company’s
landlord-controlled electricity was on renewable tariffs.
Energy Performance Certificates (“EPCs”) for the portfolio are
regularly reviewed for alignment with the 2015 Minimum Energy
Efficiency Standards (England and
Wales) legislation. The Investment
Manager is actively managing the potential risk of this legislation
to the portfolio. This legislation brought in a minimum EPC
standard of “E” for new leases and renewals for non-domestic
buildings from 1 April 2018; this
minimum standard applies to all leases from 1 April 2023. The
EPC profile for the portfolio is set out within the EPRA
Sustainability Reporting Performance Measures.
Water
Fresh water is a finite resource of increasing importance for
the environment and society and reductions in consumption can
deliver operational cost efficiencies. The Investment Manager
monitors water consumption where the landlord has supply
responsibilities and encourages active management of asset-level
consumption. Where the Company had such responsibilities, a 28%
reduction in like-for-like water consumption is reported for the
calendar year 2020 compared to the calendar year 2019. Please note,
changes in occupancy and building operations during the COVID-19
period will have had an impact on performance and so the 2020
reporting year is not directly comparable to 2019.
Waste
Effective waste management decreases pollution and resource
consumption, as well as improving operational efficiency and
associated costs. To this end, waste should be minimised and
disposal should be as sustainable as possible. The Investment
Manager therefore has set an objective to send zero waste directly
to landfill and to achieve optimal recycling. During 2020 the
Company sent zero waste directly to landfill, 53% of waste was
recycled and 47% incinerated with energy recovery. Please note,
changes in occupancy and building operations during the COVID-19
period will have had an impact on performance and so the 2020
reporting year is not directly comparable to 2019.
Improvements, Refurbishments and Green
Building Certifications
The Investment Manager seeks to deliver developments and
refurbishments to sustainable standards and deliver good
performance against building certifications, including EPCs and
BREEAM (the Building Research Establishment Environmental
Assessment Methodology: an environmental assessment method and
rating system for buildings). Standards required are set for each
project in context for the asset and the Investment Manager’s
guiding principles.
BREEAM In-Use
BREEAM In-Use is a performance-based assessment method for the
certification of existing buildings. BREEAM In-Use helps assess
operational performance against nine categories: Management, Health
& Wellbeing, Energy, Transport, Water, Resources, Resilience,
Land Use and Ecology, and Pollution. The framework supports the
overall sustainability programme for the Company with improvement
actions integrated into the responsibilities of the Investment
Manager and Property Managers.
During 2020, the Investment Manager commissioned two BREEAM
In-Use assessments for the Company.
Health Wellbeing and Productivity
The real estate industry has a good appreciation of the
importance of the built environment on human health and wellbeing.
There has been considerable development in understanding on what
building aspects matter as well as how certification schemes,
including the Well Building and Fitwel Certifications, can support
landlords and tenants to address these. The Investment Manger has
developed a Health and Wellbeing Framework to identify improvements
across managed assets and within refurbishments and developments.
This framework is being applied to the Company assets with
improvements incorporated into property management
plans.
Stakeholder Engagement and
Community
The Investment Manager seeks active engagement with tenants to
ensure a good occupational experience to help retain and attract
tenants. As the day-to-day relationship is with the Property
Manager, the Property Manager Sustainability Requirements include a
key performance indicator on tenant engagement. Tenant engagement
initiatives undertaken by the Property Manager include
incorporating sustainability as an agenda item during tenant
meetings and where a tenant handbook exists include information on
sustainability. At City Tower, Manchester the Property Manager held an
Environmental Awareness Week to address and engage with tenants on
issues such as waste management, sustainable transport, fair trade
products and clothes recycling and hosted an International Women’s
Day breakfast event with a guest speaker. At City Tower, the
Property Manager has also rolled out the interactive occupier and
community engagement platform ‘Locale’ to help deliver a best in
class customer experience.
SREIM believes in the importance of understanding a building’s
relationship with the community and its contribution to the
well-being of society. Positively impacting on local communities
helps create successful places that foster community relationships,
contribute to local prosperity, attract building users and,
ultimately, lead to better, more resilient investments. SREIM looks
to understand and develop the community relationship to ensure
investments provide sustainable social solutions for the long
term.
Sustainability in Action (Case
Studies)
The Promenade, Cheltenham
The Promenade is a 32,500 sq ft multi-let office located in a
prime location in Cheltenham town
centre. Understanding the needs and expectations of existing and
prospective tenants is essential to maintaining occupiers and
attracting higher rental levels. A comprehensive review focusing on
sustainability credentials has been undertaken.
The review included building efficiencies in terms of
electricity and water usage, ventilation and tenant facilities.
Identified improvements have been implemented including:
- Promoting green
behaviours: new shower facilities to promote green and active
travel.
- Energy efficiency: The
decommissioning of two existing large floor standing boilers which
were oversized for the requirement and downsizing to correctly
sized efficient boilers and point-of-use solutions. Replacements
and upgrades to the boiler and hot water systems are estimated to
produce savings in excess of 25% on energy consumption. In
addition, passive infrared sensors (‘PIR’) for lighting and
ventilation and new LED fittings are being installed throughout the
toilet areas and to the new showers to reduce electricity
consumption.
- Water efficiency:
non-concussive basin taps, dual toilet flushing systems, solenoid
water shut-off values and PIR sensor urinals with flushing linked
to usage to increase water usage efficiency.
- Disability facilities:
revamped disabled access WC to improve the facilities and
accessibility. We continue to develop our understanding of the
tenants’ sustainability experience to further improve the
efficiency of the building and sustainability credentials.
Headingley Central, Leeds
Headingley Central is a 125,000 sq ft multi-let hotel, retail,
leisure and office property located in a densely populated suburb
of Leeds. Sustainability and
impact reviews form a key part of major capital expenditure
projects. At Headingley Central, 24,000 sq ft of office
accommodation was converted into a shell and core configuration
suited to use by a gym operator, providing additional amenity to
the local community and complementary to the other occupiers onsite
including retail, restaurants, office and hotel uses.
This project incorporated various works to enhance the
sustainability of the unit and neighbouring parts of the property.
These included:
- Energy efficiency:
Insulation to thermal elements, including the external walls and
roof, was upgraded to a level that surpassed the requirements of
current building regulations. Where replaced, external lighting
comprise sensor controlled LED fixtures.
- Recycling: During the
removal of the previous tenant’s fit out by the landlord, a
deliberate focus was maintained on correctly segregating materials
for recycling, to minimise waste sent to landfill.
- Water efficiency: The
works provided an opportunity in which inefficient water pumps
serving the adjoining office accommodation were replaced with
modern, lower consumption units.
- Repurposing and ethically
sourcing: Where possible, components, such as timber joists,
were repurposed for use on-site and all new timber specified was
PEFC labelled, to help ensure sourcing from environmentally well
managed forests.
- Promoting green
behaviours: A dozen electric vehicle charging points have been
introduced to the outdoor car park.
We continue to review sustainability and impact initiatives
across major capital expenditure projects to ensure the assets are
performing to their best ability and to identify any gaps where
further progress on sustainability credentials could be made.
Compliance with Legislation
The Investment Manager continues to monitor requirements and
guidance in relation to managing and reporting environmental
matters and developments in legislation at all stages of the
investment lifecycle – from acquisition, through ownership, to
disposal. This process is supported by a legal register within the
EMS, as well as through appropriate devolution of responsibility to
key personnel involved in the day-to-day operation of buildings,
including asset, property and facilities’ managers.
Streamlined Energy and Carbon
Reporting (SECR)
An Energy and Carbon Report for the Company, aligned with the UK
Streamlined Energy and Carbon Reporting regulations, is included on
page 121.
Energy Savings Opportunity Scheme
The Company did not qualify for participation in the 2015 Phase
1 of the Energy Savings Opportunity Scheme and did not fall within
scope of the Scheme’s 2019 Phase 2 requirements.
Industry Initiatives
EPRA Sustainability Reporting
Performance Measures
The Company Report includes environmental performance indicator
data for the portfolio. The disclosures are aligned with EPRA Best
Practices Recommendations on Sustainability Reporting 2017 and are
included in the Company EPRA Performance Measures report. The
Company was awarded an EPRA Gold Award for Sustainability Reporting
in 2020, for the third consecutive year.
Sustainability Assurance Statement
Schroders' sustainability consultants, Evora Global, have
prepared an Assurance Statement in relation to the sustainability
matters reported in this Annual Report. The full statement can be
found on the following link, please see the Sustainability Page for
full assurance statement:
https://www.schroders.com/en/uk/adviser/fund-centre/funds-in-focus/investment-trusts/schroders-investment-trusts/schroder-real-estate-investment-trust/sustainability/
Global Real Estate Sustainability
Benchmark (GRESB)
The Investment Manager has participated in GRESB, the dominant
global standard for assessing Environmental, Social and Governance
(ESG) performance for real estate funds and companies, since 2011.
Through its annual questionnaire, GRESB evaluates the
sustainability performance of reporting entities against seven
sustainability aspects and contains approximately 50
indicators.
The Company has participated in GRESB for the past five years.
In 2020 the Company achieved a score of 71 (out of 100), came first
in its peer group (1st out of 9), secured a 3-star
status (out of 5 stars) and maintained its Green Star rating. A
Green Star rating is achieved where the scores for the two
components of Management and Performance both score higher than 50%
of the points allocated to each component.
The Investment Manager intends to participate in the survey on
behalf of the Company in 2021 with the objective of continual
improvement to its score, as well as retaining its Green Star
rating.
The Investment Manager continues to work with third party
Property Management providers to improve sustainability performance
across all assets.
UN PRI
(Principles for Responsible Investment)
Schroders plc has been a signatory to UN
PRI since 2007 and intends to remain an active and engaged
member for the PRI and to meet its ongoing membership commitments.
Schroders achieved the highest possible ESG score of A+ in 2020,
for the sixth year running, for its overarching ESG approach from
the Principles for Responsible Investment. Schroders has completed
the Direct Property Segment for four years achieving an A rating in
all four years. Schroders’ public UN PRI Transparency Report is
available here:
https://www.unpri.org/signatory-directory/schroders/1746.article.
Industry Participation
Schroders supports, and collaborates with, several industry
groups, organisations and initiatives including the United Nations
Global Compact and Net Zero Asset Managers Initiative (for which it
is a founding member). Further details of Schroders’ industry
involvement are listed at pages 44 - 47 of Schroders 2020 Annual
Sustainable Investment Report:
(https://publications.schroders.com/view/1010922180/44/).
The Investment Manager is a member of several industry bodies
including the European Public Real Estate Association (EPRA), INREV
(European Association for Investors in Non-Listed Real Estate
Vehicles), British Council for Offices and the British Property
Federation. It was a founding member of the UK Green Building
Council in 2007 and in 2017 became a member of the Better Buildings
Partnership and a Fund Manager Member of GRESB.
Employee Policies and Corporate
Responsibility
Employees
The Company is an externally-managed real estate investment
trust and has no direct employees. The Investment Manager is part
of Schroders PLC which has responsibility for the employees that
support the Company. Schroders believes diversity of thought and an
inclusive workplace are key to creating a positive environment for
their people. The Investment Manager’s real estate team have a
sustainability objective within their annual objectives.
Further information on Schroders’ principles in relation to
people including diversity and inclusion, gender pay gap, values,
employee satisfaction survey, well-being and retention can be found
on the dedicated Schroders webpage here:
https://www.schroders.com/en/working-here/our-people/.
Corporate Responsibility
Schroders’ commitment to corporate responsibility is to ensure
that its commitment to act responsibly, support clients, deliver
value to shareholders and make a wider contribution to society is
embedded across its business in all that it does.
Full information about Schroder’s Corporate Responsibility
approach including its economic contribution, environmental impacts
and community involvement, can be found here:
https://www.schroders.com/en/sustainability/corporate-responsibility/.
Slavery and Human Trafficking
Statement
The Company is not required to produce a statement on slavery
and human trafficking pursuant to the Modern Slavery Act 2015 as it
does not satisfy all the relevant triggers under that Act that
require such a statement.
SREIM, the Investment Manager to the Company, is part of
Schroders PLC, whose statement on Slavery and Human Trafficking has
been published in accordance with the Modern Slavery Act 2015 (the
'Act'). It sets out the steps that Schroders PLC and other relevant
group companies ('Schroders' or the 'Group') has made during 2020
and plans for 2021 to prevent any form of modern slavery and human
trafficking from taking place in our business, supply chain and
investments. SREIM is part of the Schroders Group.
Schroders’ Slavery and Human Trafficking Statement can be found
here:
https://www.schroders.com/en/sustainability/corporate-responsibility/slavery-and-human-trafficking-statement/.
Task Force for Climate-Related Financial Disclosure (TCFD)
The Task Force on Climate-related Financial Disclosure (TCFD)
aims to mainstream reporting on climate-related risks and
opportunities in an organisations’ annual financial filings.
Launched in 2017, TCFD has so far been a voluntary framework.
However, it becomes mandatory in the UK across a range of market
participants on a phased timeline beginning in 2021. The Company is
expected to be captured by this regulation in the near future.
The TCFD recommendations are structured around four themes:
Governance, Strategy, Risk Management, and Metrics and Targets. Key
concepts within the framework include so-called ‘transition’ and
‘physical’ risks. The former encapsulates the risks arising from
society’s transition to a low carbon economy (changing regulation
and market expectations, new technologies etc), and the latter
relates to the acute (storms, floods and wildfires etc) and chronic
(rising sea levels, increasing heat stress etc) physical effects of
a changing climate. Additional principles within TCFD include the
importance of the forward-looking assessment of climate-related
risks and opportunities, and ‘scenario analysis’. Scenario analysis
is a process of identifying and assessing the potential
implications of a range of plausible future states under conditions
of uncertainty. The recommendations note that the scenario analysis
for climate-related issues is a relatively new concept and that
practices will evolve over time.
In 2020, the Investment Manager, SREIM, completed a review of
its policies and practices against TCFD criteria and developed a
roadmap towards increased alignment. Building on our established
consideration of sustainability within the investment process,
Schroder’s believes it will be important to further integrate the
assessment of climate-related risks and opportunities into
decision-making and reporting processes. The outcome of our review
and progress towards further alignment is set out below.
Governance
In investing for the long term, we recognise the increasing
importance of both a forward-looking assessment of the potential
impacts of climate change and the likely action necessary to
support the assets and cities in which we invest resilience as we
transition to a low-carbon economy. In line with the Schroders’
Investing with Impact approach, we are also seeking to promote a
fair and socially conscious low-carbon transition, that supports
social, as well as economic and physical, resilience within local
communities. As real estate investment time horizons can be
relatively long term, we have a responsibility and opportunity to
affect real change in preparing the Company and its assets to build
resilience to climate change.
Climate change is an established component of our sustainability
programme. Responsibility for the assessment and management of
climate-related risk and opportunity is delegated to key members of
the Investment Management team, supported by regular reporting to
the Investment Committee. Schroder’s Head of Sustainability and
Impact Investing recommends the Investment Manager’s annual
Sustainability Policy and Objectives, which are reviewed and
approved by the Investment Committee. The Investment Manager
incorporates climate-related considerations into key stages of the
investment process, including acquisition proposals, annual Asset
Business Plans and annual Fund Strategy Statements. Each of these
steps of the investment process requires approval by the Investment
Committee. The Investment Manager also prepares the annual report
and financial accounts for the Company, which include
climate-related metrics and supports the Investment Manager and
Board’s monitoring of performance and progress towards
climate-related goals and targets.
We are reviewing our approach to ensure climate-related metrics
and targets are sufficiently forward-looking and cover the full
range and depth of climate-related issues. For example, we are in
the process of assessing all managed assets against Paris Aligned
1.5oC carbon and energy intensity performance
benchmarks, to the year 2050 using the Carbon Risk Real Estate
Monitor (CRREM) tool[41] as well as physical
climate risks to support a net zero pathway for the Company.
We will continue to evolve our approach to ensure oversight and
management of exposure to material risks, together with identifying
opportunities, across the asset life cycle to support resilient
long-term returns.
Strategy
Our investment philosophy and process is underpinned by
fundamental research and an analytical approach that considers
economic, demographic and structural influences on the market. We
are considering how climate change may impact on these factors over
time, as well as how government policies may enable mitigation of
and adaption to climate change.
In the short term, energy and carbon emissions performance of
our assets is a critical climate-related strategic issue. We
recognise the need and opportunity presented by climate change to
improve operational efficiency, maintenance costs and generate new
income streams (e.g. onsite energy) and which all support asset
values. These actions also support the Company with increasing
investor expectations in relation to climate action and preparing
portfolio assets for new and emerging energy efficiency
regulations, increases in energy costs, carbon taxes, changing
tenant preferences and valuation considerations. In the short,
medium and longer term, the physical effects of changing climate
also present potential material financial impacts to the Company,
for example in relation to heating or cooling buildings in changing
climates, weather events and availability of water.
Since 2016, assets of the Company have been included in the
Investment Manager’s UK energy consumption and carbon emission
reduction targets for assets where landlord operational control is
retained. As signatories of the Better Buildings Partnership
(BBP)[42] Member Climate Change Commitment,
the Investment Manager has committed to achieving net zero carbon
by 2050 at the latest. Schroder Real Estate published its pathway
to Net Zero Carbon in 2020, which is available here:
https://www.schroders.com/en/sysglobalassets/email/uk/realestate/2020/schroder-real-estate-net-zero-carbon-pathway-december-2020_1621372_v1.pdf.
As part of implementing the Net Zero Carbon strategy, the
Investment Manager is working to set new portfolio and asset energy
and carbon emissions targets to align with ‘science-based’ Paris
Aligned benchmarks using the CRREM tool1.
The Investment Manager’s acquisition and asset business planning
processes include consideration of climate-related issues, and will
include a forward-looking assessment of asset alignment to Paris
Aligned energy and carbon performance benchmarks, where information
permits. We are also reviewing our existing processes for screening
acquisitions and standing investments for climate-related physical
risks (e.g. flooding).
Engaging tenants to collaborate to reduce building energy and
carbon emissions is an increasingly important element of our
sustainability and business strategy. We have green lease
provisions within our standard lease agreement and in 2020 launched
Schroders Sustainable Occupier and Fit Out Guides for tenants.
Scenario analysis has begun to feature in our energy and carbon
performance analyses through use of the 1.5oC reduction
pathways set out in the CRREM tool.
Risk
Management
The existing portfolio-wide sustainability programme covers the
life cycle of assets and enables systematic and continual appraisal
of potentially material climate related risks. Risk criteria
assessed within acquisition due diligence inform our investment
decisions (e.g. Energy Performance Certificates and Flood Risk), as
well as featuring in business and sustainability plans such as
building technology upgrades. Pre-acquisition assessment of Paris
Alignment using the CRREM tool, where information permits, will
also support consideration of so called ‘stranding risk’ from
increasing energy efficiency regulation and changing market
expectations.
For existing investments, potential climate-related risks are
tracked and managed through ongoing monitoring (e.g. energy and
greenhouse emissions trends), action plans (e.g. energy efficiency
improvement measures), certification programmes (e.g. Energy
Performance Certificates) and technical energy audits. Impact and
Sustainability Action Plans also promote and track initiatives
relating to climate opportunities (e.g. on site renewables and
electric vehicle charging provision). Applying an assessment of the
Paris Alignment using the CRREM tool as part of our Net Zero
Pathway enables consideration of ‘stranding risk’ which will also
feed into our asset action plans for managed standing
investments.
Schroder’s environmental management system (EMS) is certified to
ISO 14001 and applies to the asset management of the Company’s real
estate assets. Key components of the EMS include a detailed
materiality assessment of risks and opportunities, and a register
to monitor existing and emerging regulatory requirements related to
energy and carbon emissions.
On physical risk, Schroders has licenced a proprietary physical
risk database through a third-party provider. The tool assesses
vulnerability to physical risk hazards, including those related to
climate change. The strategy will be to use this database to screen
acquisitions, assess standing investment portfolios and identify
required risk mitigation (i.e. enhanced defences, divestment),
adaptation, or transfer (i.e. revised insurance policies)
strategies.
Our understanding of the future potential impacts and risks from
climate change is constantly evolving. Therefore, we are
seeking to further embed the forward-looking identification and
assessment of climate related issues into our research process.
This will support ongoing monitoring of emerging risks and identify
possible enhancements to core components of our investment process,
such as our risk assessment and management framework.
Metrics &
Targets
In the 'EPRA Sustainability Reporting Performance Measures
(unaudited)’ and the ‘Streamlined Energy and Carbon Reporting’
sections of this report, we report detailed performance trend data,
intensity ratios and assessment methodologies covering energy
consumption, GHG emissions, water consumption and waste generation.
Measuring energy, GHG emissions, water and waste supports our
assessment and management of risks from transitioning to a low
carbon economy (e.g. efficiency regulation) and to a new climate
(e.g. increased water scarcity).
As also referenced in 'EPRA Sustainability Reporting Performance
Measures (unaudited)’ section of this report, we have ambitious
energy and GHG emissions reduction targets against which we have
made good progress. These targets expired in March 2021 and we are assessing the outcomes of
these targets, noting that COVID-19 has had an impact on our
ability to properly identify improvements in building performance
due to interruptions to building operation and occupation. During
2021, we will use the science based CRREM analysis to develop asset
level Paris Aligned targets to 2025 and 2030. These asset-level
targets will then be compiled to create portfolio reduction targets
for the Company.
Historically we have focussed on monitoring and targeting
reductions where we have operational control – i.e.
landlord-procured energy consumption only (so called ‘Scope 1 and
2’ GHG emissions). As the transition to a low carbon economy
presents risks and opportunities for entire assets – i.e. landlord
and tenant-controlled areas - we are reviewing how we may also
support performance improvement in tenant-controlled areas (so
called ‘Scope 3’ GHG emissions). Similarly, we are exploring
opportunities to reduce GHG emissions associated with building
materials consumed during construction and fit-out (so called
‘embodied’ ‘Scope 3’ GHG emissions).
All investment staff of the Investment Manager are required to
have ESG-related performance objectives.
Business Model
Company’s business
The Company is a real estate investment company with a premium
listing on the Official List of the Financial Conduct Authority and
whose shares are traded on the premium segment of the Main Market
of the London Stock Exchange. On 1 May
2015 the Company converted to a Real Estate Investment Trust
(‘REIT’) which means that it is able to benefit from exemptions
from UK tax on profits and gains in respect of certain qualifying
property rental business activities. The Company continues to be an
authorised closed-ended investment scheme registered in
Guernsey.
The Board
The Board of Directors is responsible for the overall
stewardship of the Company, including investment and dividend
policies, corporate strategy, gearing, corporate governance and
risk management.
The Company has no executive directors or employees.
Investment objective and purpose
The investment objective and purpose of the Company is to
provide shareholders with an attractive level of income together
with the potential for income and capital growth from owning and
actively managing a diversified portfolio of real estate. Corporate
social responsibility is deemed to be key to long-term business
success together with overseeing positive stakeholder
relationships.
The portfolio is principally invested in the three main UK
commercial real estate sectors of office, industrial and retail,
and may also invest in other sectors including office, retail, and
industrial and will also invest in other sectors including mixed
use, residential, hotels, healthcare and leisure. Over the real
estate market cycle the portfolio aims to generate an above average
income return with a diverse spread of lease expiries.
Relatively low levels of debt are used to enhance returns for
shareholders with the level of debt dependent on the real estate
cycle and the outlook for future returns.
Investment strategy
The current investment strategy is to grow income and enhance
shareholder returns through proactive asset management by our
specialist teams, and selective acquisitions and disposals. and
selling smaller properties on completion of the asset business
plan.
Our objective is to own a portfolio of larger properties in
Winning Cities and Regions with high growth, diversified local
economies, sustainable occupational demand and favourable supply
and demand characteristics. These properties should offer good
long-term fundamentals in terms of location and specification, be
let at affordable rents with the potential for income and capital
growth from good stock selection and asset management, and offer a
high standard of operational and sustainability performance. The
issuance of new shares will also be considered if this is
consistent with the strategy.
The Board has delegated investment management and accounting
services to the Investment Manager with the aim of delivering the
Company’s investment objective and strategy. Details of the
Investment Manager’s investment approach, along with other factors
that have affected performance during the year, are set out in the
Investment Manager’s Report.
Diversification and asset
allocation
The Board believes that in order to maximise the stability of
the Group's income, the optimal strategy for the Group is to invest
in a portfolio of assets diversified by location, sector, asset
size and tenant exposure with low vacancy rates and creditworthy
tenants. The value of any individual asset at the date of its
acquisition may not exceed 15% of gross assets and the proportion
of rental income deriving from a single tenant may not exceed 10%.
From time to time the Board may also impose limits on sector,
location and tenant types together with other activity such as
development.
The Company's portfolio will be invested and managed in
accordance with the Listing Rules of the Financial Conduct
Authority (‘Listing Rules’ and ‘FCA’ respectively) taking into
account the Company's investment objectives, policies and
restrictions.
Borrowings
The Board has established a gearing guideline for the Investment
Manager, which seeks to limit on-balance-sheet debt, net of cash,
to 35% of on-balance-sheet assets while recognising that this may
be exceeded in the short term from time to time. It should be noted
that the Company’s Articles limit borrowings to 65% of the Group’s
gross assets, calculated as at the time of borrowing. The Board
keeps this guideline under review and the Directors may require the
Investment Manager to manage the Group’s assets with the objective
of bringing borrowings within the appropriate limit while taking
due account of the interests of shareholders. Accordingly,
corrective measures may not have to be taken immediately if this
would be detrimental to shareholder interests.
Interest rate exposure
It is the Board’s policy to minimise interest rate risk, either
by ensuring that borrowings are on a fixed rate basis, or through
the use of interest rate swaps/derivatives used solely for hedging
purposes.
Investment restrictions
As the Company is a closed-ended investment fund for the
purposes of the Listing Rules, the Group will adhere to the Listing
Rules applicable to closed-ended investment funds. The Company and,
where relevant, its subsidiaries will observe the following
restrictions applicable to closed-ended investment funds in
compliance with the current Listing Rules:
– Neither the Company nor
any subsidiary will conduct a trading activity which is significant
in the context of the Group as a whole and the Group will not
invest in other listed investment companies; and
– Where amendments are made
to the Listing Rules, the restrictions applying to the Company will
be amended so as to reflect the new Listing Rules
In addition, the Board will ensure compliance with the UK REIT
regime requirements.
Performance
The Board uses principal financial Key Performance Indicators
(‘KPIs’) to monitor and assess the performance of the Company being
the net asset value (‘NAV’) total return, the performance of the
Company’s underlying property portfolio relative to its MSCI
Benchmark Index and the share price:
1. NAV
total return
For the year to 31 March 2021 the
Company delivered a NAV total return of 3.9%
(-1.5%[43] for the year to
31 March 2020).
2.
Underlying property portfolio performance relative to peer group
Benchmark
The performance of the Company’s property portfolio is measured
against a specific Benchmark defined as the MSCI (formerly
Investment Property Databank) UK Balanced Portfolios Quarterly
Property Index (the ‘Benchmark’). As at 31
March 2021 the Benchmark Index comprised 183 member
funds.
Underlying property portfolio
performance
Total return for 12
months to 31 March 2021 |
Total return for 12
months to 31 March 2020 |
SREIT (%) |
MSCI Benchmark (%) |
SREIT (%) |
MSCI Benchmark (%) |
4.6% |
1.8% |
1.9% |
0.2% |
The analysis above has been prepared by MSCI and takes account
of all direct property-related transaction costs.
3. Share
price performance
The Board monitors the level of the share price compared to the
NAV. As at 31 March 2021, the share
price of 39.9p was at a 33.9% discount to the NAV of 60.4 pps.
Where appropriate on investment grounds, the Company may from time
to time repurchase its own shares, but the Board recognises that
movements in the share price premium or discount are driven by
numerous factors, including investment performance, gearing and
market sentiment. Accordingly, we focus our efforts principally on
addressing the sources of risk and return as the most effective way
of producing long-term value for shareholders.
Our stakeholders
Section 172 statement
Although the Company is registered in Guernsey, in accordance with the guidance set
out in the AIC code a Section 172 statement is required. Section
172 of the Companies Act 2006 requires a Director of a company to
act in the way he or she considers, in good faith, would be most
likely to promote the success of the company for the benefit of its
members as a whole. In doing this, section 172 requires a Director
to have regard, among other matters, to: the likely consequences of
any decision in the long term; the interests of the company’s
employees; the need to foster the company’s business relationships
with suppliers, customers and others; the impact of the company’s
operations on the community and the environment; the desirability
of the company maintaining a reputation for high standards of
business conduct; and the need to act fairly with members of the
company. The Directors give careful consideration to the factors
set out above in discharging their duties under section 172.
The Board is focused on ensuring that the Company delivers on
its strategic objectives, while taking into account the impact on
its stakeholders as a whole. It is our firm belief that
prioritising positive stakeholder relationships is central to
delivering long-term, sustainable returns. The Board is focused on
ensuring that it understands its stakeholders’ needs.
Shareholders
The Board is committed to maintaining high standards of
corporate governance in order to protect shareholder interests. The
Manager undertakes an active investor relations schedule in
London and the regions throughout
the year, which includes one-on-one and group meetings with
shareholders, site visits to key assets as well regular
presentations to the sell-side analyst community. Shareholder
feedback is encouraged either through the broker or directly to the
Manager or Board.
Occupiers
The Company has a diverse range of tenants occupying space
across the portfolio. This includes a wide range of businesses who
operate out of our office or industrial space and the retailers and
shoppers who work at or visit our retail and leisure properties.
Active and constant engagement with these groups, either directly
or through property managers or agents, is required to gather
intelligence as to what is important to them. Understanding
changing needs, both at an individual company level, as well as on
a sectoral and broader economic level, is a key tenet informing
both our individual asset management investment decisions as well
as the longer-term strategic direction of the Company.
Communities
Our assets are located across the UK in range of urban
environments. The buildings and their occupiers are part of the
fabric of local communities. The Company works hard to ensure that
it is engaging with local communities, councils and individuals and
that our asset strategies are sensitive to the unique heritage of
each location.
Environment
The built environment is generally accepted to be responsible
for 40% of global carbon emissions, which places great
responsibility on those companies that are direct or indirect
contributors. The Board is sensitive to the Company’s role and is
committed to continually improving and protecting the environment
by using resources such as energy, water and materials in a
sustainable manner for the prevention of greenhouse gas emissions
and climate change mitigation. Environmental, Social and Governance
(‘ESG’) considerations are integrated into the Company’s investment
processes and each individual asset benefits from specific
ESG-related objectives. The Board constantly reviews its approach
to sustainable investing and believes that this is integral in
delivering better long-term returns for our investors and for
safeguarding the future of the environment that we live and
work in.
Service providers
As an externally managed real estate investment trust, the Board
is reliant on a range of service providers who have a direct
working or contractual relationship or share a mutual interest with
the Company. This includes, but is not limited to, the Manager,
property managers, company secretary and administrator, depositary,
auditor, tax advisers, solicitors, property valuers and banks. The
Company regularly reviews these relationships as part of its
commitment to transparency and corporate best practice.
Lenders
Borrowing allows the Company’s shareholders to increase exposure
to assets consistent with the strategy and generate enhanced
returns in at a low cost. These lenders have a financial interest
in the success of the Company.
Decision making
The Board makes decisions on, among other things, the principal
matters set out under the paragraph above headed ‘Role of the
Board’ on page 59.
Risk and Uncertainties
The Board is responsible for the Company’s system of risk
management and internal control and for reviewing its
effectiveness. The Board has carried out a robust assessment of the
principal risks and emerging risks facing the Company including
those that would threaten its business model, future performance,
solvency or liquidity. A framework of internal controls has been
designed and established to monitor and manage those risks. This
internal control framework provides a system to enable the
Directors to mitigate these risks as far as possible, which assists
in determining the nature and extent of the significant risks the
Board is willing to take in achieving its strategic objectives.
Although the Board believes that it has a robust framework of
internal controls in place this can provide only reasonable, and
not absolute, assurance against material financial misstatement or
loss and is designed to manage, not eliminate, risk.
A summary of the principal risks and uncertainties faced by the
Company, many of which have remained unchanged throughout the year
ended 31 March 2021, and actions
taken by the Board to manage and mitigate these risks and
uncertainties, are set out below.
Key risks |
Mitigation of risk |
Investment policy and strategy |
An inappropriate
investment strategy, or failure to implement the strategy, could
lead to underperformance and the share price being at a larger
discount, or smaller premium, to NAV than the property market
generally. This under performance could be caused by incorrect
sector and geographic weightings or a loss of income through tenant
failure, both of which could lead to a fall in the value of the
underlying portfolio. This fall in values would be amplified by the
Company’s external borrowings. |
The
Board seeks to mitigate these risks by:
– Diversification of its property portfolio through its
investment restrictions and guidelines which are monitored and
reported on by the Investment Manager.
– Determining a borrowing policy and the Investment
Manager operates within borrowing restrictions and guidelines.
– Receiving from the Investment Manager timely and
accurate management information including performance data,
attribution analysis, property level business plans and financial
projections.
– Monitoring the implementation and results of the
investment process with the Investment Manager with a separate
meeting devoted to strategy each year. |
Investment
management |
|
The
Investment Manager’s investment strategy, if inappropriate, may
result in the Company underperforming the market and/or peer group
companies, leading to the Company and its objectives becoming
unattractive to investors. |
Review of the
Investment Manager’s compliance with the agreed investment
restrictions, investment performance and risk against investment
objectives and strategy; relative performance; the portfolio’s risk
profile; and appropriate strategies employed to mitigate any
negative impact of substantial changes in markets, including any
potential disruption to capital markets. |
Economic and
property market risk |
|
The performance of the
Company could be affected by economic and property market
risk. In the wider economy this could include inflation or
deflation, economic recessions, movements in interest rates, Brexit
impact or other external shocks. The performance of the underlying
property portfolio could also be affected by structural or cyclical
factors impacting particular sectors or regions of the property
market. |
The Board considers
economic conditions and the uncertainty around political events
when making investment decisions. The Board mitigates property
market risk through the review of the Group’s strategy on a regular
basis and discussions are held to ensure the strategy is still
appropriate or if it needs updating. |
Covid-19 and emerging risks
The global pandemic has accentuated the economic and property
market risks, highlighted above. |
The Investment Manager is in close contact with all the property
managers and tenants with a continued focus on rent collection,
reducing risk and implementing new property management procedures
to ensure tenants can return safely to our buildings. |
Gearing and
leverage |
|
The Company utilises
credit facilities. These arrangements increase the funds available
for investment through borrowing. While this has the potential to
enhance investment returns in rising markets, in falling markets
the impact could be detrimental to performance. |
Gearing is monitored
and strict restrictions on borrowings have been imposed. |
Accounting, legal
and regulatory |
|
The risk that the NAV
and financial statements could be inaccurate. |
The
Investment Manager has robust processes in place to ensure that
accurate accounting records are maintained and that evidence to
support the financial statements is available to the Board and the
auditors. The Investment Manager operates established property
accounting systems and has procedures in place to ensure that the
quarterly NAV and Gross Asset Value are calculated accurately.
The Board has appointed the Investment Manager as Alternative
Investment Fund Manager (AIFM) in accordance with the Alternative
Investment Fund Managers Directive (AIFMD).
The quarterly and annual NAV has numerous levels of reviews
including by the Board. Additional support is produced by the Fund
Accountants to ensure financial data is complete and accurate.
An internal controls review is performed by Ernst & Young in
accordance with ISAE 3402 annually to provide assurance on
Schroders’ service organisations’ control procedures and an
external audit is completed to provide an opinion on the financial
statements which have been reviewed by the board of directors.
The Administrator monitors legal requirements to ensure that
adequate procedures and reminders are in place to meet the
Company’s legal requirements and obligations. The Investment
Manager undertakes full legal due diligence with advisors when
transacting and managing the Company’s assets. All contracts
entered into by the Company are reviewed by the Company’s legal and
other advisors.
Processes are in place to ensure that the Company complies with the
conditions applicable to property investment companies set out in
the Listing Rules. The Administrator attends all Board meetings to
be aware of all announcements that need to be made and the
Company’s advisors are aware of their obligations to advise the
Administrator and, where relevant, the Board of any notifiable
events. Finally, the Board is satisfied that the Investment Manager
and Administrator have adequate procedures in place to ensure
continued compliance with the regulatory requirements of the FCA
and the Guernsey Financial Services Commission. |
Valuation
risk |
|
Property valuations
are inherently subjective and uncertain. This uncertainty is
heightened due to the Covid-19 pandemic. |
External
valuers provide independent valuation of all assets.
Members of the Audit Committee meet with the external valuers to
discuss the basis of their valuations and their quality control
processes. |
Tax risk |
|
The Group
is exposed to changes in the tax regime affecting the cost of
corporate tax, VAT, Stamp Duty and Stamp Duty Land Tax.
The UK’s exit from the EU creates uncertainty over the future UK
tax and regulatory environment.
The Group is exposed to potential tax penalties, or loss of its
REIT status, by failing to comply with the REIT legislation. |
We
regularly monitor proposed and actual changes in tax legislation
with the help of Deloitte, and through direct liaison with HMRC, to
understand and, if possible, mitigate their impact.
HMRC has designated the Group as having a low-risk tax status, and
we hold regular meetings with them. We carry out detailed planning
ahead of any future regulatory and tax changes using Deloitte as
our tax advisors.
The Group has internal monitoring procedures in place to ensure
that the appropriate REIT rules and legislation are complied with.
To date, all REIT regulations have been complied with, including
projected tests. |
Service
providers |
|
The Company has no
employees and has delegated certain functions to a number of
service providers. Failure of controls and poor performance of any
service provider could lead to disruption, reputational damage or
loss. |
Service
providers are appointed subject to regular reviews and with clearly
documented contractual arrangements detailing service
expectations.
Regular reporting by key service providers and monitoring of the
quality of services provided.
Review of internal controls reports from key service providers,
including confirmation of business continuity and cyber security
arrangements. |
Governance Report
Board of Directors
Lorraine
Baldry (Chairman)
Status: Independent Non-Executive Director
Date of appointment: 13 January
2014
Aged 72, Lorraine is Chair of Hydroxyl Technologies Limited and
Inventa Partners Limited. She has also been the Chair of
London & Continental Railways
and Sellafield Limited, a Governor at The University of the Arts London and a Director of
Thames Water Utilities Limited. She was Chief Executive of
Chesterton International plc and prior to that held various senior
positions at Prudential Corporation, Morgan Stanley and Regus. She
is also an Honorary Member of the Royal Institution of Chartered
Surveyors and a Past President of the British Property
Federation.
Current remuneration: £50,000 per annum
Material interests in any contract which is significant to
the Company’s business: None
Graham
Basham
Status: Independent Non-Executive Director
Date of appointment: 11 September
2015
Aged 63, Graham is a director of a number of Investment and
Fiduciary regulated companies in Guernsey. He also sits on the boards of the
SREIT subsidiaries, a position he has held for more than ten years.
He has more than 40 years’ experience in fiduciary and fund work,
most of these spent in several offshore locations. He was
Group partner and Head of Guernsey
for Aspida Group Limited, prior to retiring in May 2021. He
holds a Trustee Diploma as an Associate of Chartered Institute of
Banks and is a member of both the Society of Trust and Estate
Practitioners and the Institute of Directors.
Current remuneration: £30,000 per annum
Material interests in any contract which is significant to
the Company’s business: Was a Director of Computershare
Services (Guernsey) Ltd, which
acts as Registrar to the Fund, resigning in May 2021.
Stephen
Bligh (Chairman of the Audit Committee)
Status: Independent Non-Executive Director
Date of appointment: 28 April
2015
Aged 64, Stephen was previously with KPMG for 34 years,
specialising in the audit of FTSE 350 companies in property and
construction. He is a fellow of the Institute of Chartered
Accountants in England &
Wales and was previously a
non-executive Board Member of the Department of Business,
Innovation & Skills.
Current remuneration: £35,000 per annum
Material interests in any contract which is significant to
the Company’s business: None
Alastair
Hughes (Senior Independent Director)
Status: Independent Non-Executive Director
Date of appointment: 26 April
2017
Aged 55, Alastair has over 25 years of experience in real estate
markets and currently holds Directorships with British Land PLC,
Tritax Big Box and Quad Real Property Group. He was previously the
Managing Director of Jones Lang
LaSalle (JLL) in the UK before becoming the CEO for
Europe, Middle East and Africa and then latterly becoming the CEO for
Asia Pacific. Alastair is a
Chartered Surveyor and sat on the Global Executive Board of
JLL.
Current remuneration: £35,000 per annum
Material interests in any contract which is significant to
the Company’s business: None
No Director has any entitlement to pensions and the Company has
not awarded any share options or long-term performance incentives
to any of them. No element of Directors’ remuneration is
performance-related. There were no payments to Directors for loss
of office.
No Director has a service contract with the Company. However,
each of the Directors has a letter of appointment with the Company.
The Directors’ letters of appointment, which set out the terms of
their appointments, are available for inspection at the Company’s
registered office address during normal business hours and will be
available for inspection at the AGM.
Report of the Directors
The Directors of the Company and its subsidiaries, together the
‘Group’, present the annual report and audited consolidated
financial statements of the Group for the year ended 31 March 2021 (the ‘Annual Report and
Consolidated Financial Statements’). The Company is incorporated in
Guernsey, the Channel Islands under The Companies
(Guernsey) Law, 2008 (the
'Companies Law').
Results and dividends
The results for the year under review are set out in the
attached financial statements.
During the year the Company has declared and paid the following
interim dividends to its shareholders in accordance with the
solvency test (contained in the Companies Law):
Dividend for quarter
ended |
Date Paid |
Rate |
30 June 2020 |
18 August 2020 |
0.38575 pence per share |
30 September 2020 |
11 December 2020 |
0.575 pence per share |
31 December 2020 |
12 March 2021 |
0.625 pence per share |
Subject to the solvency test provided for in the Companies Law
being satisfied, all dividends were declared and paid as interim
dividends. The Directors recommend a final dividend for the year
ended 31 March 2021 of 0.656 pence per share.
All dividends paid during the year were allocated and paid as
Property Income Distributions (PIDs).
Share capital
As at 31 March 2021 the Company
had 565,664,749 (2020: 565,664,749) Ordinary Shares in issue of
which 74,246,108 Ordinary Shares (representing 13.1% of the
Company’s total issued share capital) were held in treasury (2020:
47,151,340). Further to the share buyback programme which commenced
in September 2020, the total number
of voting rights of the Company was 491,418,641 at the year end
(2020: 518,513,409) and this figure may be used by shareholders as
the denominator for the calculations by which they will determine
if they were required to notify their interest in, or a change in
their interest of, the Company, under the Disclosure Guidance and
Transparency Rules as at the year end.
Key services providers
The Board has adopted an outsourced business model and has
appointed the following key service providers:
Investment Manager
The Board reviews the Investment Manager’s performance at its
quarterly Board meetings. In addition, the Board conducted its
annual strategic review with the Investment Manager in May 2021 to consider the portfolio strategy and
the Investment Manager’s capabilities in more depth. Subsequently,
the Directors formally discussed the performance of the Investment
Manager at a meeting of the Management Engagement Committee.
On the basis of this review, the Board remains satisfied that
the Investment Manager has the appropriate capabilities required to
support the Company and believes that the continuing appointment of
the Investment Manager under the terms of the current investment
management agreement, the details of which are set out below, is in
the interest of shareholders.
The Investment Manager received a fee of 1.1% per annum of the
Company’s NAV during the financial year for providing investment
management and accounting services. The fee is payable monthly in
arrears. There is no performance fee. The Investment Management
Agreement can be terminated by either party on not less than nine
months' written notice or on immediate notice in the event of
certain breaches of its terms or the insolvency of either
party.
The Management Engagement Committee has agreed a revision to the
Investment Management Agreement, whereby the Investment Manager has
reduced its fee to 0.9% on NAV up to £500 million, 0.8% on NAV
between £500 million to £1 billion and 0.7% on NAV over £1 billion.
The termination notice period has increased from nine to twelve
months, with effect from 1 July 2021.
The Company has appointed the Investment Manager as its AIFM
under the AIFM Directive. There is no additional fee paid to the
Investment Manager for this service.
Administration
The Board appointed Northern Trust International Fund
Administration Services (Guernsey)
Limited as the administrator to the Company (the ‘Administrator’).
The Administrator is entitled to an annual fee of £120,000.
Northern Trust (Guernsey) Limited
has been appointed by the Board to provide depositary services, as
required under the AIFM Directive, at an annual fee of £40,000.
Going concern
The Directors have examined significant areas of possible
financial risk including the non-collection of rent and service
charges as a result of the Covid-19 pandemic; considered potential
falls in property valuations; reviewed cash flow forecasts; and
have analysed forward-looking compliance with third party debt
covenants, in particular the Loan to Value covenant and interest
cover ratios.
Overall, after utilising available cash, excluding the cash
balance undrawn against the RBS facility, and uncharged properties
and units in Joint Ventures, and based on the reporting period to
31 March 2021, property valuations
would have to fall by 42% before the relevant Canada Life
Loan to Value covenants were breached, and actual
net rental income would need to fall by 74% before
the interest cover covenants were breached. Furthermore, the
properties charged to RBSI could fall in value by 70% prior to the
65% LTV covenant being reached and, based on actual net rents for
the quarter to March 2021, a 78% fall
in net income could be sustained prior to the RBSI loan
covenant of 185% being breached.
As at the financial year end, the undrawn capacity of the RBS
facility was £28 million. This facility is an efficient and
flexible source of funding due to the margin of 1.6% and its
ability to be repaid and redrawn as often as required. It is noted
that this facility expires in July
2023.
The Board and Investment Manager continue to closely monitor the
ongoing impact that the Covid-19 pandemic may have on the Company’s
rental collection and the requirement to distribute dividends in
accordance with the REIT regulations. All future dividends will be
kept under constant review to ensure the Company’s liquid resources
will be sufficient to cover any working capital requirements.
The Directors have not identified any matters which would cast
significant doubt on the Group’s ability to continue as a going
concern for the period to 1 June
2022. ( In addition to the matters described above, in
arriving at their conclusion the Directors have also
considered:
· The current cash balance at
1 June 2021 of £13.5 million;
· The nature and timing of the
Company’s income and expenses; and
· That the Investment Manager and
Administrator have successfully invoked their business continuity
plans to help ensure the safety and well-being of their staff
thereby retaining the ability to maintain the Company’s business
operations over the course of the financial year and to date.
The Directors have satisfied themselves that the Group has
adequate resources to continue in operational existence for at
least the next twelve months from the date of approval of the
financial statements. After due consideration, the Board
believes it is appropriate to adopt the going concern basis in
preparing the financial statements.
Viability statement
The Board has assessed the viability of the Company, which
considers the Company’s current position and principal risks and
uncertainties together with an assessment of future prospects.
The Board conducted this review over a five year time horizon
which was deemed appropriate as it matches the period over which
the Board monitors and reviews its financial performance and
forecasting and the Investment Manager prepares five year total
return forecasts for the UK commercial real estate market. The
Investment Manager uses its forecasts as part of analysing
acquisition opportunities as well as for its annual asset level
business planning process. At the annual Strategic Review the Board
receives an overview of the asset level business plans which the
Investment Manager uses to assess the performance of the underlying
portfolio and to therefore make investment decisions such as
disposals and investing in capital expenditure. The Company’s
principal borrowings are for a weighted duration of 15 years and
the average unexpired lease term, assuming all tenants vacate at
the earliest opportunity, is 5.3 years.
The Board’s assessment of viability considers the principal
risks and uncertainties faced by the Company and, in the current
period specifically, the additional risks arising as a result of
Covid-19, as detailed on page 47 of the Strategic Report, which
could negatively impact its ability to deliver the investment
objective, strategy, liquidity and solvency of the Company. This
includes considering a cash flow model prepared by the Manager that
analyses the sustainability of the Company’s cash flows, dividend
cover, compliance with bank covenants, REIT compliance and general
liquidity requirements for the five year period to 31 March 2026.
These metrics are subject to a sensitivity analysis which
involves flexing a number of the main assumptions including
macroeconomic scenarios, delivery of specific asset management
initiatives, rental growth and void/re-letting assumptions.
The Board has considered, and will continue to monitor, the
downside risks arising from the ongoing Covid-19 pandemic and
expects to remain compliant with all banking covenants throughout
the viability period, assuming rental collection rates return to
their pre-Covid levels later in 2021. It is assumed that the
revolving debt facility, which is due to expire in 2023, will be
successfully renegotiated during the viability assessment period
with the calculation assuming the same covenant conditions as
previously.
Based on its assessment, the Board has formed the reasonable
expectation that the Company will be able to continue in operation
and meet its liabilities as they fall due over the next five
years.
Anti-bribery policy
The Company continues to be committed to carrying out its
business fairly, honestly and openly. Appropriate policies are
considered to be in place to ensure compliance with the Bribery
Act.
Directors
The Directors of the Company, together with their beneficial
interests in the Company’s ordinary share capital as at the date of
this report, are given below:
Director |
Number of ordinary
shares |
Percentage (%) |
Lorraine Baldry |
100,597 |
Less than 0.1 |
Graham Basham |
- |
- |
Stephen Bligh |
100,000 |
Less than 0.1 |
Alastair Hughes |
101,518 |
Less than 0.1 |
Substantial shareholdings
As at 31 March 2021, the Directors
were aware that the following shareholders each owned 3% or more of
the issued Ordinary Shares of the Company.
|
Number of ordinary
shares |
Percentage (%) |
Investec Wealth & Investment
(UK) |
79,994,009 |
16.3 |
Schroders PLC |
68,183,737 |
13.9 |
Witan Investment Trust (UK) |
38,750,000 |
7.9 |
Embark Investment Services (UK) |
34,207,624 |
7.0 |
Premier Miton Investors (UK) |
25,889,263 |
5.3 |
BlackRock Inc |
22,042,890 |
4.5 |
Hargreaves Lansdown Asset Management
(UK) |
15,640,577 |
3.2 |
Independent auditors
Resolutions to reappoint Ernst & Young LLP, and to give the
Directors authority to determine the Auditor’s remuneration for the
coming year, will be put to shareholders at the Annual General
Meeting (‘AGM’) of the Company.
The Audit Committee’s evaluation of the Auditors is described in
the Report of the Audit Committee on page 65.
Disclosure of information to
auditors
The Directors who held office at the date of approval of this
Directors’ Report confirm that, so far as they are each aware,
there is no relevant audit information of which the Company’s
Auditors are unaware and each Director has taken all the steps that
they ought to have taken as a Director to make themselves aware of
any relevant audit information and to establish that the Company’s
Auditors are aware of that information.
Status for taxation
The Director of Income Tax in Guernsey has granted the Company exemption
from Guernsey income tax under the
Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 and the income of
the Company may be distributed or accumulated without deduction of
Guernsey Income Tax. Exemption under the above-mentioned Ordinance
entails the payment by the Company of an annual fee of £1,200.
The Group’s tax charge remains low because it has tax exempt
status in the UK as a UK Real Estate Investment Trust (REIT). The
Group has been a UK REIT since 2015 and the Group’s property income
and gains are exempt from UK corporate taxes provided a number of
conditions in relation to the Group’s activities are met including,
but not limited to, distributing at least 90% of the Group’s UK tax
exempt profit as property income distributions (PIDs). As far as
the Directors are aware, the Group remains in full compliance with
the REIT requirements.
Shareholders who are in any doubt
concerning the taxation implications of a REIT should consult their
own tax advisors.
Key information document
A Key Information Document (“KID”) for the Company is published
on at least an annual basis, in accordance with the Packaged Retail
and Insurance-Based Investment Products Regulation (“PRIIPs”), and
made available on the Company’s website. The calculation of figures
and performance scenarios contained in the KID are prescribed by
PRIIPS and have neither been set nor endorsed by the Board. In
fact, the Board is of the opinion that PRIIPS has been
inconsistently applied by market participants and hence creates
confusion amongst investors.
AIFMD remuneration disclosures for
Schroder Real Estate Investment Management Limited (‘SREIM’) for
the year to 31 December 2020.
Quantitative remuneration disclosures to be made in this Annual
Report in accordance with FCA Handbook rule FUND 3.3.5 are
published on the following website:
https://www.schroders.com/en/investor-relations/results-and-reports/annual-report-and-accounts-2020/
Statement of Directors’ Responsibilities
The Directors are responsible for preparing the Annual Report
and Consolidated Financial Statements in accordance with applicable
law and regulations.
The Companies Law requires the Directors to prepare the Annual
Report and Consolidated Financial Statements for each financial
year. Under the Companies law the Directors have elected to prepare
the Annual Report and Consolidated Financial Statements in
accordance with International Financial Reporting Standards and
applicable law.
The Annual Report and Consolidated Financial Statements are
required by law to give a true and fair view of the state of
affairs of the Group and of the profit or loss of the Group for the
relevant period.
In preparing the Annual Report and Consolidated Financial
Statements, the Directors are required to:
– Select suitable accounting
policies and then apply them consistently;
– Make judgements and
estimates that are reasonable and prudent;
– State whether applicable
accounting standards have been followed, subject to any material
departures disclosed and explained in the financial statements;
– Assess the Company’s
ability to continue as a going concern, disclosing as applicable
matters relating to going concern; and
– Use the going concern
basis of preparation unless they intend to either liquidate the
Company or cease operations or have no realistic alternative to do
so.
The Directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time the
financial position of the Group and enable them to ensure that the
Annual Report and Consolidated Financial Statements comply with the
Companies Law. They also have general responsibility for taking
such steps as are reasonably open to them to safeguard the assets
of the Company and to prevent and detect fraud, error and
non-compliance with law and regulations.
As part of the preparation of the Annual Report and Consolidated
Financial Statements, the Directors have received reports and
information from the Company’s Administrator and Investment
Manager. The Directors have considered, reviewed and commented upon
the Annual Report and Consolidated Financial Statements throughout
the drafting process in order to satisfy themselves in respect of
the content.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company’s website and for the preparation and dissemination of the
Annual Report and Consolidated Financial Statements.
Legislation in Guernsey
governing the preparation and dissemination of the Consolidated
Financial Statements may differ from legislation in other
jurisdictions.
Responsibility Statement of the Directors in respect of the
Annual Report
We confirm to the best of our knowledge:
– The Consolidated Financial
Statements, prepared in accordance with International Financial
Reporting Standards, give a true and fair view of the assets,
liabilities, financial position and profit of the Group and the
undertakings included in the consolidation taken as a whole and
comply with the Companies Law; and
– The Strategic Report on
pages 11 to 48 and Governance Report on pages 49 to 67 include a
fair review of the development and performance of the business and
the position of the Group and the undertakings included in the
consolidation taken as a whole, together with a description of the
principal risks and uncertainties it faces. The Directors consider
that the Annual Report and Consolidated Financial Statements, taken
as a whole, are fair, balanced and understandable and provides the
information necessary for shareholders to assess the Company’s
position and performance, business model and strategy.
By order of the Board
Lorraine
Baldry, Chairman
1 June 2021
Resolutions at 2021 Annual General Meeting
THIS SECTION IS IMPORTANT AND REQUIRES
YOUR IMMEDIATE ATTENTION.
If you are in any doubt about the
contents of this section of the document or the action you should
take, you are recommended to seek immediately your own personal
financial advice from an appropriately qualified independent
advisor authorised pursuant to the Financial Services and Markets
Act 2000 (as amended).
If you have sold or otherwise transferred all your shares in the
Company, please send this document (including the Notice of AGM)
and the accompanying documents at once to the purchaser,
transferee, or to the stockbroker, bank or other person through
whom the sale or transfer was effected for onward transmission to
the purchaser or transferee. However, such documents should not be
distributed, forwarded or transmitted in or into the United States, Canada, Australia or Japan or into any other jurisdiction if to do
so would constitute a violation of applicable laws and regulations
in such other jurisdiction.
The Notice of the Annual General Meeting of Shareholders is set
out on pages 126 to 127. The following paragraphs explain the
resolutions to be put to the AGM.
Ordinary resolutions 1–8
Ordinary Resolutions 1-8 are being proposed to approve the
ordinary business of the Company to: (i) consider and approve the
consolidated Annual Report and the remuneration report of the
Company for the year ended 31 March
2021; (ii) re-elect the Directors; and (iii) appoint the
Auditors and to authorise the Directors to determine the Auditor’s
remuneration.
Ordinary Resolution 9: Approval of the
Company's dividend policy
The Company’s dividend policy is to pay a sustainable level of
quarterly dividends to shareholders (in arrears). It is intended
that successful execution of the Company’s strategy will enable a
progressive dividend policy.
The Company’s objective and strategy, outlined in the Chairman’s
Statement and Investment Manager’s Report, is to deliver
sustainable net income growth in due course through active
management of the underlying portfolio. Any future decision to
increase the dividend will be determined by factors including
whether it is sustainable over the long term, current and
anticipated future market conditions, rental values and the
potential impact of any future debt refinancing.
As the Company is a REIT, the Board must also ensure that
dividends are paid in accordance with the requirements of the UK
REIT regime (pursuant to part 12 of the UK Corporation Tax Act
2010) in order to maintain the Company's REIT status. Shareholders
should note that the dividend policy is not a profit forecast and
dividends will only be paid to the extent permitted in accordance
with the Companies Law and the UK REIT regime.
The Board acknowledges that the dividend policy is fundamental
to shareholders’ income requirements as well as the Company’s
investment and financial planning. Therefore, in accordance with
the principles of good corporate governance and best practice
relating to the payment of interim dividends without the approval
of a final dividend by a company's shareholders, a resolution to
approve the Company’s dividend policy will be proposed annually for
approval.
Special Resolution 1: Authority to
repurchase shares
The Board recognises that movements in the ordinary share price,
premium or discount, are driven by numerous factors, including
investment performance, gearing and market sentiment. Accordingly,
it focuses its efforts principally on addressing sources of risk
and return as the most effective way of producing long-term value
for Shareholders.
However, the Directors may consider repurchasing ordinary shares
if they believe it to be in Shareholders’ interests as a whole and
as a means of correcting any imbalance between supply and demand
for the ordinary shares. The making and timing of any repurchase of
ordinary shares will be at the absolute discretion of the Board,
although the Board will have regard to the effects of any such
repurchase on long-term shareholders in exercising its discretion.
Any repurchase of ordinary shares will be subject to compliance
with the Companies law and within any guidelines established from
time to time by the Board.
During the year ended 31 March
2021 the Company repurchased 27,094,768 shares (5,713,017
were repurchased between 8 September
2020 and the date of the prior AGM on 25 September 2020 and a further 21,381,751 shares
were purchased between 26 September
2020 and 31 March 2021).
Further details of the buyback, its impact and rationale are
disclosed on page 13.
Annually the Company passes a resolution granting the Directors
general authority to purchase in the market up to 14.99% of the
number of shares in issue. The Directors intend to seek a renewal
of this authority from the Shareholders at the AGM.
In the event that the Board decides to repurchase ordinary
shares, purchases will only be made through the market for cash at
prices not exceeding the prevailing NAV of the ordinary shares (as
last calculated) where the Directors believe such purchases will
enhance shareholder value. Such purchases will also only be made in
accordance with the Listing Rules and the Disclosure Guidance and
Transparency Rules which provide that the maximum price to be paid
for each ordinary share must not be more than the higher of: (i) 5
per cent above the average mid-market value of the ordinary shares
for the five business days before the purchase is made; and (ii) an
amount equal to the higher of (a) the price of the last independent
trade; and (b) the highest current independent bid for an ordinary
share on the trading venues where the market purchases by the
Company pursuant to the authority conferred by that resolution will
be carried out. The Companies Law also provides, among other
things, that any such purchase is subject to the Company passing
the solvency test contained in the Companies Law at the relevant
time. Any ordinary shares purchased under this authority may be
cancelled or held in treasury.
This authority will expire at the conclusion of the annual
general meeting of the Company to be held in 2022 unless varied,
revoked or renewed prior to such date by ordinary resolution of the
Company.
Special Resolution 2: Authority to
disapply pre-emption rights
The Directors require specific authority from shareholders
before allotting new ordinary shares for cash (or selling shares
out of treasury for cash) without first offering them to existing
shareholders in proportion to their holdings. Special Resolution 2
empowers the Directors to allot new ordinary shares for cash or to
sell ordinary shares held by the Company in treasury for cash,
otherwise than to existing shareholders on a pro rata basis, up to
such number of ordinary shares as is equal to 10% of the ordinary
shares in issue (including treasury shares) on the date the
resolution is passed. No ordinary shares will be issued without
pre-emption rights for cash (or sold out of treasury for cash) at a
price less than the prevailing net asset value per ordinary share
at the time of issue or sale from treasury.
The Directors do not intend to allot or sell ordinary shares
other than to take advantage of opportunities in the market as they
arise and will only do so if they believe it to be advantageous to
the Company's existing shareholders and when it would not result in
any dilution of the net asset value per ordinary share (owing to
the fact that no ordinary shares will be issued or sold out of
treasury for a price less than the prevailing net asset value per
ordinary share).
This authority will expire on the earlier of the conclusion of
the annual general meeting of the Company to be held in 2022 or on
the expiry of 15 months from the passing of this Special Resolution
2.
The Board considers that the resolutions to be proposed at the
AGM are in the best interests of the Company’s shareholders as a
whole. The Board therefore recommends unanimously to shareholders
that they vote in favour of each of the resolutions, as they intend
to do in respect of their own beneficial holdings.
Lorraine Baldry,
Chairman
1 June 2021
Corporate Governance
The Directors are committed to maintaining high standards of
corporate governance. Insofar as the Directors believe it to be
appropriate and relevant to the Company, it is their intention that
the Company should comply with best practice standards for the
business carried on by the Company.
The Guernsey Financial Services Commission (the ‘GFSC’) states
in the Finance Sector Code of Corporate Governance (the ‘Code’)
that companies which report against the UK Corporate Governance
Code or the Association of Investment Companies Code of Corporate
Governance (the ‘AIC Code’) are deemed to meet the Code, and need
take no further action.
The Board has considered the principles and recommendations of
the Association of Investment Companies Code of Corporate
Governance published in February 2019
( the ‘AIC Code‘), which applies to accounting periods beginning on
or after 1 January 2019. The AIC
Code, addresses all the principles set out in the UK Corporate
Governance Code, as well as setting out additional principles and
recommendations on issues that are of specific relevance. A copy of
the AIC Code can be found at www.theaic.co.uk.
It is the Board’s intention to continue to comply with the AIC
Code and we will continue to report the Company’s compliance with
the principles and recommendations of the AIC Code, which has been
endorsed by the Financial Reporting Council (‘FRC’).
Statement of compliance
The Company has complied with the recommendations of the AIC
Code and the relevant provisions of the UK Corporate Governance
Code, except as set out below.
The UK Corporate Governance Code includes provisions relating
to:
– The role of the chief
executive;
– Executive directors’
remuneration; and
– Internal audit
function.
The Board considers that these provisions are not relevant to
the Company, being an externally managed investment company. In
particular, all of the Company’s day-to-day management and
administrative functions are outsourced to third parties. As a
result, the Company has no executive directors, employees or
internal operations. The provision in relation to the internal
audit function is referred to in the Audit Committee report. The
Company has therefore not reported further in respect of these
provisions.
Role of the Board
The Board has determined that its role is to consider and
determine the following principal matters which it considers are of
strategic importance to the Company:
– The overall objectives of
the Company, as described under the paragraph above headed
‘Investment Policy and Strategy’ and the strategy for fulfilling
those objectives within an appropriate risk framework, in light of
market conditions prevailing from time to time;
– The capital structure of
the Company, including consideration of an appropriate policy for
the use of borrowings both for the Company and in any joint
ventures in which the Company may invest from time to time;
– The appointment of the
Investment Manager, Administrator and other appropriately skilled
service providers and to monitor their effectiveness through
regular reports and meetings; and
– The key elements of the
Company’s performance including NAV growth and the payment of
dividends.
Board decisions
The Board makes decisions on, among other things, the principal
matters set out under the paragraph above headed ‘Role of the
Board’. Issues associated with implementing the Company’s strategy
are generally considered by the Board to be non-strategic in nature
and are delegated either to the Investment Manager or the
Administrator, unless the Board considers there will be
implementation matters significant enough to be of strategic
importance to the Company and should be reserved to the Board.
Generally these are defined as:
– Large property decisions
affecting 10% or more of the Company’s assets;
– Large property decisions
affecting 5% or more of the Company’s rental income; and
– Decisions affecting the
Company’s financial borrowings.
Evaluation of the Board and Audit
Committee
In January 2020 the Board
appointed Stogdale St James Limited to independently oversee an
external performance evaluation of the Board; there were no
conflicts of interest identified. The report findings were
presented and discussed with the Board. The composition of the
Board, its dynamics, its oversight of strategy and the management
of the Board meetings were all highly regarded.
In the spring of 2021 the Board carried out an internal
evaluation of the Board and its Chairman, which involved
questionnaires being completed by Non-Executive Directors,
representatives of the Investment Manager and the Company
Secretary. It was concluded that the Board and its Chairman both
operate effectively and constructively. Ongoing consideration
continues to be given towards succession planning, relationships
with key shareholders and the format and length of board
papers.
Non-Executive Directors, rotation of
Directors and Directors’ tenure
The UK Corporate Governance Code recommends that Directors
should be appointed for a specified period. The Board has resolved
in this instance that Directors’ appointments need not comply with
this requirement as all Directors are non-executive and their
respective appointments can be terminated at any time without
penalty. The Board has approved a policy that all Directors will
stand for re-election annually and it is the intention that no
Director will serve for more than nine years.
The appointment and replacement of Directors is governed by the
Company’s Articles, the Companies Law, related legislations and the
Listing Rules. The Articles may only be amended by a special
resolution of the shareholders. When a vacancy arises the Board
selects the best candidate taking into account the skills and
experience required, while taking into consideration board
diversity as part of a good corporate governance culture.
Board composition and diversity
The Board currently consists of four non-executive Directors.
The Chairman is Lorraine Baldry.
Alastair Hughes is the Senior
Independent Director. The biography of each of these Directors is
set out on page 49 of the report. The Board considers each of the
Directors to be independent.
The independence of each Director is considered on a continuing
basis. The Board has determined that all the Directors are
independent of the Investment Manager. The Board is satisfied that
it is of sufficient size with an appropriate balance of skills and
experience, independence and knowledge of both the Company and the
wider investment company sector, to enable it to discharge its
respective duties and responsibilities effectively and that no
individual or group of individuals is, or has been, in a position
to dominate decision making. Accordingly the Board approves the
nomination for re-election of each of the Directors at the
forthcoming annual general meeting.
Board committees
The Board has delegated certain of its responsibilities to its
Audit, Nomination, and Management Engagement Committees. Each of
these committees has formal terms of reference established by the
Board which are available on the Company's website. The Board
believes that its committees have an appropriate composition and
blend of backgrounds, skills and experience to discharge their
duties effectively.
Audit committee
Details of the Audit Committee are set out in the Report of the
Audit Committee.
Nomination committee
The role of the Nomination Committee, chaired by Lorraine Baldry, is to consider and make
recommendations to the Board on its composition and with regard to
any adjustments that may be appropriate, including in connection
with the re-election of the Board, so as to maintain an appropriate
balance of skills, experience and diversity, including gender, and
to ensure progressive refreshing of the Board. On individual
appointments, the Nomination Committee leads the process and makes
recommendations to the Board.
Before the appointment of a new director, the Nomination
Committee prepares a description of the role and capabilities
required for a particular appointment. While the Nomination
Committee is dedicated to selecting the best person for the role,
it aims to promote diversification and the Board recognises the
importance of diversity. The Board agrees that its members should
possess a range of experience, knowledge, professional skills and
personal qualities as well as the independence necessary to provide
effective oversight of the affairs of the Company.
Remuneration committee
As all the Directors are non-executives, the Board has resolved
that it is not necessary to have a Remuneration Committee.
Management Engagement committee
A Management Engagement committee has been established to review
the performance and terms of engagement of, in particular, the
Investment Manager, as well as the Administrator, Depositary,
Valuers and other service providers (other than the Auditors, who
are the responsibility of the Audit Committee).
Following discussions with the Investment Manager, the
Investment Manager has agreed to reduce its annual management fee
from 1.1% of NAV to 0.9% up to £500m of NAV, to 0.8% for NAV
between £500m to £1bn and to 0.7% for NAV over £1bn. The
termination notice period has been extended from nine to twelve
months, with effect from 1 July 2021.
Further details are disclosed on pages 99 and 100.
Board meetings and attendance
The Board meets at least four times each year. Additional
meetings are also arranged as required and regular contact between
Directors, the Investment Manager and the Administrator is
maintained throughout the year. Representatives of the Investment
Manager and Company Secretary attend each Board meeting and other
advisors also attend when requested to do so by the Board. At least
once a year the Board carries out a site visit to properties owned
by the Company.
Attendance records for the four quarterly Board meetings and
three Audit Committee meetings during the year under review are set
out in the table below.
|
Board |
Audit committee |
Lorraine Baldry (Chairman) |
4/4 |
3/3 |
Alastair Hughes |
4/4 |
3/3 |
Graham Basham |
4/4 |
3/3 |
Stephen Bligh |
4/4 |
3/3 |
Number of meetings during the
year |
4 |
3 |
In addition to its regular quarterly meetings, the Board met on
sixteen other occasions during the year, attended by all or the
majority of Directors.
Information flows
All Directors receive, in a timely manner, relevant management,
regulatory and financial information and are provided, on a regular
basis, with key information on the Company’s policies, regulatory
requirements and internal controls. The Board receives and
considers reports regularly from the Investment Manager and other
key advisors and ad hoc reports and information are supplied to the
Board as required.
Data protection and security
The Board has reviewed its systems and controls in light of the
implementation of the General Data Protection Regulation (EU
Regulation 2016/679) (the "GDPR") in 2018 to ensure that the
Company is compliant with the requirements of the GDPR. As part of
that process the Board took steps to update its contracts and
policies accordingly and is comfortable that it meets its
obligations as a controller of personal data. The Board also
requires its Investment Manager and Administrator to have a robust
information security and data protection environment in place. This
is reviewed with the Investment Manager at the annual Manager‘s
visit day. All Board communication of a confidential nature is
managed via a secure Board application. The Company’s privacy
notice is available on its webpage.
Directors’ and Officers’ Liability
Insurance
During the year, the Company has maintained insurance cover for
its Directors under a liability insurance policy.
Relations with shareholders
The Board believes that the maintenance of good relations with
both institutional and retail shareholders is important for the
long-term prospects of the Company. The Board receives feedback on
the views of shareholders from its corporate broker, the Investment
Manager and from the Chairman. Through this process the Board seeks
to monitor the views of shareholders and to ensure an effective
communication programme.
The Board believes that the Annual General Meeting provides an
appropriate forum for investors to communicate with the Board and
it encourages participation. The Notice of the next Annual General
Meeting on page 126 sets out the business of the Annual General
Meeting to be held on 9 September
2021.
Remuneration Report
The Company’s Articles currently limit the aggregate fees
payable to the Board of Directors to a total of £250,000 per annum.
Subject to this overall limit, it is the Board’s policy to
determine the level of Directors’ fees having regard to the fees
payable to non-executive directors in the industry generally, the
role that individual directors fulfil in respect of Board and
Committee responsibilities, and time committed to the Company’s
affairs.
Directors receive a base fee of £30,000 per annum, and the
Chairman receives £50,000 per annum. The Chairman of the Audit
Committee and the Senior Independent Director each receive an
additional fee of £5,000 respectively. The fees were reviewed by an
external consultant during 2015, which led to the recommendation
adopted and the current level of fees taking effect from
1 October 2015.
No Director past or present has any entitlement to pensions and
the Company has not awarded any share options or long-term
performance incentives to any of them. No element of Directors’
remuneration is performance-related.
The Board believes that the principles of Section D of the UK
Corporate Governance Code relating to remuneration do not apply to
the Company, except as outlined above, as the Company has no
executive directors.
No Director has a service contract with the Company. However,
each of the Directors has a letter of appointment with the Company.
The Directors’ letters of appointment, which set out the terms of
their appointment, are available for inspection at the Company’s
registered office address during normal business hours and will be
available for inspection at the AGM.
All Directors are appointed for an initial term covering the
period from the date of their appointment until the first AGM
thereafter, at which they are required to stand for re-election in
accordance with the Articles. When recommending whether an
individual Director should seek re-election, the Board will take
into account the provisions of the UK Corporate Governance Code,
including the merits of refreshing the Board and its
Committees.
The Board has approved a policy that all Directors will stand
for re-election annually.
Performance
The performance of the Company is described on page 42 in the
Business Model Report.
The following amounts were paid by the Company for services as
non-executive Directors:
Director |
31
March 2021 (£) |
31
March 2020 (£) |
Lorraine Baldry
(Chairman) |
50,000 |
50,000 |
Stephen
Bligh# |
35,000 |
35,000 |
Graham
Basham## |
30,000 |
30,000 |
Alastair
Hughes^ |
35,000 |
35,000 |
Total |
150,000 |
150,000 |
^ Senior Independent Director
# Chairman of the Audit
Committee.
## Graham Basham
remains a director of a majority of the subsidiary companies,
£23,000 was paid to his former employer, Aspida Group Limited, for
their provision of another director for the subsidiaries. Mr Basham
owned 13% of Aspida Group Limited during that time. However,
this holding has now been sold following his retirement.
Information to be disclosed in accordance with Listing Rule
9.8.4R
Listing Rule 9.8.4C requires the Company to include certain
information about the Company in a single identifiable section of
this annual report or a cross reference table indicating where the
information required under Listing Rule 9.8.4 R is set out.
The Directors confirm that there are no disclosures to be made
in this regard.
Lorraine Baldry,
Chairman
1 June 2021
Report of the Audit Committee
Composition
The Audit Committee is chaired by Stephen Bligh with Graham Basham and Alastair Hughes as members. The Board considers
that Stephen Bligh’s professional experience makes him suitably
qualified to chair the Audit Committee, and his continuing
professional commitments provide him with recent relevant financial
experience. The Company’s Chairman is invited to attend all
meetings.
Responsibilities
The Audit Committee ensures that the Company maintains the
highest standards of integrity in financial reporting and internal
control. This includes responsibility for reviewing the half-year
and annual financial statements before their submission to the
Board. In addition, the Audit Committee is specifically charged
under its terms of reference to advise the Board, inter alia, on
the terms and scope of the appointment of the Auditors, including
their remuneration, independence, objectivity and reviewing with
the Auditors the results and effectiveness of the audit and the
interim review.
Work of the Audit Committee
The Audit Committee meets no less than twice a year. If
required, meetings are also attended by the Investment Manager, the
Administrator and the Auditor. During the year under review, the
Audit Committee met on three occasions to consider:
– The contents of the
interim and annual financial statements and to consider whether,
taken as a whole, they were fair, balanced and understandable and
provided the information necessary for shareholders to assess the
Company’s performance, business model and strategy;
– The effectiveness of the
Company’s system of internal control;
– The external Auditor’s
terms of appointment, audit plan, half year review findings and
year end report;
– The management
representation letters to the Auditors;
– The effectiveness of the
audit process;
– The independence,
effectiveness and objectivity of the external Auditor;
– The risk assessment of the
Company; and
– Compliance with the UK
REIT regime.
As noted in the Corporate Governance report, an evaluation of
the Audit Committee was completed by Stogdale St James in early
2020, in which "the overall performance of the Audit Committee was
very highly rated”. In 2021, the Audit Committee performed an
internal evaluation of its performance, which it considers
continues to be very satisfactory.
Significant matters considered by the
Audit Committee in relation to the financial statements
Matter |
Action |
Property valuation
Property valuation is central to the business and is a significant
area of judgement which is inherently subjective, although the
valuations are performed by independent firms of valuers: Knight
Frank LLP and BNP Paribas Real Estate UK for the two joint
ventures.
Errors in valuation could have a material impact on the Company’s
net asset value. |
The Audit Committee reviewed the outcomes of the
valuation process throughout the year and discussed the detail
of each quarterly valuation with the Investment Manager at the
Board meetings.
Members of the Audit Committee met with Knight Frank LLP
and BNP Paribas Real Estate UK to discuss the process,
assumptions, independence and communication with the
Investment Manager. Their approach to the 31 March 2021 valuations
in light of the current Covid-19 pandemic was also discussed and
the Committee was satisfied that both firms had taken a considered
approach. |
Impact of Covid-19
on ongoing rent collection and Going Concern
There is a risk that the ongoing Covid-19 pandemic may impact
Company liquidity and investment returns in the short to medium
term which could impact the Going Concern assumption and the
viability of the Group. |
The Audit Committee has been closely monitoring rent collections
over the course of the financial year. The Investment Manager and
property managing agents have taken a proactive approach to tenants
who have had cash flow difficulties and have agreed amended terms
where possible. The Audit Committee has also considered the
potential reduction in 2021 rentals and its impact on the Company’s
liquidity, and the prospects for the next five years.
As disclosed in the Going Concern and Viability Statements on pages
52 and 53, the Audit Committee has considered various stress tests
and sensitivities to the normal cash flow forecasts, and is
confident that the Company will be able to continue in operation
and meet its liabilities as they fall due over the five year period
of its assessment. |
Internal control
The UK Corporate Governance Code requires the Board to conduct,
at least annually, a review of the adequacy of the Company’s
systems of internal control and to report to shareholders that it
has done so. The Audit Committee, on behalf of the Board, also
regularly reviews a detailed 'Risk Map' identifying significant
strategic, investment-related, operational and service
provider-related risks and ensures that risk management and all
aspects of internal control are reviewed at least annually.
The Company’s system of internal controls is substantially
reliant on the Investment Manager’s and the Administrator’s own
internal controls and internal audit processes due to the
relationships in place.
Although the Board believes that it has a robust framework of
internal controls in place, this can provide only reasonable and
not absolute assurance against material financial misstatement or
loss and is designed to manage, not eliminate, risk. No significant
issues were identified from the internal controls review.
Internal audit
The Audit Committee considered the need for an internal audit
function and concluded that this function is provided by the
Schroders Group’s Internal Audit reviews, which cover the functions
provided by the Investment Manager, Schroder Real Estate Investment
Management Limited.
In addition, the Investment Manager prepares an ISAE 3402/AAF
01/06 Internal Controls Report which includes the Company within
the scope of the review. This report is reviewed by Ernst &
Young LLP (EY) which issued an unqualified opinion for the year
ended December 2020. The Audit
Committee has considered both the Investment Manager’s internal
controls report and the review by EY.
External Auditor remuneration,
independence and effectiveness
Annually, the Audit Committee considers the remuneration and
independence of the external auditor. The Committee recommends the
remuneration of the external auditor to the Board and keeps under
review the ratio of audit to non-audit fees to ensure that the
independence and objectivity of the external auditor are
safeguarded.
Effectiveness of the independent audit
process
The Audit Committee evaluated the effectiveness of Ernst &
Young prior to making a recommendation on its reappointment at the
forthcoming Annual General Meeting. As part of the evaluation, the
Committee considered feedback from the Investment Manager on the
audit process and the half year and year end report from the
Auditor, which details the auditor’s compliance with regulatory
requirements, on safeguards that have been established and their
own internal quality control procedures. The Audit Committee had
discussions with the audit partner on audit planning, accounting
policies and audit findings, and met the audit partner both with
and without representatives of the Investment Manager present. The
Chairman of the Audit Committee also had informal discussions with
the audit partner during the course of the year. The Committee is
satisfied with the effectiveness of the auditors.
Non-audit services
In order to help safeguard the independence and objectivity of
the auditor, the Audit Committee maintains a policy on the
engagement of the external auditor to provide non-audit services.
The Audit Committee’s policy for the use of the external auditor
for non-audit services recognises that there are certain
circumstances where, due to Ernst & Young’s expertise and
knowledge of the Company, it will often be in the best position to
perform non-audit services. Under the policy, the use of the
external auditor for non-audit services is subject to pre-clearance
by the Audit Committee. Clearance will not be granted if it is
believed it would impair the external auditor’s independence or
where provision of such services by the Company’s auditor is
prohibited. Prior to undertaking any non-audit service, Ernst &
Young also completes its own independence confirmation processes
which are approved by the audit partner.
During the year, the non-audit services fees paid to Ernst &
Young were £17,525 in relation to the interim review.
Stephen Bligh,
Director
1 June 2021
Independent Auditor’s report to the members of Schroder Real
Estate Investment Trust Limited
Opinion
We have audited the consolidated financial statements (the
“financial statements”) of Schroder Real Estate Investment Trust
Limited (the “Company”) and its subsidiaries (together the “Group”)
for the year ended 31 March 2021
which comprise the Consolidated Statement of Comprehensive Income,
the Consolidated Statement of Financial Position, the Consolidated
Statement of Changes in Equity, the Consolidated Statement of Cash
Flows and the related notes 1 to 24, including a summary of
significant accounting policies. The financial reporting framework
that has been applied in their preparation is applicable law and
International Financial Reporting Standards (‘IFRS’).
In our opinion, the financial statements:
- give a true and fair view of the
state of the Group’s affairs as at 31 March
2021 and of its profit for the year then ended;
- have been properly prepared in
accordance with International Financial Reporting Standards;
and
- have been properly prepared in
accordance with the requirements of The Companies (Guernsey) Law, 2008.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the
Auditor’s responsibilities for the audit of the financial
statements section of our report. We are independent of the Group
in accordance with the ethical requirements that are relevant to
our audit of the financial statements, including the UK FRC’s
Ethical Standard as applied to listed public interest entities, and
we have fulfilled our other ethical responsibilities in accordance
with these requirements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Conclusions relating to going
concern
In auditing the financial statements, we have concluded that the
Directors’ use of the going concern basis of accounting in the
preparation of the financial statements is appropriate. To evaluate
the Directors’ assessment of the Group’s ability to continue to
adopt the going concern basis of accounting, we have:
· obtained an understanding of the
process followed by management to make its going concern
assessment;
· obtained the cash flow forecasts
which support the Directors’ assessment of going concern and
have challenged the sensitivities and assumptions used in the
forecasts and evaluated the impact of these forecasts on the
Group’s ability to continue to meet financial covenants and
financial commitments as they fall due;
· challenged the stress testing
performed and validated the static data assumptions used by
agreement to supporting documentation;
· recalculated the debt covenants
on external loans to validate compliance within the accounting
period;
· held discussions with the Audit
Committee and the Investment Manager to determine whether, in their
opinion, there is any material uncertainty regarding the Group’s
ability to pay liabilities and commitments as they fall due and
challenged this assessment through our audit procedures in relation
to the liquidity assessment; and
· assessed the disclosures in the
Annual Report and Financial Statements relating to going concern to
ensure they were fair, balanced and understandable and in
compliance with IAS 1.
Based on the work we have performed, we have not identified any
material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the
Group’s ability to continue as a going concern for the period to
1 June 2022 from when the financial
statements are authorised for issue.
In relation to the Group’s reporting on how they have applied
the UK Corporate Governance Code, we have nothing material to add
or draw attention to in relation to the Directors’ statement in the
financial statements about whether the Directors considered it
appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the Directors
with respect to going concern are described in the relevant
sections of this report. However, because not all future
events or conditions can be predicted, this statement is not a
guarantee as to the Group’s ability to continue as a going
concern.
Overview of our audit approach
Audit scope |
· We have audited
the financial statements of the Group for the year ended 31 March
2021. |
Key audit matters |
· Risk of misstatement in the fair
value of directly or indirectly held investment property
portfolio
· Risk of incomplete or inaccurate
rental revenue recognition and related year-end
receivables |
Materiality |
·
Overall Group materiality of £3.0m which represents 1% of
equity. |
An overview of the scope of our
audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and
our allocation of performance materiality determine our audit scope
for the Group. This enables us to form an opinion on the financial
statements. We take into account size, risk profile, the
organisation of the Group and effectiveness of group-wide controls
and changes in the business environment when assessing the level of
work to be performed.
All audit work performed for the purposes of the audit was
undertaken by the Group audit team.
Changes from the prior year
There have been no significant changes in scope from the prior
year audit.
Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had
the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the
engagement team. These matters were addressed in the context of our
audit of the financial statements as a whole, and in our opinion
thereon, and we do not provide a separate opinion on these
matters.
Risk |
Our response to the
risk |
Key observations
communicated to the Audit Committee |
Risk of
misstatement in the fair value of directly or indirectly held
investment property portfolio
Refer to the Report of the Audit Committee (page 65);
Significant accounting policies (page 82); and
Note 11 of the Financial Statements (pages 87 to 90)
The Group’s investment property portfolio consists of UK properties
held directly and through joint ventures, with a combined fair
value of £438.8m (2020: £406.2m).
There is a risk of incorrect valuation of the property portfolio
which could result in the Consolidated Statement of Financial
Position and the Consolidated Statement of Comprehensive Income
being materially misstated. |
We have
performed the following procedures:
- obtained an understanding of the process and
controls surrounding property valuation by performing our
walkthrough procedures and evaluating the implementation and design
effectiveness of controls;
- assessed the independence and competence of the
independent valuers as required by auditing standards;
- read the valuation report provided by the
Group’s independent valuers to agree the appropriateness and
suitability of the reported values and the changes in value from
the previous accounting period;
- engaged our EY property valuation specialists
to perform review of a judgmentally selected sample of property
valuations to assess whether the reported value fell within a range
of reasonable outcomes, which included:
- validating the assumptions used by the
independent valuers in undertaking their valuation and assessment
of the valuation methodologies adopted;
- challenging the key inputs and assumptions
relating to equivalent yield and rental rates with reference to
published market data and comparable transaction evidence through
market activity;
- assessing the appropriateness of market related
inputs and reasonableness of valuation methods, by comparing
against our own market data and understanding of the property
market;
- performed analytical review procedures across
the portfolio of investments, focusing on correlations with market
data and any significant movements;
- with respect to key objective inputs to the
valuation, comprising rental income and length of lease, agreed the
inputs to lease agreements or rent review schedules on a sample
basis;
- verified that the fair values derived by the
Group’s independent valuers for the entire portfolio were correctly
included in the financial statements
assessed the adequacy of the additional disclosures of estimates
and valuation assumptions as disclosed in the notes were made in
accordance with IFRS 13 – Fair Value Measurement. |
The
results of our procedures are:
Based on our procedures performed over the risk of misstatement in
the fair value of directly and indirectly held investment property
portfolio, we concluded that the methodology applied was
appropriate and that the external valuations were a reasonable
assessment of the fair value of the directly and indirectly held
investment properties at 31 March 2021.
The disclosure set out in the notes to the financial statements are
fundamental to users understanding of this matter. We conclude that
the balances and disclosures in the financial statements and notes
appropriately reflect the risk factors identified.
In relation to the specific properties that were selected for
testing by our EY property valuation specialists, we have concluded
that the assessment of fair values performed by the valuers are
within an acceptable range. |
Risk of
incomplete or inaccurate rental revenue recognition and related
year-end receivables
Refer to the Significant accounting policies (page 83) in the
Financial Statements.
Revenue is earned in the form of rental income from the investment
properties and is recognised on an accrual basis.
During the year, the Group recognised £21.5m of rental income
(2020: £22.2m) and rent receivable of £4.1m (2020: £2.4m).
There is a risk of incomplete or inaccurate rental revenue
recognition and related year-end receivables through failure to
recognise proper income entitlements or to apply the appropriate
accounting treatment. The recoverability of year-end receivable is
based on a number of assumptions. |
We have
performed the following procedures:
- obtained an understanding of the process and
controls for each revenue stream by performing our walkthrough
procedures and evaluating the implementation and design
effectiveness of controls;
- performed substantive analytical review
procedures over rental revenue for each property. We formed an
expectation of the rental income for each property, and compared
this expectation to the actual revenue recognised during the
year;
- agreed a sample of rental rates to tenancy
agreements and recalculated rental revenue earned by the property
for the period;
- recalculated a sample of lease incentives based
on the terms within the lease agreement to assess the
appropriateness of the amount recorded; this included, on a sample
basis, verifying lease modifications through agreement of the
updated terms to amended and restated lease agreements and
performing an independent assessment as to whether they have been
appropriately treated in accordance with IFRS 16 — Leases (‘IFRS
16’);
- reviewed management’s assessment of the
recoverability of the overdue rent receivables, and challenged the
judgments involved. For a sample of tenants, we have
inspected the cash receipt subsequent to the year-end date;
and
- tested the risk of management override of
controls, we tested a sample of rental revenue journals to identify
unauthorised or inappropriate journals. We enquired as to the
nature of each transaction sampled and obtained corroborating
evidence to conclude on whether the journals were reasonable and in
line with our expectations. We selected journals by applying
criteria and thresholds based on our professional judgment. |
The
results of our procedures are:
Based on our procedures performed over the risk of incomplete or
inaccurate rental revenue recognition and related year-end
receivables, we concluded that revenue and related year-end
receivables are fairly stated. |
Prior year comparison
In the prior year, our auditor’s report included a key audit
matter in relation to the ‘Impact of COVID-19 on Going Concern’.
This is not considered to be a key audit matter in the current year
as the impact of COVID-19 on the Group is less uncertain given the
changes in the external environment since the last reporting
date.
Our application of materiality
We apply the concept of materiality in planning and performing
the audit, in evaluating the effect of identified misstatements on
the audit and in forming our audit opinion.
Materiality
The magnitude of an omission or
misstatement that, individually or in the aggregate, could
reasonably be expected to influence the economic decisions of the
users of the financial statements. Materiality provides a basis for
determining the nature and extent of our audit procedures.
We determined materiality for the Group to be £3.0m
(2020:£3.1m), which is 1% (2020:1%) of equity. We believe that
equity provides us with a materiality aligned to the key
measurement of the Group’s performance.
During the course of our audit, we reassessed initial
materiality and considered there to be no change from the basis
determined at the audit planning stage, we have updated the value
based on equity as at 31 March
2021.
Performance materiality
The application of materiality at the
individual account or balance level. It is set at an amount
to reduce to an appropriately low level the probability that the
aggregate of uncorrected and undetected misstatements exceeds
materiality.
On the basis of our risk assessments, together with our
assessment of the Group’s overall control environment, our
judgement was that performance materiality was 75% (2020:50%) of
our planning materiality, namely £2.2m (2020:£1.6m). We have
used a higher threshold than in our first-year audit because we now
have prior experience as to the likelihood of misstatements and the
effectiveness of the control environment and accounting
processes.
Reporting threshold
An amount below which identified
misstatements are considered as being clearly trivial.
We agreed with the Audit Committee that we would report to them
all uncorrected audit differences in excess of £0.15m
(2020:£0.16m), which is set at 5% of planning materiality, as well
as differences below that threshold that, in our view, warranted
reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the
quantitative measures of materiality discussed above and in light
of other relevant qualitative considerations in forming our
opinion.
Other information
The other information comprises the information included in the
annual report set out on pages 3 to 67 and pages 101 to 130, other
than the financial statements and our auditor’s report
thereon. The Directors are responsible for the other
information contained within the annual report.
Our opinion on the financial statements does not cover the other
information and, except to the extent otherwise explicitly stated
in this report, we do not express any form of assurance conclusion
thereon.
Our responsibility is to read the other information and, in
doing so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge
obtained in the course of the audit or otherwise appears to be
materially misstated. If we identify such material inconsistencies
or apparent material misstatements, we are required to determine
whether there is a material misstatement in the financial
statements themselves. If, based on the work we have performed, we
conclude that there is a material misstatement of the other
information, we are required to report that fact.
We have nothing to report in this regard.
Matters on which we are required to
report by exception
We have nothing to report in respect of the following matters in
relation to which The Companies (Guernsey) Law, 2008 requires us to report to
you if, in our opinion:
- proper accounting records have not been kept
by the Group; or
- the financial statements are not in
agreement with the Group’s accounting records and returns; or
- we have not received all the information and
explanations we require for our audit.
Corporate Governance Statement
The Listing Rules require us to review the Directors’ statement
in relation to going concern, longer-term viability and that part
of the Corporate Governance Statement relating to the Group’s
compliance with the provisions of the UK Corporate Governance Code
specified for our review.
Based on the work undertaken as part of our audit, we have
concluded that each of the following elements of the Corporate
Governance Statement is materially consistent with the financial
statements or our knowledge obtained during the audit:
- Directors’ statement with regards to the
appropriateness of adopting the going concern basis of accounting
and any material uncertainties identified set out on page 52;
- Directors’ explanation as to its assessment
of the Group’s prospects, the period this assessment covers and why
the period is appropriate set out on page 52;
- Directors’ statement on fair, balanced and
understandable set out on page 56;
- Board’s confirmation that it has carried out
a robust assessment of the emerging and principal risks set out on
page 46;
- The section of the annual report that
describes the review of effectiveness of risk management and
internal control systems set out on page 66; and
- The section describing the work of the audit
committee set out on page 65.
Responsibilities of Directors
As explained more fully in the Statement of Directors’
Responsibilities set out on page 55, the Directors are responsible
for the preparation of the financial statements and for being
satisfied that they give a true and fair view, and for such
internal control as the Directors determine is necessary to enable
the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are
responsible for assessing the Group’s ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless the
Directors either intend to liquidate the Group or to cease
operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the
audit of the financial statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor’s report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
Explanation as to what extent the
audit was considered capable of detecting irregularities, including
fraud
Irregularities, including fraud, are instances of non-compliance
with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect irregularities,
including fraud. The risk of not detecting a material
misstatement due to fraud is higher than the risk of not detecting
one resulting from error, as fraud may involve deliberate
concealment by, for example, forgery or intentional
misrepresentations, or through collusion. The extent to which
our procedures are capable of detecting irregularities, including
fraud is detailed below.
However, the primary responsibility for the prevention and
detection of fraud rests with both those charged with governance of
the Group and management.
- We obtained an understanding of the legal
and regulatory frameworks that are applicable to the Group and
determined that the most significant are the Companies
(Guernsey) Law, 2008, the UK
Corporate Governance Code, REIT requirements set out in part 12 of
the Corporation Tax Act (CTA) 2010 (‘REIT rules’) and the
Listing Rules of the UK Listing Authority ;
- We understood how the Group is complying
with those frameworks by making enquiries of the Investment
Manager, the Administrator and those charged with governance
regarding:
- their knowledge of any non-compliance or
potential non-compliance with laws and regulations that could
affect the financial statements;
- the Group’s methods of enforcing and
monitoring non-compliance with such policies;
- the Investment Manager’s process for
identifying and responding to fraud risks, including programs and
controls the Group has established to address risks identified by
the Group, or that otherwise prevent, deter and detect fraud;
and
- how the Group monitors those programs and
controls.
- We assessed the susceptibility of the
Group’s financial statements to material misstatement, including
how fraud might occur by:
- obtaining an understanding of entity-level
controls and considering the influence of the control
environment;
- obtaining management’s assessment of fraud
risks including an understanding of the nature, extent and
frequency of such assessment documented in the Group’s Risk
Matrix;
- making inquiries with those charged with
governance as to how they exercise oversight of management’s
processes for identifying and responding to fraud risks and the
controls established by management to mitigate specifically those
risks the entity has identified, or that otherwise help to prevent,
deter and detect fraud;
- making inquiries with management and those
charged with governance regarding how they identify related parties
including circumstances related to the existence of a related party
with dominant influence; and
- making inquiries with management and those
charged with governance regarding their knowledge of any actual or
suspected fraud or allegations of fraudulent financial reporting
affecting the Group.
- Based on this understanding we designed our
audit procedures to identify non-compliance with such laws and
regulations. Our procedures involved:
- Through discussion, gaining an understanding
of how those charged with governance and the Investment Manager
identify instances of non-compliance by the Group with relevant
laws and regulations;
- Inspecting the relevant policies, processes
and procedures to further our understanding;
- Reviewing Board minutes and internal
compliance reporting;
- Inspected management’s specialist’s
assessment of the Group’s compliance with the REIT rules. We have
tested through recalculating and corroborating, to supporting
information, the Group’s compliance with each of the REIT rules,
including the proportion of dividend distributed in the form of
property income distributions;
- Inspecting correspondence with regulators;
and
- Obtaining relevant written representations
from the Board of Directors.
A further description of our responsibilities for the audit of
the financial statements is located on the Financial Reporting
Council’s website at
https://www.frc.org.uk/auditorsresponsibilities. This description
forms part of our auditor’s report.
Other matters we are required to
address
- Following the recommendation
from the audit committee we were appointed by the Company on
5 November 2019 to audit the
financial statements for the year ending 31
March 2020 and subsequent financial periods.
The period of total uninterrupted engagement including previous
renewals and reappointments is 2 years, covering the years ending
2020 to 2021.
- The non-audit services
prohibited by the FRC’s Ethical Standard were not provided to the
Group and we remain independent of the Group in conducting the
audit.
- The audit opinion is consistent
with the additional report to the audit committee.
Use of our report
This report is made solely to the Company’s members, as a body,
in accordance with Section 262 of The Companies (Guernsey) Law 2008. Our audit work has been
undertaken so that we might state to the Group’s members those
matters we are required to state to them in an auditor’s report and
for no other purpose. To the fullest extent permitted by law, we do
not accept or assume responsibility to anyone other than the Group
and the Group’s members as a body, for our audit work, for this
report, or for the opinions we have formed.
Richard Geoffrey Le Tissier
for and on behalf of Ernst & Young LLP
Guernsey, Channel Islands
1 June 2021
Financial Statements
Consolidated Statement of Comprehensive Income
|
|
31/03/2021 |
31/03/2020 |
|
Notes |
£000 |
£000 |
|
|
|
|
Rental income |
|
21,458 |
22,160 |
Other income |
4 |
205 |
1,333 |
Property operating
expenses |
5 |
(3,038) |
(2,248) |
Net rental and
related income, excluding joint ventures |
|
18,625 |
21,425 |
Share
of net rental income in joint ventures
Net rental and related income, including joint ventures |
|
2,452
21,077 |
2,567
23,812 |
|
|
|
|
Profit on disposal
of investment property |
11 |
121 |
1,897 |
Net unrealised
valuation loss on investment property |
11 |
(8,286) |
(17,364) |
|
|
|
|
Expenses |
|
|
|
Investment management
fee |
3 |
(2,906) |
(3,470) |
Valuers’ and other
professional fees |
|
(1,698) |
(1,629) |
Administrators’
fee |
3 |
(120) |
(120) |
Auditor’s
remuneration |
6 |
(150) |
(140) |
Directors’ fees |
7 |
(150) |
(150) |
Other expenses |
7 |
(278) |
(303) |
Total
expenses |
|
(5,302) |
(5,812) |
|
|
|
|
Net operating
profit/(loss) before net finance costs |
|
5,158 |
(34) |
|
|
|
|
Refinancing costs |
16 |
- |
(27,364) |
Finance costs |
|
(4,203) |
(5,271) |
Net finance
costs |
|
(4,203) |
(32,635) |
Share of net rental
income in joint ventures |
12 |
2,452 |
2,567 |
Share of valuation
gain/(loss) in joint ventures |
12 |
1,135 |
(2,357) |
Profit/(loss)
before taxation |
|
4,542 |
(32,459) |
Taxation |
8 |
- |
- |
Profit/(loss) and
total comprehensive income for the year attributable to the equity
holders of the parent |
|
4,542 |
(32,459) |
Basic and diluted
earnings/(loss) per share |
9 |
0.9p |
(6.3p) |
All items in the above statement are derived from continuing
operations. The accompanying notes 1 to 24 form an integral part of
the financial statements.
Consolidated Statement of Financial Position
|
|
31/03/2021 |
31/03/2020 |
|
Notes |
£000 |
£000 |
Investment
property |
11 |
351,776 |
321,382 |
Investment in joint
ventures |
12 |
79,120 |
77,985 |
Non-current
assets |
|
430,896 |
399,367 |
|
|
|
|
Trade and other
receivables |
13 |
17,028 |
15,115 |
Cash and cash
equivalents |
14 |
12,175 |
33,051 |
Current
assets |
|
29,203 |
48,166 |
Total
assets |
|
460,099 |
447,533 |
|
|
|
|
Issued capital and
reserves |
15 |
332,811 |
336,258 |
Treasury shares |
15 |
(35,967) |
(26,452) |
Equity |
|
296,844 |
309,806 |
|
|
|
|
Interest-bearing loans and borrowings
Lease liability |
16
11 |
153,370
1,988 |
128,667
2,416 |
Non-current
liabilities |
|
155,358 |
131,083 |
|
|
|
|
Trade and other
payables |
17 |
7,897 |
6,644 |
Current
liabilities |
|
7,897 |
6.644 |
|
|
|
|
Total
liabilities |
|
163,255 |
137,727 |
|
|
|
|
Total equity and
liabilities |
|
460,099 |
447,533 |
Net Asset Value per Ordinary Share |
18 |
60.4p |
59.7p |
The financial statements on pages 76 to 79 were approved at a
meeting of the Board of Directors held on 1
June 2021 and signed on its behalf by:
Lorraine
Baldry, Chairman
Stephen Bligh,
Director
The accompanying notes 1 to 24 form an integral part of the
financial statements.
Consolidated Statement of Changes in Equity
|
Notes |
Share
premium |
Treasury share reserve |
Revenue reserve |
Total |
|
|
£000 |
£000 |
£000 |
£000 |
Balance as at 31
March 2019 |
|
219,090 |
(26,452) |
163,738 |
356,376 |
Loss for the year |
|
- |
- |
(32,459) |
(32,459) |
Dividends paid |
10 |
- |
- |
(14,111) |
(14,111) |
Balance as at 31
March 2020 |
|
219,090 |
(26,452) |
117,168 |
309,806 |
Share buyback |
18 |
- |
(9,515) |
- |
(9,515) |
Profit for the
year |
|
- |
- |
4,542 |
4,542 |
Dividends paid |
10 |
- |
- |
(7,989) |
(7,989) |
Balance as at 31
March 2021 |
|
219,090 |
(35,967) |
113,721 |
296,844 |
The accompanying notes 1 to 24 form an integral part of the
financial statements.
Consolidated Statement of Cash Flows
|
|
31/03/2021 |
31/03/2020 |
|
|
£000 |
£000 |
Operating
activities |
|
|
|
Profit/(loss) for the
year |
|
4,542 |
(32,459) |
Adjustments for: |
|
|
|
Profit on disposal of
investment property |
|
(121) |
(1,897) |
Net valuation loss on
investment property |
|
8,286 |
17,364 |
Share of profit of
joint ventures |
|
(3,587) |
(210) |
Net finance cost |
|
4,202 |
32,635 |
Operating cash generated before changes in working
capital |
13,322 |
15,433 |
Increase in trade and
other receivables |
|
(1,923) |
(1,645) |
Increase/(decrease) in
trade and other payables |
|
1,254 |
(2,743) |
Cash generated from
operations |
|
12,653 |
11,045 |
|
|
|
|
Finance costs
paid |
|
(3,990) |
(5,698) |
Cash flows from
operating activities |
|
8,663 |
5,347 |
|
|
|
|
Investing
activities |
|
|
|
Proceeds from sale of
investment property |
|
6,409 |
80,034 |
Acquisition of
investment property |
|
(36,500) |
- |
Additions to
investment property |
|
(8,896) |
(6,504) |
Addition to joint
ventures |
|
- |
(496) |
Capital redemptions in
joint ventures |
|
- |
319 |
Net income distributed
from joint ventures |
|
2,452 |
2,567 |
Cash flows from
investing activities |
|
(36,535) |
75,920 |
|
|
|
|
Financing
activities |
|
|
|
Additions/(repayments) to debt
Refinancing fees paid
Dividends paid
Share buyback |
|
24,500
-
(7,989)
(9,515) |
(29,000)
(26,147)
(14,111)
- |
Cash flows used in
financing activities |
|
6,996 |
(69,258) |
|
|
|
|
Net
(decrease)/increase in cash and cash equivalents for the
year |
|
(20,876) |
12,009 |
Opening cash and
cash equivalents |
|
33,051 |
21,042 |
Closing cash and
cash equivalents |
|
12,175 |
33,051 |
The accompanying notes 1 to 24 form an integral part of the
financial statements.
Notes to the Financial Statements
1. Significant accounting
policies
Schroder Real Estate Investment Trust Limited (“the Company”) is
a closed-ended investment company registered in Guernsey. The consolidated financial
statements of the Company for the year ended 31 March 2021 comprise the Company and its
subsidiaries (together referred to as the “Group”).
Statement of compliance
The financial statements have been prepared in accordance with
International Financial Reporting Standards (“IFRS”) issued by the
International Accounting Standards Board (the ”IASB”), and
interpretations issued by the International Financial Reporting
Interpretations Committee.
The financial statements give a true and fair view and are in
compliance with The Companies (Guernsey) Law, 2008, applicable legal and
regulatory requirements and the Listing Rules of the UK Listing
Authority.
Basis of preparation
The financial statements are presented in sterling, which is the
Company’s functional currency, rounded to the nearest thousand.
They are prepared on the historical cost basis except that
investment property and derivative financial instruments are stated
at their fair value.
The accounting policies have been consistently applied to the
results, assets, liabilities and cash flows of the entities
included in the consolidated financial statements and are
consistent with those of the previous year.
Going concern
The Directors have examined significant areas of possible
financial risk, including the non-collection of rent and service
charges as a result of the Covid-19 pandemic; have considered
potential resulting falls in property valuations; have reviewed
cash flow forecasts; and have analysed forward-looking compliance
with third party debt covenants, in particular the Loan to Value
covenant and interest cover ratios.
Overall, after utilising available cash, excluding the cash
undrawn against the RBS facility, and uncharged properties and
units in Joint Ventures, and based on the reporting period to
31 March 2021, property valuations
would have to fall by 42% before the relevant Canada Life
Loan to Value covenants were breached, and actual
net rental income would need to fall by 74% before
the interest cover covenants were breached. Furthermore, the
properties charged to RBSI could fall in value by 70% prior to the
65% LTV covenant being reached and, based on actual net rents for
the quarter to March 2021, a 78% fall
in net income could be sustained prior to the RBSI loan covenant of
185% being breached.
As at the financial year end the undrawn capacity of the RBS
facility was £28 million. This facility is an efficient and
flexible source of funding due to the margin of 1.6% and its
ability to be repaid and redrawn as often as required.
The Board and Investment Manager are closely monitoring the
potential impact the Covid-19 pandemic may have on the Company’s
rental collection and the requirement to distribute dividends in
accordance with the REIT regulations. All future dividends will be
kept under constant review to ensure the Company’s liquid resources
will be sufficient to cover any working capital requirements.
The Directors have not identified any matters which would cast
significant doubt on the Group’s ability to continue as a going
concern for the period to 1 June 2022
. In addition to the matters described above, in arriving at their
conclusion the Directors have also considered:
· The current cash balance at
1 June 2021 of £13.5 million;
· The nature and timing of the
Company’s income and expenses; and
· That the Investment Manager and
Administrator have successfully invoked their business continuity
plans to help ensure the safety and well-being of their staff
thereby retaining the ability to maintain the Company’s business
operations.
The Directors have satisfied themselves that the Group has
adequate resources to continue in operational existence for at
least the next twelve months from the date of approval of the
financial statements. After due consideration, the Board
believes it is appropriate to adopt the going concern basis in
preparing the financial statements.
Use of estimates and judgements
The preparation of financial statements in conformity with IFRS
requires management to make judgements, estimates and assumptions
that affect the application of policies and the reported amounts of
assets and liabilities, income and expenses. These estimates and
associated assumptions are based on historical experience and
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis of making
judgements about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates. The estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognised in the period in which the
estimates are revised and in any future periods affected.
The most significant estimates made in preparing these financial
statements relate to the carrying value of investment properties,
including those within joint ventures, which are stated at fair
value. The Group uses external professional valuers to determine
the relevant amounts. Judgements made by management in the
application of IFRS that have a significant effect on the financial
statements and estimates with a significant risk of material
adjustment in the next year are disclosed in note 19.
Another significant estimate is the amount of expected credit
losses as per IFRS 9 from rent demanded during the period which has
not yet been collected. Management has considered rental debtors on
a quarterly basis and made provisions and write offs where it has
been deemed that these amounts are irrecoverable. As at
31 March 2021 total provisions of
£1.1m were recognised and rental debtors are shown net of this
provision in notes 13 and 19. In addition to bad debt provisions
recognised relating to rent recognised during the period, an
additional judgement has been made relating to rent demanded at the
end of March relating to the subsequent quarter from April and to
June. Any amounts which are deemed to be potentially irrecoverable
have been removed from the deferred income and rental debtor
balances reported as at 31 March.
Basis of consolidation
Subsidiaries
The consolidated financial statements comprise the financial
statements of the Company and all of its subsidiaries drawn up to
31 March each year. Subsidiaries are those entities controlled by
the Company. Control exists where the investor has the
following;
-power over the investee,
-exposure, or rights, to variable returns from its involvement
with the investee,
-the ability to use its power over the entity to affect the
amount of the investor’s returns.
The financial statements of subsidiaries are included in the
consolidated financial statements from the date that control
commences until the date that control ceases. Where properties are
acquired by the Group through corporate acquisitions but the
acquisition does not meet the definition of a business combination,
the acquisition has been treated as an asset acquisition.
Joint ventures
Joint ventures are those entities over whose activities the
Group has joint control, established by contractual agreement. The
consolidated financial statements include the Group's share of
profit or loss of jointly controlled entities on an equity
accounted basis. When the Group’s share of losses exceeds its
interest in an entity, the Group’s carrying amount is reduced to
nil and recognition of further losses is discontinued except to the
extent that the Group has incurred legal or constructive
obligations or is making payments on behalf of an entity.
Transactions eliminated on
consolidation
Intra-group balances, and any gains and losses arising from
intra-group transactions, are eliminated in preparing the
consolidated financial statements. Gains arising from transactions
with joint ventures are eliminated to the extent of the Group’s
interest in the entity. Losses are eliminated in the same way as
gains but only to the extent that there is no evidence of
impairment.
Investment property
Investment property is land and buildings held to earn rental
income together with the potential for capital growth.
Acquisitions and disposals are recognised on the unconditional
exchange of contracts. Acquisitions are initially recognised at
cost, being the fair value of the consideration given, including
transaction costs associated with the investment property.
After initial recognition, investment properties are measured at
fair value, with unrealised gains and losses recognised in the
statement of comprehensive income. Realised gains and losses on the
disposal of properties are recognised in the statement of
comprehensive income in relation to carrying value. Fair value is
based on the market valuations of the properties as provided by a
firm of independent chartered surveyors at the reporting date.
Market valuations are carried out on a quarterly basis.
As disclosed in note 20, the Group leases out all owned
properties on operating leases. A property held under an operating
lease is classified and accounted for as an investment property
where the Group holds it to earn rentals, capital appreciation, or
both. Any such property leased under an operating lease is
classified as an investment property and carried at fair value.
Leases
For any material leases for which the Group is a lessee, the
leasehold interest is measured at fair value and included in
investment properties with the corresponding liability being shown
as a non-current liability. The fair value is calculated as the
present value of the future lease payments.
Financial instruments
Non-derivative financial
instruments
Financial assets
Non-derivative financial instruments comprise trade and other
receivables and cash and cash equivalents. These are recognised
initially at fair value plus any directly attributable transaction
costs. Subsequent to initial recognition they are measured at
amortised cost using the effective interest rate method less any
impairment losses.
Cash and cash equivalents
Cash at bank and short-term deposits that are held to maturity
are carried at cost. Cash and cash equivalents are defined as cash
in hand, demand deposits and short-term, highly liquid investments
readily convertible to known amounts of cash and subject to
insignificant risk of changes in value. For the purposes of the
Consolidated Statement of Cash Flows, cash and cash equivalents
consist of cash in hand and short-term deposits at banks with a
term of no more than three months.
Financial liabilities
Non-derivative financial instruments comprise loans and
borrowings and trade and other payables.
Loans and borrowings
Borrowings are recognised initially at fair value of the
consideration received, less attributable transaction costs.
Subsequent to initial recognition, interest bearing borrowings are
stated at amortised cost with any difference between cost and
redemption value being recognised in the statement of comprehensive
income over the period of the borrowings on an effective interest
basis.
Trade and other payables
Trade and other payables are stated at amortised cost.
Share capital
Ordinary shares, including treasury shares, are classified as
equity.
Share buyback
Shares purchased are recognised on the trade date and debited to
the existing treasury reserve in the statement of changes in
equity. Any broker’s fees relating to the share buyback are debited
to other expenses.
Dividends
Dividends are recognised in the period in which they are
paid.
Rental income
Rental income from investment properties is recognised on a
straight-line basis over the term of ongoing leases and is shown
gross of any UK income tax. Lease incentives are spread evenly over
the lease term.
Surrender premiums and dilapidations are recognised in line with
individual lease agreements when cash inflows are
certain.
Impairment
Financial assets
Financial assets at amortised cost are subject to
impairment.
The Group's significant financial assets that are subject to
IFRS 9’s expected credit loss model are trade receivables from the
leasing of investment properties. The credit risk associated
with unpaid rent has increased due to Covid 19 and management have
done a detailed analysis over the recoverability of expected rents.
Rents received in advance have been closely monitored and any rents
deemed irrecoverable discussed by management. Note 19 provides
further details on the measurement of the loss allowance and amount
recognised at 31 March 2021.
Non-financial assets
The carrying amounts of the Group’s non-financial assets, being
the investment in joint ventures, are reviewed at each reporting
date to determine whether there is any indication of impairment. If
any such indication exists, then the asset’s recoverable amount is
estimated.
The recoverable amount of an asset or cash-generating unit is
the greater of its value in use and its fair value less costs to
sell. In assessing value in use, the estimated future cash flows
are discounted to their present value using a pre-tax discount rate
that reflects current market assessments of the time value of money
and the risks specific to that asset.
For the purpose of impairment testing, assets are grouped
together into the smallest group of assets that generates cash
inflows from continuing use that are largely independent of the
cash inflows of other assets or groups of assets (the
“cash-generating unit”).
An impairment loss is recognised if the carrying amount of an
asset or its cash-generating unit exceeds its estimated recoverable
amount. Impairment losses are recognised in the statement of
comprehensive income.
Provisions
A provision is recognised in the Consolidated Statement of
Financial Position when the Group has a legal or constructive
obligation as a result of a past event and it is probable that an
outflow of economic benefits will be required to settle the
obligation.
Finance costs
Finance costs comprise interest expense on borrowings that are
recognised in the statement of comprehensive income. Attributable
transaction costs incurred in establishing the Group’s credit
facilities are deducted from the fair value of borrowings on
initial recognition and are amortised over the lifetime of the
facilities through the statement of comprehensive income. Finance
costs are accounted for on an effective interest basis.
Expenses
All expenses are accounted for on an accruals basis. The costs
recharged to occupiers of the properties are presented net of the
service charge income as management consider that the property
agent acts as principal in this respect.
Taxation
SREIT elected to be treated as a UK real estate investment trust
(“REIT”). The UK REIT rules exempt the profits of SREIT and its
subsidiaries’ (the “Group”) UK property rental business from
corporation tax. Gains on UK properties are also exempt from tax,
provided they are not held for trading or sold in the three years
after completion of development. The Group is otherwise subject to
corporation tax.
As a REIT, SREIT is required to pay Property Income
Distributions equal to at least 90% of the Group’s exempted net
income. To retain UK REIT status there are a number of conditions
to be met in respect of the principal company of the Group, the
Group’s qualifying activity and its balance of business. The Group
continues to meet these conditions.
Segmental reporting
The Directors are of the opinion that the Group is engaged in a
single segment of business, being property investment and in one
geographical area, the United Kingdom. There is no one tenant
that represents more than 10% of group revenues. SREIM acts as
advisor to the Board, who then make management decisions following
their recommendations. As such the Board of Directors are
considered to be the chief operating decision maker. A set of
consolidated IFRS information is provided on a quarterly basis.
2. New standards and
interpretations
Standards, interpretations and
amendments to published standards that are not yet effective
Annual Improvements cycle – Effective date of 2018 – 2020
On 14 May 2020, the IASB issued
'Annual Improvements to IFRS Standards 2018–2020'. The
pronouncement contains amendments to four International Financial
Reporting Standards (IFRSs) as result of the IASB's annual
improvements project. The amendments are effective for annual
reporting periods beginning on or after 1
January 2022.
It is Management’s expectation that there will be no material
impact on the financial statements when these amendments become
effective.
Management are satisfied that there are no other standards that
are published and not yet effective that will have a material
effect on the accounts.
3. Material agreements
Schroder Real Estate Investment Management Limited is the
Investment Manager to the Company. The Investment Manager is
entitled to a fee together with reasonable expenses incurred in the
performance of its duties. The fee is payable monthly in arrears at
one twelfth of the aggregate of 1.1% of the NAV of the Company. The
Investment Management Agreement can be terminated by either party
on not less than nine months written notice or on immediate notice
in the event of certain breaches of its terms or the insolvency of
either party. The total charge to the Consolidated Statement of
Comprehensive Income during the year was £2,906,000 (2020:
£3,470,000). At the year end £20,000 (2020: £295,000) was
outstanding. As noted in the Report of the Directors, the terms of
the Investment Management Agreement have been revised with effect
from 1 July 2021.
Northern Trust International Fund Administration Services
(Guernsey) Limited is the
Administrator to the Company. The Administrator is entitled to an
annual fee equal to £120,000 (2020: £120,000) of which £nil (2020:
£nil) was outstanding at the year end. In addition to this £40,000
(2020: £40,000) was paid for depository fees of which £3,000 (2020:
£nil) was outstanding at year end.
4. Other income
|
|
31/03/2021 |
31/03/2020 |
|
|
£000 |
£000 |
Dilapidations |
|
192 |
482 |
Surrender
premiums |
|
- |
840 |
Miscellaneous
income |
|
13 |
11 |
|
|
205 |
1,333 |
5. Property operating
expenses
|
|
31/03/2021 |
31/03/2020 |
|
|
£000 |
£000 |
Agents' fees |
|
122 |
81 |
Repairs and
maintenance |
|
92 |
130 |
Advertising |
|
33 |
97 |
Rates – vacant |
|
400 |
342 |
Service charge,
insurance and utilities on vacant units |
|
1,445 |
933 |
Ground rent |
|
109 |
137 |
Bad debt provisions and
write offs |
|
837 |
528 |
|
|
3,038 |
2,248 |
6. Auditor’s
remuneration
The total expected audit fees for the year are £122,475 (2020:
£116,500) and £17,525 (2020: £16,500) for the half year interim
review of the financial statements. An additional £10,000 was
paid to the auditors during the year ended 31 March 2021 in respect of additional costs
incurred during the 2020 audit, primarily as a result of the COVID
pandemic.
7. Other expenses
|
|
31/03/2021 |
31/03/2020 |
|
|
£000 |
£000 |
Professional fees |
|
248 |
235 |
Other expenses |
|
30 |
68 |
|
|
278 |
303 |
Directors’ fees
Directors are the only officers of the Company and there are no
other key personnel. The Directors’ annual remuneration for
services to the Group was £150,000 (2020: £150,000), as set out in
the Remuneration Report on page 63.
8. Taxation
|
|
31/03/2021 |
31/03/2020 |
|
|
£000 |
£000 |
|
|
|
|
Tax expense in year |
|
- |
- |
|
|
|
|
Reconciliation of
effective tax rate |
|
|
|
Profit/(loss) before
tax |
|
4,542 |
(32,459) |
Effect of: |
|
|
|
Tax using the UK
corporation tax rate of 19% |
|
863 |
(6,167) |
Revaluation loss not
taxable |
|
1,574 |
3,299 |
Share of profit of
associates and joint ventures not taxable |
|
(682) |
(40) |
Profit on disposal of
investment property not taxable |
|
(23) |
(360) |
UK REIT exemption |
|
(1,732) |
3,268 |
Current tax expense
in the year |
|
- |
- |
SREIT elected to be treated as a UK real estate investment trust
(“REIT”). The UK REIT rules exempt the profits of SREIT and its
subsidiaries’ (the “Group”) UK property rental business from
corporation tax. Gains on UK properties are also exempt from tax,
provided they are not held for trading or sold in the three years
after completion of development. The Group is otherwise subject to
corporation tax.
As a REIT, SREIT is required to pay Property Income
Distributions equal to at least 90% of the Group’s exempted net
income. To retain UK REIT status there are a number of conditions
to be met in respect of the principal company of the Group, the
Group’s qualifying activity and its balance of business. The Group
continues to meet these conditions.
9. Basic and diluted
earnings per share
The basic and diluted earnings per share for the Group are based
on the profit for the year of £4,542,000 (2020: loss of
£32,459,000) and the weighted average number of Ordinary Shares in
issue during the year of 508,699,880 (2020: 518,513,409).
10. Dividends paid
In respect
of |
Ordinary |
Rate |
31/03/2021 |
|
shares |
(pence) |
£000 |
|
|
|
|
Q/e 30 June 2020
(dividend paid 18 August 2020) |
518.51
million |
0.38575 |
2,002 |
Q/e 30 September 2020
(dividend paid 11 December 2020) |
503.30
million |
0.575 |
2,894 |
Q/e 31 December 2020
(dividend paid 12 March 2021) |
495.00
million |
0.625 |
3,093 |
|
|
1.59 |
7,989 |
|
|
|
|
In respect
of |
Ordinary |
Rate |
31/03/2020 |
|
shares |
(pence) |
£000 |
Q/e 31 March 2019
(dividend paid 7 June 2019) |
518.51
million |
0.65 |
3,370 |
Q/e 30 June 2019
(dividend paid 16 August 2019) |
518.51
million |
0.65 |
3,370 |
Q/e 30 September 2019
(dividend paid 18 December 2019) |
518.51
million |
0.65 |
3,370 |
Q/e 31 December 2019
(dividend paid 11 March 2020) |
518.51
million |
0.77 |
4,001 |
|
|
2.72 |
14,111 |
A dividend for the quarter ended 31 March
2021 of 0.656 pence per share
was approved and will be paid on the 25 June
2021.
11. Investment property
|
Leasehold |
Freehold |
Total |
£000 |
£000 |
£000 |
Fair value as at 31
March 2019 |
39,822 |
331,275 |
371,097 |
Additions |
34 |
6,470 |
6,504 |
Gross proceeds on
disposals |
- |
(43,168) |
(43,168) |
Realised gain on
disposals |
- |
1,897 |
1,897 |
Fair Value leasehold
adjustment * |
2,416 |
- |
2,416 |
Net unrealised
valuation loss on investment property |
(5,454) |
(11,910) |
(17,364) |
Fair value as at 31
March 2020 |
36,818 |
284,564 |
321,382 |
Additions |
8,856 |
40 |
8,896 |
Acquisitions |
- |
36,500 |
36,500 |
Gross proceeds on
disposals |
(4,116) |
(2,293) |
(6,409) |
Realised gain on
disposals |
65 |
56 |
121 |
Fair value leasehold
adjustment movement |
(428) |
- |
(428) |
Net unrealised
valuation loss on investment property |
(4,819) |
(3,467) |
(8,286) |
Fair value as at 31
March 2021 |
36,376 |
315,400 |
351,776 |
* Relates to the fair value of the leasehold element of The
Galaxy, Luton. The corresponding
lease liability is included on the Balance Sheet under non-current
liabilities.
The balance above includes:
|
Leasehold |
Freehold |
Total |
£000 |
£000 |
£000 |
Investment
property |
34,388 |
315,400 |
349,788 |
Fair value leasehold
adjustment |
1,988 |
- |
1,988 |
Fair value as at 31
March 2021 |
36,376 |
315,400 |
351,776 |
|
Leasehold |
Freehold |
Total |
£000 |
£000 |
£000 |
Investment
property |
34,402 |
284,564 |
318,966 |
Fair value leasehold
adjustment |
2,416 |
- |
2,416 |
Fair value as at 31
March 2020 |
36,818 |
284,564 |
321,382 |
No investment properties have been deemed to meet the criteria
of a held for sale asset at the year end (31
March 2020: £nil).
The fair value of investment properties, as determined by the
valuer, totals £359,300,000 (2020: £328,300,000). In addition to
this, £9,512,000 (2020: £9,334,000) relating to lease incentives is
included within trade and other receivables.
The fair value of investment property has been determined by
Knight Frank LLP, a firm of independent chartered surveyors,
who are registered independent appraisers. The valuation has been
undertaken in accordance with the RICS Valuation –
Professional Standards global January
2019, issued by the Royal Institution of Chartered Surveyors
(the “Red Book”) including the International Valuation
Standards.
The properties have been valued on the basis of “Fair Value” in
accordance with the RICS Valuation - Professional Standards
VPS4(7.1) Fair Value and VPGA1 Valuations for Inclusion in
Financial Statements which adopt the definition of Fair Value
used by the International Accounting Standards Board. The
properties have been valued individually and not as part of a
portfolio.
The valuation has been undertaken using an appropriate valuation
methodology and the Valuer’s professional judgement.
Consistent with the prior year, the Valuer’s opinion of Fair Value
was primarily derived using recent comparable market
transactions on arm’s length terms, where available, and
appropriate valuation techniques (The Investment Method).
All investment properties are categorised as Level 3 fair values
as they use significant unobservable inputs. There have not been
any transfers between levels during the year. Investment properties
have been classed according to their real estate sector.
Information on these significant unobservable inputs per class of
investment property is disclosed below:
Quantitative information about fair
value measurement using unobservable inputs (Level 3) as at
31 March 2021
31 March
2021 |
|
Industrial (1) |
Retail
(incl. retail warehouse) |
Office |
Other |
Total |
Fair
value (£000) |
|
170,400 |
87,050 |
85,350 |
16,500 |
359,300 |
Area
(‘000 sq ft) |
|
1,963 |
506 |
414 |
177 |
3,060 |
Net
passing rent per sq ft per annum |
Range
Weighted average |
£4.20 -
£8.36 £5.16 |
£0 -
£32.85 £11.46 |
£0 -
£29.10 £16.46 |
£0
-£13.00
£6.95 |
£0 -
£32.85 £7.55 |
Gross
ERV per sq ft per annum |
Range
Weighted average |
£3.50 -
£13.00
£5.70 |
£7.40 -
£32.85 £13.40 |
£12.00-£24.00
£17.59 |
£2.10
-£13.00
£7.98 |
£2.10 -
£32.85 £8.40 |
Net
initial yield (1) |
Range
Weighted average |
4.40% -
7.02% 5.57% |
2.72%
-9.45% 6.24% |
5.77%-11.00% 7.47% |
4.75%-9.27%
7.00% |
2.72% -
11.00% 6.25% |
Equivalent yield |
Range
Weighted average |
5.10% -
7.41% 6.16% |
5.80%-10.04% 7.38% |
5.72%-9.25% 7.74% |
4.75%
-8.96%
7.25% |
4.75%-10.04% 6.65% |
Notes:
(1) Yields based on rents receivable
after deduction of head rents but gross of non-recoverables.
Quantitative information about fair
value measurement using unobservable inputs (Level 3) as at
31 March 2020
31
March 2020 |
|
Industrial (1) |
Retail
(incl. retail warehouse) |
Office |
Other |
Total |
Fair
value (£000) |
|
116,150 |
98,400 |
95,100 |
18,650 |
328,300 |
Area
(‘000 sq ft) |
|
1,398 |
527 |
463 |
177 |
2,565 |
Net
passing rent per sq ft per annum |
Range
Weighted average |
£0 -
£10.00
£4.64 |
£0 -
£38.50
£11.72 |
£0 -
£29.10
£15.02 |
£0
-£13.00
£8.22 |
£0 -
£38.50
£8.22 |
Gross
ERV per sq ft per annum |
Range
Weighted average |
£3.75 -
£10.00
£5.50 |
£4.30 -
£31.80
£14.36 |
£10.00-£26.00
£17.05 |
£2.10
-£13.00
£8.49 |
£2.10 -
£31.80
£9.61 |
Net
initial yield (1) |
Range
Weighted average |
4.75% -
6.52%
5.23% |
0%
-11.50%
5.88% |
5.36% -
9.58%
6.85% |
4.85%
-8.31%
7.33% |
0% -
11.50%
6.01% |
Equivalent yield |
Range
Weighted average |
5.30% -
6.75%
6.25% |
5.71%-9.82%
6.97% |
5.56%-9.93%
7.48% |
4.85%
-7.99%
6.84% |
4.85%-9.93%
6.87% |
Notes: (1) Yields based on rents receivable after
deduction of head rents but gross of non-recoverables
Sensitivity of measurement to
variations in the significant unobservable inputs
The significant unobservable inputs used in the fair value
measurement categorised within Level 3 of the fair value hierarchy
of the Group’s property portfolio, together with the impact of
significant movements in these inputs on the fair value
measurement, are shown below:
Unobservable input |
Impact on fair value measurement of significant
increase in input |
Impact on fair value measurement of significant
decrease in input |
Passing rent |
Increase |
Decrease |
Gross ERV |
Increase |
Decrease |
Net initial yield |
Decrease |
Increase |
Equivalent yield |
Decrease |
Increase |
There are interrelationships between the yields and rental values
as they are partially determined by market rate conditions.
The sensitivity of the valuation to changes in the most
significant inputs per class of investment property are shown
below:
Estimated movement in fair value
of investment properties at 31 March 2021 |
Industrial
£’000 |
Retail
£’000 |
Office
£’000 |
Other
£’000 |
All sectors
£’000 |
Increase in ERV by 5% |
8,119 |
2,536 |
3,822 |
706 |
15,183 |
Decrease in ERV by 5% |
(7,955) |
(3,497) |
(3,809) |
(501) |
(15,762) |
Increase in net initial yield by
0.25% |
(7,320) |
(3,355) |
(2,763) |
(569) |
(13,821) |
Decrease in net initial yield by
0.25% |
8,008 |
3,635 |
2,954 |
611 |
14,973 |
Estimated movement
in fair value of investment properties at 31 March 2020 |
Industrial
£’000 |
Retail
£’000 |
Office
£’000 |
Other
£’000 |
All sectors
£’000 |
Increase in ERV by 5% |
5,611 |
4,238 |
4,520 |
638 |
15,007 |
Decrease in ERV by 5% |
(5,589) |
(3,894) |
(4,221) |
(392) |
(14,096) |
Increase in net initial yield by
0.25% |
(5,303) |
(4,015) |
(3,347) |
(615) |
(13,107) |
Decrease in net initial yield by
0.25% |
5,836 |
4,371 |
3,600 |
659 |
14,245 |
12. Investment in joint ventures
|
£000 |
Closing balance as at
31 March 2019 |
80,165 |
Purchase of interest in City Tower
Unit Trust |
496 |
Capital distribution
from Store Unit Trust
Valuation loss on JV |
(319)
(2,357) |
Closing balance as at 31 March
2020 |
77,985 |
Valuation gain on JV |
1,135 |
Closing balance as at 31 March
2021 |
79,120 |
Summarised joint venture financial information not adjusted for
the Group’s share – City Tower Unit Trust |
|
31/03/2021
£000 |
31/03/2020
£000 |
|
|
|
|
Investment
properties |
|
160,700 |
163,750 |
Other assets |
|
1,494 |
3,270 |
Total
liabilities1 |
|
(3,240) |
(2,745) |
Revenues for the
year |
|
8,271 |
8,313 |
Total comprehensive
rental income |
|
4,769 |
5,397 |
Net asset value
attributable to the Group |
|
39,739 |
41,069 |
Total comprehensive
income attributable to the Group |
|
1,266 |
1,349 |
1 Liabilities are non-recourse to the Group.
Summarised joint venture financial information not adjusted for
the Group’s share – Store Street Unit Trust |
|
31/03/2021
£000 |
31/03/2020
£000 |
|
|
|
|
|
|
|
|
Investment
properties |
|
78,725 |
73,900 |
Other assets |
|
241 |
38 |
Total
liabilities1 |
|
(203) |
(106) |
Revenues for the
year |
|
2,922 |
2,882 |
Total comprehensive
rental income |
|
2,395 |
2,497 |
Net asset value
attributable to Group |
|
39,381 |
36,916 |
Total comprehensive
income attributable to the Group |
|
1,186 |
1,249 |
1 Liabilities are non-recourse to the Group.
The Company owns 25% of City Tower Unit Trust and 50% of Store
Unit Trust. The remaining units in the City Tower and Store
Unit Trusts are owned by other Schroders’ funds.
The fair value of investment property owned by the two
Joint Ventures has been determined by BNP Paribas Real Estate, who
are registered independent appraisers. The two valuations were
undertaken on the same basis as that described under Note 11,
Investment Property.
13. Trade and other receivables
|
|
31/03/2021
£000 |
31/03/2020
£000 |
Rent receivable |
|
4,094 |
2,365 |
Other debtors and
prepayments |
|
12,934 |
12,750 |
|
|
17,028 |
15,115 |
Other debtors and prepayments includes £9,512,000 (2020:
£9,334,000) in respect of lease incentives.
As per Note 1 the rent receivable balance at 31 March 2021 included a bad debt adjustment
relating to rent demanded at the end of March 2021 relating to the April to June 2021 quarter of £354,000 (2020: £nil).
14. Cash and cash equivalents
As at 31 March 2021 the Group had
£12.2 million (2020: £33.1 million) in cash and none of this amount
is held with Canada Life (2020: £22.7 million).
15. Issued capital and reserves
Stated Capital
The share capital of the Company is represented by an unlimited
number of Ordinary Shares of no par value. As at the date of this
Report, the Company has 565,664,749 ordinary shares in issue (2020:
565,664,749) of which 74,246,108 Ordinary shares are held in
treasury (2020: 47,151,340). The total number of voting rights of
the Company was 491,418,641 (2020: 518,513,409) at the financial
year end.
Treasury capital
74,246,108 (2020: 47,151,340) Ordinary Shares, which represent
13.1% (2020: 8.3%) of the Company’s total issued share capital, are
held in treasury.
Revenue reserve
This reserve represents an accumulated amount of the Group's
prior earnings net of dividends.
16. Interest-bearing loans and
borrowings
This note provides information about the contractual terms of
the Group’s interest-bearing loans and borrowings. For more
information about the Group’s exposure to interest rate risk, see
note 19.
|
|
31/03/2021 |
31/03/2020 |
|
|
|
£000 |
|
£000 |
Non-current
liabilities |
|
|
|
|
|
Loan facility |
|
|
154,085 |
|
129,585 |
Unamortised
arrangement fees |
|
|
(715) |
|
(918) |
|
|
|
153,370 |
|
128,667 |
The Group has in place a £129.6 million loan facility with
Canada Life. This has been in place since 16
April 2013 and has been refinanced several times, most
recently in October 2019. As part of
this most recent refinancing, a break fee of £25.8 million was paid
and all previously unamortised finance costs of £1.6 million were
written off.
The loan is split in to two equal tranches of £64.8 million as
follows:
– Facility A matures in
October 2032 and attracts an interest
rate of 2.36%
– Facility B matures in
October 2039 and attracts an interest
rate of 2.62%
The Company also has in place a revolving credit facility
(‘RCF’) with Royal Bank of Scotland. In January
2019 the RCF limit was increased from £32.5 million to £52.5
million. As at 31 March 2021 there
was a balance of £24.5 million drawn (2020: £nil). This facility
expires on 3 July 2023.
The interest rate is based on the Loan to Value ratio as set out
below:
– LIBOR + 1.60% if the Loan
to Value is less than or equal to 60%; and
– LIBOR + 1.85% if the Loan
to Value is greater than 60%
During both the current and prior year, the Loan to Value has
remained less than 60%. Since this loan has variable interest, an
interest rate cap for £32.5 million of the loan was entered into
and this comes in to effect if GBP 3
month LIBOR reaches 1.5%. As at the reporting date GBP 3 month LIBOR has not reached 1.5%.
The Canada Life facility has a first charge security over all
the property assets in the ring-fenced Security Pool (the ‘Security
Pool’) which at 31 March 2021
contained properties valued at £273.6 million (2020: £262.8
million). Various restraints apply during the term of the loan
although the facility has been designed to provide significant
operational flexibility.
The RBS facility has a first charge security over all the
property assets held in SREIT No.2 Limited which at 31 March 2021 contained properties valued at
£125.9 million (2020: £105.3 million).
The principal covenants for Canada Life and RBS are that the
loan should not comprise more than 65% of the value of the assets
in the Security Pool nor should estimated rental and other income
arising from assets in the Security Pool, calculated on any
interest payment date and one year projected from any interest
payment date, comprise less than 185% of the interest payments.
As at the Interest Payment Date, the Canada Life interest cover,
calculated in accordance with the ICR covenant was 562% (2020:
548%) and the forward-looking interest cover was 423% (2020: 436%),
with the Loan to Value ratio of 47.4% (47.4% net of all cash)
(2020: 49.3%, 40.7% net of all cash).
As at the Interest Payment Date, the RBS interest cover,
calculated in accordance with the ICR covenant was 1,151% (2020:
2,135%) and the forward-looking interest cover was 864% (2020:
1,712%), with the Loan to Value ratio of 19.5% (2020: 0%).
Please see a reconciliation of financing movements for the year
below split in to cash and non cash items:
|
|
31/03/2021
£000 |
Loan balance
brought forward |
|
128,667 |
Drawdown on RBS RCF
(cash) |
|
37,000 |
Repayment of RBC RCF
(cash) |
|
(12,500) |
Movement in fair
value |
|
203 |
Loan balance carried
forward |
|
153,370 |
17. Trade and other payables
|
|
31/03/2021
£000 |
31/03/2020
£000 |
Deferred income |
|
3,701* |
3,885 |
Rental deposits |
|
1,448 |
1,166 |
Interest payable |
|
780 |
728 |
Other trade payables
and accruals |
|
1,968 |
865 |
|
|
7,897 |
6,644 |
*As per Note 1 this balance includes a bad debt adjustment
relating to rent demanded at the end March for the April to June
quarter of £354k
18. NAV per Ordinary Share and share
buyback
On 8 September 2020 the Company
announced that it was commencing a share buyback programme. From
8 September 2020 to 31 March 2021 the Company purchased a sum of
27,094,768 shares for a sum of £9.52 million and at an average
price of 35 pence per share.
As a consequence of the buyback the number of ordinary shares in
issue fell from 518,513,409 to 491,418,641 during the reporting
period.
The NAV per Ordinary Share is based on the net assets of
£296,844,000 (2020: £309,806,000) and 491,418,641 (2020:
518,513,409) Ordinary Shares in issue at the reporting date.
19. Financial instruments, properties
and associated risks
Financial risk factors
The Group holds cash and liquid resources as well as having
debtors and creditors that arise directly from its operations. The
Group uses interest rate contracts when required to limit exposure
to interest rate risks, but does not have any other derivative
instruments.
The main risks arising from the Group’s financial instruments
and properties are market price risk, credit risk, liquidity risk
and interest rate risk. The Group has no exposure to foreign
currency exchange risk. The Board regularly reviews and agrees
policies for managing each of these risks and these are summarised
below:
Market price risk
Rental income and the market value for properties are generally
affected by overall conditions in the economy, such as changes in
gross domestic product, employment trends, inflation and changes in
interest rates. Changes in gross domestic product may also impact
employment levels, which in turn may impact the demand for
premises. Furthermore, movements in interest rates may also affect
the cost of financing for real estate companies. Both rental income
and property values may also be affected by other factors specific
to the real estate market, such as competition from other property
owners, the perceptions of prospective tenants of the
attractiveness, convenience and safety of properties, the inability
to collect rents because of bankruptcy or the insolvency of
tenants, the periodic need to renovate, repair and re-lease space
and the costs thereof, the costs of maintenance and insurance, and
increased operating costs.
The Directors monitor the market value of investment properties
by having independent valuations carried out quarterly by a firm of
independent chartered surveyors. Note 11 sets out the sensitivity
analysis on the market price risk. Concentration risk, based on
industry and geography, is set out in the tables on pages 20 and
21. Included in market price risk is interest rate risk which is
discussed further below.
Credit risk
Credit risk is the risk that an issuer or counterparty will be
unable or unwilling to meet a commitment that it has entered into
with the Group. In the event of default by an occupational tenant,
the Group will suffer a rental income shortfall and incur
additional costs, including legal expenses, in maintaining,
insuring and re-letting the property. The Investment Manager
reviews reports prepared by Dun & Bradstreet, or other sources,
to assess the credit quality of the Group’s tenants and aims to
ensure there is no excessive concentration of risk and that the
impact of any default by a tenant is minimised.
In respect of credit risk arising from other financial assets,
which comprise cash and cash equivalents, exposure to credit risk
arises from default of the counterparty with a maximum exposure
equal to the carrying amounts of these instruments. In order to
mitigate such risks, cash is maintained with major international
financial institutions with high quality credit ratings. During the
year, and at the reporting date, the Group maintained a
relationship with branches and subsidiaries of HSBC. HSBC has a
Credit Rating of AA negative (provided by Standard and Poor).
The maximum exposure to credit risk for rent receivables at the
reporting date by type of sector was:
|
31/03/2021
Carrying amount
£000 |
31/03/2020
Carrying amount
£000 |
Office |
545 |
468 |
Industrial |
1,916 |
973 |
Retail |
3,100 |
1,443 |
|
5,561* |
2,884* |
*Note that this is the gross rental debtors, this is shown in
note 13 as £4,094k (2020: £2,365k) which is the above figure
net of bad debt provision of £1,113k (2020: £519k) and deferred
income adjustment of £354k (2020: £nil) as per Note 1 significant
estimates and judgements.
Rent receivables which are past their due date were:
|
31/03/2021
Carrying amount
£000 |
31/03/2020
Carrying amount
£000 |
0-30 days |
2,952 |
2,490 |
31-60 days |
77 |
92 |
61-90 days |
201 |
38 |
91 days plus |
2,331 |
64 |
|
5,561* |
2,884* |
*Note that this is the gross rental debtors, this is shown in
note 13 as £4,094k (2020: £2,365k) which is the above figure
net of bad debt provision of £1,113k (2020: £519k) and deferred
income adjustment of £354k (2020: £nil) as per Note 1 significant
estimates and judgements.
Management has considered rental debtors on a quarterly basis
and made provisions where it has been deemed that these amounts are
unrecoverable. As at 31 March 2021
total provisions of £1.1m were recognised and rental debtors are
shown net of this provision in the balance sheet.
On initial recognition the Group calculates the expected credit
loss for debtors based on the lifetime expected credit losses under
the IFRS 9 simplified approach. Management consider aged debtors’
analyses, the strength of tenant covenants, macroeconomic factors
and any rental deposits held when considering this.
Liquidity risk
Liquidity risk is the risk that the Group will encounter
difficulties in meeting obligations associated with its financial
obligations.
The Group’s investments comprise UK commercial property.
Property and property-related assets are inherently difficult
to value due to the individual nature of each property. As a
result, valuations are subject to substantial uncertainty.
There is no assurance that the estimates resulting from the
valuation process will reflect the actual sale price even where
such sales occur shortly after the valuation date. Investments in
property are relatively illiquid. However, the Group has
tried to mitigate this risk by investing in properties that it
considers to be good quality.
In certain circumstances, the terms of the Group’s debt
facilities entitle the lender to require early repayment and in
such circumstances the Group’s ability to maintain dividend levels
and the net asset value could be adversely affected. The Investment
Manager prepares cash flows on a rolling basis to ensure the Group
can meet future liabilities as and when they fall due.
The following table indicates the maturity analysis of the
financial liabilities.
As at 31 March 2021 |
Carrying
amount
£000 |
Expected
cash flows
£000 |
6
mths
or less
£000 |
6 mths –
2 years
£000 |
2–5 years
£000 |
More
than 5 years
£000 |
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing loans and
borrowings and interest |
153,370 |
204,800 |
1,813 |
5,438 |
35,377* |
162,173 |
Leasehold liability |
1,988 |
10,717 |
46 |
139 |
278 |
10,254 |
Trade and other payables |
3,416 |
3,416 |
1,968 |
- |
- |
1,448 |
Total financial
liabilities |
158,774 |
218,934 |
3,827 |
5,577 |
35,655 |
173,875 |
*Please note that this assumes that the £24.5 million facility is
repaid in 2023. |
|
|
|
|
|
|
As at 31 March 2020 |
Carrying
amount
£000 |
Expected
cash flows
£000 |
6
mths
or less
£000 |
6 mths –
2 years
£000 |
2–5 years
£000 |
More
than 5 years
£000 |
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing loans and
borrowings and interest |
129,395 |
181,533 |
1,614 |
4,840 |
9,680 |
165,399 |
Leasehold liability |
2,416 |
13,442 |
57 |
173 |
346 |
12,866 |
Trade and other payables |
2,031 |
2,031 |
865 |
- |
- |
1,166 |
Total financial
liabilities |
133,842 |
197,006 |
2,536 |
5,013 |
10,026 |
179,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate risk
Exposure to market risk for changes in interest rates relates
primarily to the Group’s long-term debt obligations and to interest
earned on cash balances. As interest on the Group’s long-term debt
obligations is payable on a fixed-rate basis the Group is not
exposed to interest rate risk in relation to this loan facility.
As at 31 March 2021 the fair
value of the Group’s £129.6 million loan with Canada Life was
£128.4 million (2020: £131.1 million).
The RBS revolving credit facility is a low margin flexible
source of funding with a margin of 1.6% above 3 month LIBOR and it
is considered by management that the carrying value is equal to
fair value (sum of £24.5m drawn as at year end).
A 1% increase or decrease in short-term interest rates would
increase or decrease the annual income and equity by £122,000 based
on the cash balance as at 31 March
2021.
Fair values
The fair values of financial assets and liabilities are not
materially different from their carrying values, unless disclosed
below, in the financial statements.
The fair value hierarchy levels are as follows:
– Level 1 – quoted prices
(unadjusted) in active markets for identical assets and
liabilities;
– Level 2 – inputs other
than quoted prices included within level 1 that are observable for
the asset or liability, either directly (i.e. as prices) or
indirectly (i.e. derived from prices); and
– Level 3 – inputs for the
assets or liability that are not based on observable market
data
(unobservable inputs).
There have been no transfers between Levels 1, 2 and 3 during
the year (2020: none).
The following summarises the main
methods and assumptions used in estimating the fair values of
financial instruments and investment property.
Investment property – level 3
Fair value is based on valuations provided by an independent
firm of chartered surveyors and registered appraisers. These values
were determined after having taken into consideration recent market
transactions for similar properties in similar locations to the
investment properties held by the Group. The fair value hierarchy
of investment property is level 3. See Note 11 for further
details.
Interest-bearing loans and borrowings
– level 2
Fair values are based on the present value of future cash flows
discounted at a market rate of interest. Issue costs are amortised
over the period of the borrowings. As at 31
March 2021, the fair value of the Group’s £129.6 million
loan with Canada Life was £128.4 million (2020: £131.1
million).
Capital management
The Board’s policy is to maintain a strong capital base to
maintain investor, creditor and market confidence and to sustain
future development of the business. The objective is to ensure that
it will continue as a going concern and to maximise the return to
its equity shareholders through an appropriate level of gearing.
The Company's capital management process ensures it meets its
financial covenants in its borrowing arrangements. Breaches in
meeting the financial covenants could permit the lenders to
immediately accelerate the repayment of loans and borrowings. The
Company monitors as part of its quarterly board meetings that it
will adhere to specific leverage, interest cover and rental cover
ratios. There have been no breaches in the financial covenants of
any loans and borrowings during the financial year.
The Company’s debt and capital
structure comprises the following:
|
|
31/03/2021
£000 |
31/03/2020
£000 |
Debt |
|
|
|
Fixed-rate loan
facility |
|
129,585 |
129,585 |
Floating rate loan
facility * |
|
24,500 |
- |
|
|
154,085 |
129,585 |
Equity |
|
|
|
Called-up share
capital |
|
183,123 |
192,638 |
Reserves |
|
113,721 |
117,168 |
|
|
296,844 |
309,806 |
Total debt and
equity |
|
450,929 |
439,391 |
There were no changes in the Group’s approach to capital management
during the year.
* This amount refers to the amount drawn. The total facility as
at 31 March 2021 was £52.5m (2020:
£52.5m).
20. Operating leases
The Group leases out its investment property under operating
leases. At 31 March 2021 the future
minimum lease receipts under non-cancellable leases are as
follows:
|
31/03/2021
£000 |
31/03/2020
£000 |
Less than one
year |
24,623 |
20,916 |
Between one and five
years |
69,917 |
62,642 |
More than five
years |
58,123 |
61,871 |
|
152,663 |
145,429 |
The total above comprises the total contracted rent receivable as
at 31 March 2021.
The Group has entered into leases on its property portfolio. The
commercial property leases typically have lease terms between 5 and
15 years and include clauses to enable periodic upward revision of
the rental charge according to prevailing market conditions. Some
leases contain options to break before the end of the lease
term.
21. List of Subsidiary and Joint
Venture Undertakings
The companies listed below are those which were part of the
Group at 31 March 2021 and
31 March 2020:
Undertaking |
Category |
Country of incorporation |
Ultimate ownership |
SREIT No.2 Ltd |
Subsidiary |
Guernsey |
100% |
SREIT Holding (No.2)
Ltd |
Subsidiary |
Guernsey |
100% |
SREIT Holding Company
Limited |
Subsidiary |
Guernsey |
100% |
SREIT Property
Ltd |
Subsidiary |
Guernsey |
100% |
SREIT (Portergate)
Ltd |
Subsidiary |
Guernsey |
100% |
SREIT (Victory)
Ltd |
Subsidiary |
Guernsey |
100% |
SREIT (Uxbridge)
Ltd |
Subsidiary |
Guernsey |
100% |
SREIT (City Tower)
Ltd |
Subsidiary |
Guernsey |
100% |
SREIT (Store) Ltd |
Subsidiary |
Guernsey |
100% |
SREIT (Bedford)
Ltd |
Subsidiary |
Guernsey |
100% |
SREIT Holding Company
(No.3) Limited |
Subsidiary |
Guernsey |
100% |
SREIT No.3 Finance
Limited |
Subsidiary |
Guernsey |
100% |
City Tower Unit
Trust |
Joint Venture |
Jersey |
25% |
Store Unit Trust |
Joint Venture |
Jersey |
50% |
The registered address for all 100% owned entities is the same
as for the group and can be found on page 130.
22. Related party transactions
Material agreements and transactions with the Investment Manager
are disclosed in note 3. Transactions with regard to joint ventures
are disclosed in note 12. Transactions with the directors are shown
in the directors’ remuneration report.
23. Capital commitments
As at 31 March 2021 the Group had
capital commitments of £3.2 million (2020: £6.0 million).
24. Post balance sheet events
Between the period of the 1 April and 12
April 2021, the Company purchased a further 338,340 shares
pursuant to its buyback programme, to be held in treasury, for a
sum of £136,000 at an average price of 40.3
pence per share.
As noted in the Chairman’s Statement, the Board and Investment
Manager have agreed a change to the Investment Manager’s fees which
will result in an initial saving of approximately £600,000 per
annum. This will take effect from 1 July
2021.
The current annual investment management fee is 1.1% of net
asset value (‘NAV’) and equates to an annualised fee, based on the
audited NAV as at 31 March 2021, of
£3.3 million per annum. The fee covers all of the appointed
services of the Investment Manager and there are standard
provisions for reimbursement of expenses. Additional fees can
be agreed for out of scope services on an ad hoc basis. The new fee
agreement includes a blended (not cliff edge), tiered fee structure
as follows:
NAV |
Management fee percentage per annum
of NAV |
<£500 million |
0.9% |
£500 million - £1 billion |
0.8% |
£1 billion+ |
0.7% |
Based on the most recent NAV at 31 March
2021, the impact of this fee reduction would be to reduce
the current annualised fee from £3.3 million to £2.7 million per
annum, a reduction of £600,000 per annum or 18%. In consideration
for agreeing the fee reduction, the notice period for non-fault
termination of the Investment Manager’s appointment will be
increased from nine to twelve months.
Other information (unaudited)
EPRA Performance Measures (unaudited)
As recommended by the European Public Real Estate Association,
EPRA performance measures are disclosed in the section below.
EPRA performance measures: summary
table
|
|
31/03/2021 |
31/03/2020 |
EPRA earnings |
|
£11,572,000 |
£12,729,000 |
EPRA earnings per
share |
|
2.3pps |
2.5pps |
EPRA Net Tangible Assets |
|
£296,844,000 |
£309,806,000 |
EPRA Net Tangible
Assets per share |
|
60.4pps |
59.7pps |
|
|
|
|
EPRA Net Disposal
Value |
|
£297,806,000 |
£308,253,000 |
EPRA Net Disposal
Value per share |
|
60.6pps |
59.4pps |
|
|
|
|
EPRA Net Initial
Yield |
|
5.4% |
5.3% |
EPRA “topped-up” Net
Initial Yield |
|
5.7% |
5.6% |
|
|
|
|
EPRA vacancy rate |
|
4.8% |
7.3% |
EPRA cost ratios -
including direct vacancy costs |
|
34.6% |
32.2% |
Adjusted EPRA cost
ratios - including direct vacancy costs |
|
26.8% |
27.2% |
EPRA cost ratios -
excluding direct vacancy costs |
|
34.6% |
32.2% |
Adjusted EPRA cost
ratios - excluding direct vacancy costs |
|
26.8% |
27.2% |
a. EPRA
earnings and EPS
Total comprehensive income or loss excluding realised and
unrealised gains and losses on investment property, share of profit
or loss on joint venture investments and changes in the fair value
of financial instruments, divided by the weighted average number of
shares.
|
|
31/03/2021 |
31/03/2020 |
|
|
£000 |
£000 |
IFRS profit/(loss)
after tax |
|
4,542 |
(32,459) |
Adjustments to
calculate EPRA Earnings: |
|
|
|
Profit on disposal of
investment property |
|
(121) |
(1,897) |
Net valuation loss on
investment property |
|
8,286 |
17,364 |
Share of valuation
(gain)/loss in associates and joint ventures |
|
(1,135) |
2,357 |
Refinancing costs |
|
- |
27,364 |
EPRA
earnings |
|
11,572 |
12,729 |
|
|
|
|
Weighted average
number of Ordinary shares |
|
508,699,880 |
518,513,409 |
IFRS
earnings/(loss) per share (pence) |
|
0.9 |
(6.3) |
EPRA earnings per
share (pence) |
|
2.3 |
2.5 |
b.
EPRA Net Tangible Assets per share
The IFRS equity attributable to shareholders adjusted for items
including deferred tax, the fair value of financial instruments and
intangible assets.
|
|
31/03/2021 |
31/03/2020 |
|
|
£000 |
£000 |
IFRS NAV per financial
statements |
|
296,844 |
309,806 |
EPRA Net Tangible
Assets |
|
296,844 |
309,806 |
|
|
|
|
Shares in issue at the
end of the year |
|
491,418,641 |
518,513,409 |
IFRS NAV per share
(pence) |
|
60.4 |
59.7 |
EPRA Net Tangible
Assets per share (pence) |
|
60.4 |
59.7 |
c.
EPRA Net Disposal Value per share
The IFRS equity attributable to shareholders adjusted for items
including goodwill as a result of deferred tax, intangibles and the
fair value of fixed interest rate debt.
|
|
31/03/2021 |
31/03/20 |
|
|
£000 |
£000 |
IFRS NAV per the
Financial Statements |
|
296,844 |
309,806 |
Adjustments to
calculate EPRA Net Disposal Value: |
|
|
|
The fair value of fixed
interest rate debt |
|
962 |
(1,553) |
EPRA Net Disposal
Value |
|
297,806 |
308,253 |
|
|
|
|
EPRA Net Disposal
Value per share (pence) |
|
60.6 |
59.4 |
d. EPRA
Net Initial Yield
Annualised rental income based on the cash rents passing at the
Balance Sheet date, less non-recoverable property operating
expenses, divided by the grossed-up market value of the complete
property portfolio. The EPRA “topped up” NIY is the EPRA NIY
adjusted for unexpired lease incentives.
|
|
31/03/2021 |
31/03/2020 |
|
|
£000 |
£000 |
Investment property –
wholly-owned |
|
359,300 |
328,300 |
Investment property –
share of joint ventures and funds |
|
79,538 |
77,888 |
Complete property
portfolio |
|
438,838 |
406,188 |
Allowance for
estimated purchasers’ costs |
|
25,453 |
23,559 |
Gross up completed
property portfolio valuation |
|
464,291 |
429,747 |
|
|
|
|
Annualised cash
passing rental income |
|
28,327 |
24,878 |
Property
outgoings |
|
(3,041) |
(2,251) |
Annualised net
rents |
|
25,286 |
22,627 |
Notional rent
expiration of rent free periods(1) |
|
1,165 |
1,518 |
Topped-up net
annualised rent |
|
26,451 |
24,145 |
|
|
|
|
EPRA NIY |
|
5.4% |
5.3% |
EPRA “topped-up”
NIY |
|
5.7% |
5.6% |
(1) The period over which rent free periods expire is 2 years
(2020: 2 years).
e.
EPRA cost ratios
Administrative and operating costs as a percentage of gross rental
income calculated including and excluding direct vacancy costs.
|
|
31/03/2021 |
31/03/2020 |
|
|
£000 |
£000 |
Administrative/property operating
expense line per IFRS income statement |
|
8,340 |
8,059 |
Ground rent costs |
|
(110) |
(138) |
EPRA Costs (including direct
vacancy costs) |
|
8,230 |
7,921 |
Direct vacancy costs |
|
(1,844) |
(1,232) |
EPRA Costs (excluding direct
vacancy costs) |
|
6,386 |
6,689 |
Company adjustments |
|
- |
- |
Adjusted EPRA Costs (including
company adjustment costs) |
|
8,230 |
7,921 |
Direct vacancy costs |
|
(1,844) |
(1,232) |
Adjusted EPRA Costs (excluding
direct vacancy costs) |
|
6,386 |
6,689 |
|
|
|
|
Gross Rental Income less ground rent
costs |
|
21,349 |
22,022 |
Share of Joint Ventures income less
ground rent costs |
|
2,452 |
2,567 |
Gross Rental Income |
|
23,801 |
24,589 |
|
|
|
|
EPRA cost ratio (including direct
vacancy costs) |
|
34.6% |
32.2% |
EPRA cost ratio (excluding direct
vacancy costs) |
|
26.8% |
27.2% |
EPRA vacancy rate |
|
4.8% |
7.3% |
Adjusted EPRA cost ratio (including
company adjustment costs) |
|
34.6% |
32.2% |
Adjusted EPRA cost ratio (excluding
direct vacancy costs) |
|
26.8% |
27.2% |
Alternative Performance Measures (unaudited)
The Company uses the following Alternative Performance Measures
(“APMs”) in its annual report, financial statements and notes to
the financial statements. The APMs are reconciled to the financial
statements through the narrative below. The Board believes that
each of the APMs provides additional useful information to the
shareholders in order to assess the Company’s performance.
Dividend Cover – the ratio of EPRA Earnings (page 101) to
dividends paid (note 10) in the period.
Dividend Yield - the dividends paid, expressed as a
percentage relative to its share price.
EPRA Earnings - the earnings excluding all capital
components not relevant to the underlying net income performance of
the portfolio, such as the realised and unrealised fair value gains
or losses on investment properties. See page 101 for a
reconciliation of this figure.
EPRA Net Tangible Assets – the IFRS equity attributable
to shareholders adjusted for items including deferred tax, the fair
value of financial instruments and intangible assets.
Gross LTV - the value of the external loans unadjusted
for unamortised arrangement costs (note 16) expressed as a
percentage of the market value of property investments as at the
Balance Sheet date. The market value of property investments
includes joint venture investments and are as per external
valuations and have not been adjusted for IFRS lease incentive
debtors nor the fair value of the head lease at Luton.
LTV net of cash – the value of the external loans
unadjusted for unamortised arrangement costs (note 16) less cash
held (note 14) expressed as a percentage of the market value of the
property investments as at the Balance Sheet date. The market value
of property investments includes joint venture investments and are
as per external valuations and have not been adjusted for IFRS
lease incentive debtors or the fair value of the head lease at
Luton.
Ongoing charges including Fund expenses – all operating
costs expected to be regularly incurred and that are payable by the
Company expressed as a percentage of the average quarterly NAVs of
the Company for the financial period. No capital costs, including
capital expenditure or acquisition/disposal fees, are included as
costs.
Ongoing charges including Fund and property expenses -
all operating costs expected to be regularly incurred and that are
payable by the Company expressed as a percentage of the average
quarterly NAVs of the Company for the financial period. Any capital
costs, including capital expenditure and acquisition/disposal fees,
are excluded as costs, as well as interest costs and any other
costs considered to be non-recurring. In the current period the
material non-recurring costs include non-cash bad debt expenses of
£0.8m.
Share discount/premium – the share price of an
Investment Trust is derived from buyers and sellers trading their
shares on the stock market. This price is not identical to the NAV
per share of the underlying assets less liabilities of the Company.
If the share price is lower than the NAV per share, the shares are
trading at a discount. Shares trading above the NAV per share are
said to be at a premium. The discount/premium is calculated as
the variance between the share price as at the Balance Sheet date
and the NAV per share (page 77) expressed as a percentage.
NAV total return – the return to shareholders calculated
on a per share basis by adding dividends paid (note 10) in the
period on a time-weighted basis to the increase or decrease in the
NAV per share (page 77).
AIFMD Disclosures (unaudited)
The Alternative Investment Fund
Managers Directive (‘AIFMD’) remuneration and leverage disclosures
for Schroder Real Estate Investment Manager (‘SREIM’) for the year
to 31 December 2020
Remuneration disclosures
These disclosures form part of the non-audited section of this
Annual Report and Consolidated Financial Statements and should be
read in conjunction with the Schroders plc Remuneration Report on
pages 75 to 102 of the 2020 Annual Report & Accounts (available
on the Group’s website
-https://www.schroders.com/en/investor-relations/results-and-reports/annual-report-and-accounts-2020/),
which provides more information on the activities of our
Remuneration Committee and our remuneration principles and
policies.
The AIF Material Risk Takers (‘AIF MRTs’) of SREIM are
individuals whose roles within the Schroders Group can materially
affect the risk of SREIM or any AIF fund that it manages. These
roles are identified in line with the requirements of the AIFM
Directive and guidance issued by the European Securities and
Markets Authority.
The Remuneration Committee of Schroders plc has established a
remuneration policy to ensure the requirements of the AIFM
Directive are met for all AIF MRTs. The Remuneration Committee and
the Board of Schroders plc review remuneration strategy at least
annually. The directors of SREIM are responsible for the adoption
of the remuneration policy, for reviewing its general principles at
least annually, for overseeing its implementation and for ensuring
compliance with relevant local legislation and regulation. During
2020 the Remuneration Policy was reviewed to ensure compliance with
the UCITS/AIFMD remuneration requirements and no significant
changes were made.
The implementation of the remuneration policy is, at least
annually, subject to independent internal review for compliance
with the policies and procedures for remuneration adopted by the
Board of SREIM and the Remuneration Committee. The most recent
review found no fundamental issues but resulted in a range of more
minor recommendations, principally improvements to process and
policy documentation.
The total spend on remuneration is determined based on a profit
share ratio, measuring variable remuneration charge against
pre-bonus profit, and from a total compensation ratio, measuring
total remuneration expense against net income. This ensures that
the interests of employees are aligned with Schroders’ financial
performance. In determining the remuneration spend each year, the
underlying strength and sustainability of the business is taken
into account, along with reports on risk, legal, compliance and
internal audit matters from the heads of those areas.
The remuneration data that follows reflects amounts paid in
respect of performance during 2020.
· The total amount of remuneration
paid by SREIM to its staff is nil as SREIM has no employees.
Employees of SREIM or other Schroders Group entities who serve as
Directors of SREIM receive no additional fees in respect of their
role on the Board of SREIM.
· The following disclosures relate
to AIF MRTs of SREIM. Those AIF MRTs were employed by and provided
services to other Schroders group companies and clients. In the
interests of transparency, the aggregate remuneration figures that
follow reflect the full remuneration for each SREIM AIF MRT. The
aggregate total remuneration paid to the 76 AIF MRTs of SREIM in
respect of the financial year ended 31
December 2020 is £56.30 million, of which £36.33 million was
paid to senior management, £14.75 million was paid to MRTs deemed
to be taking risk on behalf of SREIM or the AIF funds that it
manages and £5.22 million was paid to other AIF MRTs including
control function MRTs.
For additional qualitative information on remuneration policies
and practices see www.schroders.com/rem-disclosures.
Leverage disclosure
In accordance with AIFMD the Company is required to make
available to investors information in relation to leverage.
Under AIFMD, leverage is any method by which the exposure of the
Company is increased through the borrowing of cash or securities,
leverage embedded in derivative positions or by another means. It
is expressed as a ratio between the total exposure of the Company
and its net asset value and is calculated in accordance with the
“Gross method” and the “Commitment method” as described in the
AIFMD. The Gross method represents the aggregate of all the
Company’s exposures other than cash balances held in the base
currency, while the Commitment method, which is calculated on a
similar basis, may also take into account cash and cash
equivalents, netting and hedging arrangements, as applicable.
The Investment Manager has set the expected maximum leverage
percentages for the Company and calculated the actual leverages as
at 31 December 2020 as shown below
(the Company calculates and externally reports its leverage one
quarter in arrears):
|
Maximum limit set |
Actual as at
31.12.2020 |
Gross leverage |
195 |
152 |
Commitment
leverage |
220 |
160 |
There have been no changes to the maximum levels of leverage
employed by the Company during the financial year nor any breaches
of the maximum levels during the financial reporting period.
Sustainability Performance Measures (Environmental)
(unaudited)
SREIT reports sustainability information in accordance with EPRA
Best Practice Recommendations on Sustainability Reporting (sBPR)
2017, 3rd Edition for the 12 months, 1st January 2020 – 31st
December 2020, presented with comparison against 2019. As
permitted by the EPRA Sustainability Reporting Guidelines,
environmental data has been developed and presented in line with
the Global Real Estate Sustainability Benchmark (GRESB).
The reporting boundary has been scoped to where SREIT has
operational control being managed properties where SREIT is
responsible for payment of utility invoices and/or arrangement of
waste disposal contracts. ‘Operational control’ has been selected
as the reporting boundary (as opposed to ‘financial control’ or
‘equity share’) as this reflects the portion of the portfolio where
the Company can influence operational procedures and, ultimately,
sustainability performance. The operational control approach is the
most commonly applied within the industry.
As at 31 December 2020, there were
25 managed properties within the portfolio of which two properties
were purchased towards the end of the reporting period and so have
not been captured in the reported data. This compares to 22 managed
properties in the portfolio during 2019 which have been included in
the reporting.
Where data coverage is less than 100%, a supporting explanation
is provided within the data notes immediately below the relevant
table. Energy and water consumption data is reported according to
automatic meter reads, manual meter reads or invoice estimates.
Where required, missing consumption data has been estimated by
prorating data from other periods using recognised techniques. The
proportion of data that is estimated is presented in the footnotes
to the data tables. Historic consumption data has been restated
where more complete and/or accurate records have become
available.
SREIT does not contain any managed assets that consume energy
from district heating or cooling sources. Therefore, the EPRA sBPR
DH&C-Abs and DH&C-LfL indicators are not applicable and not
presented in this report. Furthermore, the Company does not have
any direct employees; it is served by the employees of the
Investment Manager (Schroder Real Estate Investment Management).
Accordingly, the EPRA Overarching Recommendation for companies to
report on the environmental impact of their own offices is not
relevant/material and not presented in this report.
There have been significant reductions in consumption due to the
COVID-19 pandemic which has affected the majority of the 2020
reporting year. The reductions are due to changes in occupancy and
building operations during the COVID-19 period.
This report has been prepared by EVORA Global, retained
sustainability and energy management consultants to Schroder Real
Estate Investment Management. The Sustainability Performance
Measures have been assured in accordance with AA1000 to provide a
Type 2 Moderate Assurance unqualified audit of the sustainability
content located within the SREIT annual report for the year ending
31st December 2020. The
full assurance statement can be found on the following link, please
see the Sustainability Page for full assurance statement:
https://www.schroders.com/en/uk/adviser/fund-centre/funds-in-focus/investment-trusts/schroders-investment-trusts/schroder-real-estate-investment-trust/sustainability/
Total energy consumption (Elec-Abs; Fuels-Abs)
The table below sets out total landlord obtained energy
consumption from the Company’s managed portfolio by sector:
|
Total electricity consumption
(kWh) |
Total fuel consumption
(kWh) |
Energy Intensity
(kWh/m2) |
Sector |
2019 |
2020 |
2019 |
2020 |
2019 |
2020 |
|
Industrial, Distribution
Warehouse |
87,758 |
134,716 |
105 |
21,021 |
0.8 |
1.4 |
|
Coverage |
5/5 |
6/6 |
2/2 |
4/4 |
5/5 |
6/6 |
|
Leisure |
268,140 |
218,056 |
72,697 |
|
24.6 |
15.7 |
|
Coverage |
1/1 |
1/1 |
1/1 |
|
1/1 |
1/1 |
|
Mixed use,
Office/Retail |
285,074 |
279,179 |
|
|
121.7 |
119.2 |
|
Coverage |
1/1 |
1/1 |
|
|
1/1 |
1/1 |
|
Mixed use, Other |
2,528,805 |
1,795,726 |
1,234 |
|
109.8 |
77.9 |
|
Coverage |
2/2 |
2/2 |
1/1 |
|
2/2 |
2/2 |
|
Office, Low-Rise |
2,106,939 |
1,699,887 |
1,819,356 |
1,514,969 |
135.3 |
110.8 |
|
Coverage |
10/10 |
10/10 |
9/9 |
9/9 |
10/10 |
10/10 |
|
Office, Mid-Rise |
308,871 |
279,792 |
431,247 |
378,210 |
184.0 |
163.6 |
|
Coverage |
1/1 |
1/1 |
1/1 |
1/1 |
1/1 |
1/1 |
|
Retail High
Street |
17,618 |
16,795 |
|
|
9.2 |
8.8 |
|
Coverage |
1/1 |
1/1 |
|
|
1/1 |
1/1 |
|
Retail Warehouse |
39,377 |
63,987 |
|
23,955 |
3.4 |
7.7 |
|
Coverage |
1/1 |
1/1 |
|
1/1 |
1/1 |
1/1 |
|
Sub-Total |
5,642,582 |
4,488,140 |
2,324,640 |
1,938,154 |
|
|
|
Coverage |
22/22 |
23/23 |
14/14 |
15/15 |
|
|
|
Total (Electricity and
fuel) |
7,967,222 |
6,426,294 |
|
|
|
|
|
Coverage |
22/22 |
23/23 |
|
|
|
|
|
Renewable electricity
% |
98% |
97% |
|
|
|
|
|
Coverage |
22/22 |
23/23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
– Consumption data relates
to the managed portfolio only:
– Industrial, Distribution
Warehouse: Tenant Space and Outdoor/Exterior Area/Parking;
– Leisure: Common Areas,
Tenant Space and Outdoor/Exterior Area/Parking;
– Mixed-use, Office/Retail:
Whole Building;
– Mixed-use, Other: Whole
Building, Common Areas, Tenant Space;
– Office, Low-Rise: Whole
Building, Shared Services, Common Areas, Tenant Space and
Outdoor/Exterior/Parking;
– Office, Mid-Rise Office:
Shared Services;
– Retail High Street: Common
Areas; and
– Retail Warehouse: Tenant
Space and Outdoor/Exterior Area/Parking
– Energy procured directly
by tenants is not reported.
– Estimation: 0% electricity
and gas data have been estimated through prorating.
– Where appropriate (for
relevant assets) consumption data has been adjusted to reflect the
Company’s share of asset ownership.
– Coverage relates to the
number of managed assets for which data is reported.
– Renewable electricity (%)
is calculated according to the attributes of energy supply
contracts as at 31 December 2020 and
only reflects renewable electricity procured under a 100% ‘green
tariff’ (i.e. where generation is from 100% renewable sources). The
renewables percentage of standard (non-‘green tariff’) energy
supplies are not currently known and therefore has not been
included within this number. As far as we know, no renewable fuel
was consumed during the reporting period and therefore a percentage
renewable fuel figure is not presented here.
– All energy was procured
from a third-party supplier. No ‘self-generated’ renewable energy
was consumed during the reporting period and is therefore not
presented here.
– Intensity: An energy
intensity kWh/m2 is reported for assets. The numerator
is landlord-managed energy consumption and the denominator is net
lettable floor area (m2). For Retail High Street, common
parts’ energy consumption is divided by common parts area
(m2).
– Please see the Objectives
and Targets section in the CSR Report page 32 for narrative
commentary on historical trends and programmes in place to improve
performance.
Like-for-like energy consumption (Elec-LfL; Fuels-LfL;
Energy-Int)
The table below sets out the like-for-like landlord-obtained
energy consumption from the Company’s managed portfolio by
sector.
|
Total electricity consumption
(kWh) |
Total fuel consumption
(kWh) |
Energy Intensity
(kWh/m2) |
Sector |
2019 |
2020 |
%
Change |
2019 |
2020 |
% Change |
2019 |
2020 |
|
Mixed-use,
Office/Retail |
285,074 |
279,179 |
-2% |
|
|
|
121.7 |
119.2 |
|
Coverage |
1/1 |
1/1 |
|
|
|
|
|
1/1 |
|
Mixed-use, Other |
2,424,786 |
1,690,178 |
-30% |
|
|
|
169.5 |
118.2 |
|
Coverage |
1/1 |
1/1 |
|
|
|
|
|
1/1 |
|
Office, Low-Rise |
1,994,121 |
1,620,182 |
-19% |
1,758,557 |
1,477,145 |
-16% |
129.4 |
106.8 |
|
Coverage |
9/9 |
9/9 |
|
8/8 |
8/8 |
|
|
10/10 |
|
Office, Mid-Rise |
308,871 |
279,792 |
-9% |
431,247 |
378,210 |
-12% |
184.0 |
163.6 |
|
Coverage |
1/1 |
1/1 |
|
1/1 |
1/1 |
|
|
1/1 |
|
Retail, High
Street |
17,618 |
16,795 |
-5% |
|
|
|
9.2 |
8.8 |
|
Coverage |
1/1 |
1/1 |
|
|
|
|
|
1/1 |
|
Retail, Warehouse |
|
|
|
|
|
|
|
|
|
Coverage |
|
|
|
|
|
|
|
|
|
Sub-Total |
5,030,471 |
3,886,127 |
-23% |
2,189,805 |
1,855,355 |
-15% |
|
|
|
Coverage |
13/13 |
13/13 |
|
9/9 |
9/9 |
|
|
|
|
Total (Electricity and
fuel) |
7,220,275 |
5,741,482 |
-20% |
|
|
|
|
|
|
Coverage |
14/14 |
14/14 |
|
|
|
|
|
|
|
Renewable electricity
% |
100% |
100% |
|
|
|
|
|
|
|
Coverage |
14/14 |
14/14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
– Like-for-like excludes
assets that were purchased, sold, under refurbishment or subject to
a significant change in the scope of reported data during the two
years reported.
– Consumption data relates
to the managed portfolio only:
– Industrial, Distribution
Warehouse: Tenant Space and Outdoor/Exterior Area/Parking;
– Leisure: Common Areas,
Tenant Space and Outdoor/Exterior Area/Parking;
– Mixed use, Office/Retail:
Whole Building;
– Mixed use, Other: Whole
Building, Common Areas, Tenant Space;
– Office, Low-Rise: Whole
Building, Shared Services, Common Areas, Tenant Space and
Outdoor/Exterior/Parking;
– Office, Mid-Rise Office:
Shared Services;
– Retail High Street: Common
Areas; and
– Retail Warehouse: Tenant
Space and Outdoor/Exterior Area/Parking
– Estimation: 0% electricity
and gas data have been estimated through prorating.
– Where appropriate (for
relevant assets), consumption data has been adjusted to reflect the
Company’s share of ownership.
– Coverage relates to the
number of managed assets for which data is reported.
– Intensity: An energy
intensity kWh/m2 is reported for assets within the
like-for-like portfolio. The numerator is landlord-managed energy
consumption and the denominator is net lettable floor area
(m2). For Retail High Street, common parts energy
consumption is divided by the common parts area
(m2).
Refer to Objectives and Targets section in the CSR Report on
page 32 for narrative commentary on historical trends and
programmes in place to improve performance.
Greenhouse gas emissions (GHG-Dir-Abs; GHG-Indir-Abs;
GHG-Int)
The table below sets out the Company’s greenhouse gas emissions
by sector.
|
Absolute emissions
(tCO²e) |
Absolute intensity
(kg CO2e/m2) |
Like for like emissions
(tCO²e) |
Like for like intensity
(kg CO2e/m2) |
|
Sector |
2019 |
2020 |
2019 |
2020 |
2019 |
2020 |
Change |
2019 |
2020 |
|
Industrial,
Distribution Warehouse |
|
|
|
|
|
Scope 1 |
|
3.9 |
0.2 |
0.3 |
|
|
|
|
|
|
Scope 2 |
22.5 |
31.4 |
|
|
|
|
|
|
|
|
Coverage |
5/5 |
6/6 |
5/5 |
6/6 |
|
|
|
|
|
|
Leisure |
|
|
|
|
|
|
|
|
|
|
Scope 1 |
13.4 |
|
5.9 |
3.7 |
|
|
|
|
|
|
Scope 2 |
68.6 |
50.9 |
|
|
|
|
|
|
|
|
Coverage |
1/1 |
1/1 |
1/1 |
1/1 |
|
|
|
|
|
|
Mixed use, Office/Retail |
|
|
|
|
|
|
|
|
|
|
Scope 1 |
|
|
31.2 |
27.8 |
|
|
|
31.2 |
27.8 |
|
Scope 2 |
73.0 |
65.1 |
|
|
73.0 |
65.1 |
-11% |
|
|
|
Coverage |
1/1 |
1/1 |
1/1 |
1/1 |
1/1 |
1/1 |
|
1/1 |
|
Mixed use, Other |
|
|
|
|
|
|
|
|
|
|
Scope 1 |
0.2 |
|
28.1 |
18.2 |
|
|
|
43.4 |
27.6 |
|
Scope 2 |
647.4 |
419.0 |
|
|
620.7 |
394.3 |
-36% |
|
|
|
Coverage |
2/2 |
2/2 |
2/2 |
2/2 |
1/1 |
1/1 |
|
|
1/1 |
|
Office, Low-Rise |
|
|
|
|
|
|
|
|
|
|
Scope 1 |
334.8 |
278.8 |
30.1 |
23.3 |
323.6 |
271.8 |
-16% |
28.8 |
22.4 |
|
Scope 2 |
539.4 |
396.6 |
|
|
510.5 |
378.0 |
-26% |
|
|
|
Coverage |
10/10 |
10/10 |
10/10 |
10/10 |
10/10 |
10/10 |
|
|
10/10 |
|
Office, Mid-Rise |
|
|
|
|
|
|
|
|
|
|
Scope 1 |
79.3 |
69.6 |
39.4 |
33.5 |
79.3 |
69.6 |
-12% |
39.4 |
33.5 |
|
Scope 2 |
79.1 |
65.3 |
|
|
79.1 |
65.3 |
-17% |
|
Coverage |
1/1 |
1/1 |
1/1 |
1/1 |
1/1 |
1/1 |
|
|
1/1 |
|
Retail, High Street |
|
|
|
|
|
|
|
|
|
|
Scope 1 |
|
|
2.4 |
2.1 |
|
|
|
2.4 |
2.1 |
|
Scope 2 |
4.5 |
3.9 |
|
|
4.5 |
3.9 |
-13% |
|
|
|
Coverage |
1/1 |
1/1 |
1/1 |
1/1 |
1/1 |
1/1 |
|
|
1/1 |
|
Retail, Warehouse |
|
|
|
|
|
|
|
|
|
|
Scope 1 |
|
4.4 |
0.9 |
1.7 |
|
|
|
|
|
|
Scope 2 |
10.1 |
14.9 |
|
|
|
|
|
|
Coverage |
1/1 |
1/1 |
|
1/1 |
|
|
|
|
|
|
Total Scope 1 |
428 |
357 |
|
403 |
341 |
-15% |
|
|
|
Total Scope 2 |
1,445 |
1,047 |
|
|
1,288 |
907 |
-30% |
|
|
|
Total Scope 1 & 2 |
1,872 |
1,404 |
|
|
1,691 |
1,248 |
-26% |
|
|
|
Coverage |
22/22 |
23/23 |
|
|
14/14 |
14/14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
– Like-for-like excludes
assets that were purchased, sold, under refurbishment or subject to
a significant change in the scope of reported data during the two
years reported.
– Scope 1 GHG emissions
relate to the use of onsite natural gas.
– Scope 2 GHG emissions
relate to the use of electricity.
– The Company’s greenhouse
gas (GHG) inventory has been developed as follows:
– Fuels/electricity GHG
emissions factors taken from the UK government’s Greenhouse Gas
Reporting Factors for Company Reporting (2019 and 2020).
– GHG emissions from
electricity (Scope 2) are reported according to the
‘location-based’ approach.
– GHG emissions are
presented as tonnes of carbon dioxide equivalent (tCO²e)
and GHG intensity is presented as kilograms of carbon dioxide
equivalent (kgCO2e), where available greenhouse gas emissions
conversion factors allow.
– Emissions data relates to
the managed portfolio only:
– Industrial, Distribution
Warehouse: Tenant Space and Outdoor/Exterior Area/Parking
– Leisure: Common Areas,
Tenant Space and Outdoor/Exterior Area/Parking
– Mixed-use, Office/Retail:
Whole Building
– Mixed-use, Other: Whole
Building, Common Areas, Tenant Space
– Office, Low-Rise: Whole
Building, Shared Services, Common Areas, Tenant Space and
Outdoor/Exterior/Parking
– Office, Mid-Rise Office:
Shared Services
– Retail High Street: Common
Areas
– Retail Warehouse: Tenant
Space and Outdoor/Exterior Area/Parking
– Emissions associated with
energy procured directly by tenants is not reported.
– Estimation: 0% electricity
and gas data have been estimated through prorating.
– Where appropriate (for
relevant assets), emissions data has been adjusted to reflect the
Company’s share of asset ownership.
– Coverage relates to the
number of managed assets for which data is reported.
– Intensity: An intensity
kgCO2e/m2 is reported for absolute consumption and for
assets within the like-for-like portfolio. The numerator is
landlord-managed GHG emissions from energy consumption and the
denominator is net lettable floor area (m2). For Retail
High Street, GHG emissions from common parts energy consumption is
divided by common parts area (m2).
– Refer to the Objectives
and Targets Section in the CSR report on page 32 for the narrative
commentary on historical trends and programmes in place to improve
performance.
Water (Water-Abs; Water-LfL; Water-Int)
The table below sets out water consumption for assets managed by
the Company.
|
Absolute water (m³) |
Absolute intensity
(m³/m²) |
Like-for-like
water (m³) |
Like-for-like intensity
(m³/m²) |
Sector |
2019 |
2020 |
2019 |
2020 |
2019 |
2020 |
Change |
2019 |
2020 |
Leisure |
144 |
136 |
0.06 |
0.05 |
144 |
136 |
-6% |
0.06 |
0.05 |
Coverage |
1/1 |
1/1 |
1/1 |
1/1 |
1/1 |
1/1 |
|
|
1/1 |
Mixed use, Other |
5,644 |
4,280 |
0.30 |
0.30 |
5,644 |
4,280 |
-24% |
0.39 |
0.30 |
Coverage |
2/2 |
1/1 |
2/2 |
1/1 |
1/1 |
1/1 |
|
|
1/1 |
Office, Low-Rise |
13,231 |
9,726 |
0.63 |
0.47 |
13,231 |
9,726 |
-26% |
0.63 |
0.47 |
Coverage |
8/8 |
8/8 |
8/8 |
8/8 |
8/8 |
8/8 |
|
|
8/8 |
Office, Mid-Rise |
13 |
143 |
0.00 |
0.04 |
|
|
|
|
|
Coverage |
1/1 |
1/1 |
1/1 |
1/1 |
|
|
|
|
|
Retail, High
Street |
2,309 |
1,194 |
1.21 |
0.62 |
2,309 |
1,194 |
-48% |
1.21 |
0.62 |
Coverage |
1/1 |
1/1 |
1/1 |
1/1 |
1/1 |
1/1 |
|
|
1/1 |
Retail, Warehouse |
|
129 |
|
0.01 |
|
|
|
|
|
Coverage |
|
1/1 |
|
1/1 |
|
|
|
|
|
Total |
21,342 |
15,608 |
|
|
21,328 |
15,337 |
-28% |
|
|
Coverage |
13/13 |
13/13 |
|
|
11/11 |
11/11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
– Like-for-like excludes
assets that were purchased, sold, under refurbishment or subject to
a significant change in the scope of reported data during the two
years reported.
– Consumption data relates
to the managed portfolio only:
– Leisure: Common Areas
– Mixed-use, Other: Whole
Building and Common Areas
– Office, Low-Rise: Whole
Building, Tenant Space and Common Areas
– Office, Mid-Rise: Tenant
Space
– Retail, High Street:
Common Areas
– Retail, Warehouse: Tenant
Space
– Estimation: 0.8% water
data have been estimated through prorating.
– Where appropriate (for
relevant assets), consumption data has been adjusted to reflect the
Company’s share of ownership.
– Coverage relates to the
number of managed assets for which data is reported.
– Intensity: An intensity
m3/m2 is reported for absolute consumption
and for assets within the like-for-like portfolio. For Office,
Mid-rise, and Retail, Warehouse the numerator is landlord-managed
whole building water consumption and the denominator is net
lettable floor area (m2). For Mixed-use, Other and
Office, Low Rise landlord-managed whole building or common parts
water consumption is divided by net lettable area or common parts
area (m2). For Leisure and Retail, High Street
landlord-managed common parts’ water consumption is divided by
common parts area (m2).
– All water was procured
from a municipal supply. As far as we are aware, no surface,
ground, rainwater or wastewater from another organisation was
consumed during the reporting period and therefore is not presented
here.
– Refer to the Objectives
and Targets Section in the CSR report on page 33 for the
narrative commentary on historical trends and programmes in place
to improve
performance.
Waste (Waste-Abs; Waste-LfL)
The table below sets out waste managed by the Company by
reported disposal route and sector.
|
Absolute
tonnes |
Like for like
tonnes |
2019 |
2020 |
2019 |
2020 |
%
change |
Tonnes |
% |
Tonnes |
% |
Tonnes |
% |
Tonnes |
% |
Leisure |
Recycled |
143.9 |
44.8% |
85.1 |
44.5% |
143.9 |
44.8% |
85.06 |
44.5% |
-40.9% |
Incineration with
energy recovery |
177.0 |
55.2% |
106.0 |
55.5% |
177.0 |
55.2% |
106.0 |
55.5% |
-40.1% |
Unknown |
0.0 |
0.0% |
0.0 |
0.0% |
0.0 |
0.0% |
0.0 |
0.0% |
0.0% |
Landfill |
0.0 |
0.0% |
0.0 |
0.0% |
0.0 |
0.0% |
0.0 |
0.0% |
0.0% |
Total |
320.9 |
|
191.0 |
|
320.9 |
|
191.0 |
|
-40.5% |
Coverage |
1/1 |
|
1/1 |
|
1/1 |
|
1/1 |
|
|
Mixed-use,
Office/Retail |
Recycled |
0.2 |
4.0% |
3.2 |
31.4% |
0.2 |
4.0% |
3.20 |
31.4% |
2033.3% |
Incineration with
energy recovery |
3.6 |
96.0% |
7.0 |
68.6% |
3.6 |
96.0% |
7.00 |
68.6% |
94.4% |
Landfill |
|
|
|
|
|
|
|
|
|
Total |
3.8 |
|
10.2 |
|
3.8 |
|
10.2 |
|
172.0% |
Coverage |
1/1 |
|
1/1 |
|
1/1 |
|
1/1 |
|
|
Mixed-use,
Other |
Recycled |
284.2 |
45.8% |
204.4 |
51.9% |
284.2 |
45.8% |
204.4 |
51.9% |
-28.1% |
Incineration with
energy recovery |
336.0 |
54.2% |
189.6 |
48.1% |
336.0 |
54.2% |
189.6 |
48.1% |
-43.6% |
Landfill |
|
|
|
|
|
|
|
|
|
Total |
620.16 |
|
394.0 |
|
620.1 |
|
394.0 |
|
-36.5% |
Coverage |
2/2 |
|
2/2 |
|
2/2 |
|
2/2 |
|
|
Office, Low-Rise |
Recycled |
63.5 |
40.2% |
54.1 |
54.4% |
63.5 |
40.2% |
54.1 |
54.4% |
-14.9% |
Incineration with energy
recovery |
94.7 |
59.9% |
45.3 |
45.6% |
94.7 |
59.8% |
45.3 |
45.6% |
-52.1% |
Landfill |
|
|
|
|
|
|
|
|
|
Total |
158.2 |
|
99.4 |
|
158.22 |
|
99.4 |
|
-37.2% |
Coverage |
9/9 |
|
9/9 |
|
9/9 |
|
9/9 |
|
|
Office, Mid-Rise |
Recycled |
18.2 |
70.3% |
20.6 |
69.5% |
|
|
|
|
|
Incineration with energy
recovery |
7.7 |
29.7% |
9.1 |
30.5% |
|
|
|
|
|
Landfill |
|
|
|
|
|
|
|
|
|
Total |
25.9 |
|
29.6 |
|
|
|
|
|
|
Coverage |
1/1 |
|
1/1 |
|
|
|
|
|
|
Retail, High Street |
Recycled |
82.9 |
96.5% |
49.8 |
83.1% |
82. 9 |
96.5% |
49.8 |
83.1% |
-39.9% |
Incineration with energy
recovery |
3.00 |
3.5% |
10.2 |
16.9% |
3.00 |
3.5% |
10.2 |
16.9% |
239.7% |
Landfill |
|
|
|
|
|
|
|
|
|
Total |
85.9 |
|
60.0 |
|
85.9 |
|
60.0 |
|
-30.2% |
Coverage |
1/1 |
|
1/1 |
|
1/1 |
|
1/1 |
|
|
Total |
Recycled |
592.8 |
48.8% |
417.1 |
53.2% |
574.6 |
48.3% |
396.5 |
52.5% |
-31.0% |
Incineration with energy
recovery |
621.9 |
51.2% |
367.1 |
46.8% |
614.2 |
51.7% |
358.1 |
47.5% |
-41.7% |
Landfill |
|
|
|
|
|
|
|
|
|
Total |
1,215 |
|
784 |
|
1,189 |
|
755 |
|
-36.5% |
Coverage |
15/15 |
|
15/15 |
|
14/14 |
|
14/14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
– Whilst zero waste is sent
directly to landfill, a residual component of the ‘recycled’ and
‘incineration with energy recovery’ waste streams may end up in
landfill.
– Like-for-like excludes
assets that were purchased, sold, under refurbishment or subject to
a significant change in the scope of reported data during the two
years reported.
– Waste data relates to the
managed portfolio only.
– Waste management procured
directly by tenants is not reported.
– The Company has no waste
management responsibilities for Industrial or Retail, Warehouse
– Where appropriate (for
relevant assets), waste data has been adjusted to reflect the
Company’s share of asset ownership.
– Coverage relates to the
number of managed assets for which data is reported.
– Reported data relates to
non-hazardous waste only. Hazardous waste is not reported as due to
the low volumes produced it is not considered material.
Furthermore, robust tonnage data on the small quantities that are
produced is not available.
– Refer to the Objectives
and Targets Section in the CSR report on page 34 for the narrative
commentary on historical trends and programmes in place to improve
performance.
Sustainability certification (Cert-Tot): Green building
certificates
The table below sets out the proportion of the Company’s total
portfolio with a Green Building Certificate by floor area.
Rating |
Portfolio by floor area (%) |
Mixed-use, Other
(BREEAM Fit Out/ Refurbishment, BREEAM In Use) |
3% |
Offices, Low and
Mid-rise (BREEAM In-Use) |
6% |
All other sectors |
0% |
Total |
9% |
Coverage |
100% |
– Green building certificate
records for the Company are provided as at 31st
March 2021 by portfolio floor
area.
– Data provided includes
managed and non-managed assets (i.e. the whole portfolio),
excluding two assets that were bought at the end of the reporting
period, which will be onboarded and captured in next year’s
reporting.
– Where appropriate (for
relevant assets), floor area coverage data has been adjusted to
reflect the Company’s share of ownership.
Sustainability certification (Cert-Tot): Energy performance
certificates
The table below sets out the proportion of the Company’s total
portfolio with an Energy Performance Certificate by floor area.
Energy performance
certificate rating |
Portfolio by floor area (%) |
A |
1 |
B |
4 |
C |
31 |
D |
25 |
E |
9 |
F |
2 |
G |
1 |
Exempt |
2 |
No EPC |
25 |
Coverage |
100% |
– Energy Performance
Certificate (EPC) records for the Company are provided as at
31st March 2021 by
portfolio floor area.
– Data provided includes
managed and non-managed assets (i.e. the whole portfolio),
excluding two assets that were bought at the end of the reporting
period, which will be onboarded and captured in next year’s
reporting.
– Where appropriate (for
relevant assets), floor area coverage data has been adjusted to
reflect the Company’s share of asset ownership, including 25% of
the net lettable area of City Tower, Manchester (reflecting the Company’s 25%
ownership share) and 50% of Store Street, London (reflecting the Company’s 50% ownership
share).
– EPCs are available for 76%
of the portfolio by floor area. In general terms, since the
introduction of the EPC Regulations in 2008, EPCs are required for
the letting of units or buildings or the sale of buildings. In
addition, the UK Minimum Energy Efficiency Standards regulations
(‘MEES’) came into force for commercial buildings on 1st
April 2019 and require a minimum EPC
rating of E for new lettings; the rules apply to all leases from
1 April 2023. The EPCs for the
portfolio will be managed to ensure compliance with the MEES
regulations. The F&G EPCs relate to six units in six assets.
These are being reviewed in 2021 and 2022 to improve the EPC
ratings where feasible.
Sustainability Performance Measures (Social)
EPRA’s Sustainability Best Practices Recommendations Guidelines
2017 (“EPRA’s Guidelines”) include Social and Governance reporting
measures to be disclosed for the entity i.e. the Company. The
Company is an externally managed Real Estate Investment Trust and
has no direct employees. A number of these Social Performance
measures relate to entity employees and therefore these measures
are not relevant for reporting at the entity level. The Investment
Manager to the Company, Schroder Real Estate Investment Management
Limited, is part of Schroders PLC which has responsibility for the
employees that support the Company. The Company aims to comply with
EPRA’s Guidelines and therefore has included Social and Governance
Performance Measure disclosures in this report. However, these are
presented as appropriate for the activities and responsibilities of
Schroder Real Estate Investment Trust Limited (the “Company”),
Schroders PLC or the Investment Manager, Schroder Real Estate
Investment Management Limited.
The Schroders PLC Annual Report and Accounts for the 12 months
to 31 December 2020 supports the
performance measures in relation to the Investment Manager as set
out below. Schroders PLC’s principles in relation to people
including diversity, gender pay gap, values, employee satisfaction
survey, wellbeing and retention can be found at:
-
https://www.schroders.com/en/sysglobalassets/annual-report/2020/documents/Schroders_2020AnnualReport.pdf
-
https://www.schroders.com/en/working-here/inclusion-and-diversity/
-
https://www.schroders.com/en/working-here/inclusion-and-diversity/gender-pay-gap-report-2020/
Employee gender diversity (Diversity-Emp)
As at 31 March 2021 the Company
Board comprised of four members: 1 (25% female); 3 (75% male).
For further information on Schroders PLC employee gender
diversity, covering more employee categories, please refer to
Schroders 2020 Annual Report and Accounts (page 37):
https://www.schroders.com/en/sysglobalassets/annual-report/2020/documents/Schroders_2020AnnualReport.pdf
Gender pay ratio (Diversity-Pay)
The remuneration of the Company Board is set out on page 63 of
this Report and Accounts document.
Schroders PLC female representation and gender pay report can be
found in Schroders 2020 Annual Report and Accounts (pages 37, 87
and 93):
https://www.schroders.com/en/sysglobalassets/annual-report/2020/documents/Schroders_2020AnnualReport.pdf
Information on Diversity and Inclusion at Schroders can be found
at:
-
https://www.schroders.com/en/people/diversity-and-inclusion
-
https://www.schroders.com/en/working-here/inclusion-and-diversity/gender-pay-gap-report-2020/
The following are reported for Schroders in relation to the
Investment Management of the Company:
Training and development (Emp-Training)
Schroders requires employees to complete mandatory internal
training. Schroders encourages all staff with professional
qualifications to maintain the training requirements of their
respective professional body.
Employee performance appraisals (Emp-Dev)
The Schroders’ performance management process requires annual
performance objective setting and annual performance reviews for
all staff. The Investment Manager confirms that performance
appraisals were completed for 100% of investment staff relevant to
the Company in 2020.
The following are reported for Schroders PLC:
Employee turnover and retention (Emp-Turnover)
For Schroders’ PLC turnover and retention rates please refer to
Schroders Annual Report and Accounts (page 22):
https://www.schroders.com/en/sysglobalassets/annual-report/2020/documents/Schroders_2020AnnualReport.pdf
Employee health and safety (H&S-Emp)
Schroders PLC does not include employee health and safety
performance measures in its Annual Report and Accounts.
The following are reported in relation to the assets held in the
Company’s portfolio over the reporting period to 31 December 2020:
Asset health and safety assessments (H&S-Asset)
The table below sets out the proportion of the Company’s total
portfolio where health and safety impacts were assessed or reviewed
for compliance or improvement.
|
Portfolio by floor
area (%) |
2019 |
2020 |
All sectors |
100% |
100% |
Asset health and safety compliance (H&S-Comp)
The table below sets out the number of incidents of
non-compliance with regulations/and or voluntary codes
identified.
|
Number of
incidents |
2019 |
2020 |
All Sectors |
0 |
0 |
Community engagement, impact assessments and development
programmes (Comty-Eng)
The table below sets out the proportion of the Company’s total
portfolio that completed local community engagement, impact
assessments and/or development programs.
|
Portfolio by number
assets (%) |
|
2019 |
2020 |
Industrial, Distribution
Warehouse |
0% |
7.5% |
Mixed-use, Other |
2.5% |
2.5% |
Office, Low-rise |
12.5% |
12.5% |
Office, Mid-rise |
0% |
2.5% |
All other sectors |
0% |
0% |
Total |
15% |
25% |
Sustainability Performance Measures (Governance)
Composition of the highest governance body (Gov-Board)
The Board of the Company comprised 4 Non-Executive independent
Directors (0 executive board members) for the 12 months to
31 March 2021.
· The average tenure of the four
directors to 31 March is five years and ten months; and
· The number of directors with
competencies relating to environmental and social topics is two and
their experience can be seen in their biographies.
Nominating and selecting the highest governance body
(Gov-Select)
The role of the Nomination Committee, chaired by Lorraine Baldry, is to consider and make
recommendations to the Board on its composition so as to maintain
an appropriate balance of skills, experience and diversity,
including gender, and to ensure progressive refreshing of the
Board. On individual appointments, the Nomination Committee leads
the process and makes recommendations to the Board.
Before the appointment of a new director, the Nomination
Committee prepares a description of the role and the capabilities
required for a particular appointment. While the Nomination
Committee is dedicated to selecting the best person for the role,
it aims to promote diversification and the Board recognises the
importance of diversity. The Board agrees that its members should
possess a range of experience, knowledge, professional skills and
personal qualities as well as the independence necessary to provide
effective oversight of the affairs of the Company.
Process for managing conflicts of interest (Gov-Col)
The Company’s Conflicts of Interest Policy sets out the policy
and procedures of the Board and the Company Secretary for the
management of conflicts of interest.
Streamlined Energy and Carbon Reporting
Schroder Real Estate Investment Trust plc (the “Company”) is a
real estate investment company with a premium listing on the
Official List of the Financial Conduct Authority and whose shares
are traded on the Main Market of the London Stock Exchange (ticker:
SREI).
The Company is a Real Estate Investment Trust (‘REIT’) and
benefits from the various tax advantages offered by the UK REIT
regime. The Company continues to be declared as an authorised
closed-ended investment scheme by the Guernsey Financial Services
Commission under section 8 of the Protection of Investors
(Bailiwick of Guernsey) Law, 1987,
as amended and the Authorised Closed-ended Collective Investment
Schemes Rules 2008.
The Board and Investment Manager, in recognition of the
importance it places on sustainability, has voluntarily included a
report for the Company aligned with the UK Companies (Directors’
Report) and Limited Liability Partnerships (Energy and Carbon
Report) Regulations 2018, (the Regulations) on its UK energy use,
associated Scope 1 and 2 greenhouse gas (GHG) emissions, an
intensity metric and, where applicable, global energy use. This
reporting is also referred to as Streamlined Energy and Carbon
Reporting (SECR).
This Energy and Carbon Report applies for the Company’s annual
report for the 12 months to 31 March
2021. The statement has, however, been prepared for the
calendar year, the 12 months to 31 December
2020, to report annual figures for emissions and energy use
for the available period for which such information is available.
In addition, the regulations advise providing a narrative on energy
efficiency actions taken in the previous financial year.
As a property company, energy consumption and emissions result
from the operation of buildings. The reporting boundary has been
scoped to those held properties where the Company retained
operational control: where the Company is responsible for operating
the entire building, shared services (e.g. common parts’ lighting,
heating and air conditioning), external lighting and/or void
spaces. ‘Operational control’ has been selected as the reporting
boundary (as opposed to ‘financial control’ or ‘equity share’) as
this reflects the portion of the portfolio where the Company can
influence operational procedures and, ultimately, sustainability
performance. This incorporates consumption in tenant areas, where
the landlord procures energy for the whole building. As at
31 December 2020, there were 25
managed properties within the portfolio, of which two properties
were purchased at the end of the reporting period and so have not
been captured in the reported data. This compares to 22 managed
properties in the portfolio during 2019 which have been included in
the reporting. All Company assets are located in the UK.
The Company is not directly responsible for any GHG
emissions/energy usage at single let/FRI assets nor at multi-let
assets where the tenant is a counterparty to the energy contract.
These emissions form part of the wider value chain (i.e. ‘Scope 3’)
emissions, which are not monitored at present. As a real estate
company with no direct employees or company owned vehicles as at
31 December 2020, there is no energy
consumption or emissions associated with travel or occupation of
corporate offices to report. Fugitive emissions associated
with refrigerant losses from air conditioning equipment are widely
understood by the industry to be less material than other sources
of emissions and data is often not collected. The Company received
fugitive emissions data for the reporting year and this confirmed
that they are de minimis and consequently these have been excluded
from the reporting.
In addition to reporting absolute energy consumption and GHG
emissions, the Company has reported separately on performance
within the ‘like-for-like’ portfolio, as well as providing
intensity ratios, where appropriate. The like-for-like portfolio
includes buildings where each of the following conditions is
met:
•
Owned for the full 24-month period (sales/acquisitions are
excluded);
•
No major renovation or refurbishment has taken place;
•
At least 24 months data is available;
Note also that buildings where tenant voids may have led to
additional utility responsibility being temporarily met by the
Landlord are also excluded.
For the intensity ratios, the denominator determined to be
relevant to the business is square metres of net lettable area for
most sectors, including Industrial Distribution Warehouses,
Leisure, Mixed-use, Offices and Retail Warehouses. For Retail High
street, the most relevant denominator is the common parts area. The
intensity ratio is expressed as:
•
Energy: kilowatt hours per metre squared (net lettable area or
common parts area) per year or kWh/m2/yr.
•
GHG: kilograms carbon dioxide equivalent per metre square (net
lettable area or common parts area) per year or
kgCO2e/m2/yr.
Energy Consumption and Greenhouse Gas
Emissions
The table below sets out the Company’s energy consumption.
|
Absolute Energy (kWh) |
Like-for-like Energy (kWh) |
|
2019 |
2020 |
2019 |
2020 |
%
change |
Gas |
2,324,640 |
1,938,154 |
2,189,805 |
1,855,355 |
-15% |
Electricity |
5,642,582 |
4,488,140 |
5,030,471 |
3,886,127 |
-23% |
Total |
7,967,222 |
6,426,294 |
7,220,275 |
5,741,482 |
-20% |
The table below sets out the Company’s greenhouse gas
emissions.
|
Absolute Emissions (tCO2e) |
Like-for-like Emissions (tCO2e) |
|
2019 |
2020 |
2019 |
2020 |
%
change |
Scope 1 (Direct
emissions from gas consumption) |
428 |
357 |
403 |
341 |
-15% |
Scope 2 (Indirect
emissions from electricity) |
1,445 |
1,047 |
1,288 |
907 |
-30% |
Total |
1,872 |
1,404 |
1,691 |
1,248 |
-26% |
The like-for-like energy consumption for the 2020 calendar year
for the managed assets held within the Company has decreased by
20%; the greenhouse gas emissions have decreased by 26%. Please
note, changes in occupancy and building operations during the
COVID-19 period will have had an impact on performance and so the
2020 reporting year is not directly comparable to 2019. However,
energy performance improvement opportunities continued to be
considered across the portfolio. Initiatives undertaken during the
reporting year include boiler and hot water system
replacements/upgrades, wall and roof insulation upgrades, LED
lighting upgrades and installation of lighting and ventilation
occupancy sensors. Automatic meter readers are also being rolled
out to all landlord electricity supplies for improved energy
monitoring.
The table below sets out the Company’s energy and greenhouse gas
emissions intensities by sector.
|
Energy Intensities (kWh per m2) |
Emissions Intensities (tCO2e per
m2) |
|
2019 |
2020 |
2019 |
2020 |
Industrial
Distribution Warehouses |
0.8 |
1.4 |
0.2 |
0.3 |
Leisure |
24.6 |
15.7 |
5.9 |
3.7 |
Mixed-use,
Office/Retail |
121.7 |
119.2 |
31.2 |
27.8 |
Mixed-use, Other |
109.8 |
77.9 |
28.1 |
18.2 |
Office, Low Rise |
135.3 |
110.8 |
30.1 |
23.3 |
Office, Mid Rise |
184 |
163.6 |
39.4 |
33.5 |
Retail High
Street |
9.2 |
8.8 |
2.4 |
2.1 |
Retail Warehouse |
3.4 |
7.7 |
0.9 |
1.7 |
Methodology
· All energy consumption and GHG
emissions reported occurred at the Company assets, all of which are
located in the UK.
· Energy consumption data is
reported according to automatic meter readings, manual meter
readings or invoice estimates. Historic energy and consumption data
have been restated where more complete and/or accurate records have
become available. Where required, missing consumption data has been
estimated through pro rata extrapolation. Data has been adjusted to
reflect the Company’s share of asset ownership, where relevant.
· The sustainability content
located on throughout the SREIT annual report for the year ending
31st December 2020 has been assured
in accordance with AA1000. The same data set has been used to
compile this data report. The full Assurance Statement can be found
at the following link:
https://www.schroders.com/en/uk/adviser/fund-centre/funds-in-focus/investment-trusts/schroders-investment-trusts/schroder-real-estate-investment-trust/sustainability/
· The Company’s GHG emissions are
calculated according to the principles of the Greenhouse Gas (GHG)
Protocol Corporate Standard.
o The Company’s Greenhouse Gas Emissions are reported as
tonnes of carbon dioxide equivalent (tCO2e), which includes the
following emissions covered by the GHG Protocol (where relevant and
available greenhouse gas emissions factors allow): carbon dioxide
(CO2), methane (CH4), hydrofluorocarbons
(HFCs), nitrous oxide (N20), perfluorocarbons (PFCs),
sulphur hexafluoride (SF6) and nitrogen triflouride
(NF3).
o GHG emissions from electricity (Scope 2) are reported
according to the ‘location-based’ approach.
o The following greenhouse gas emissions conversion
factors and sources have been applied:
Country |
Emissions Source |
GHG Emissions Factor |
Emissions Factor Data Source |
United Kingdom |
Electricity 2019 |
0.2560kgCO2e |
UK Government’s GHG Conversion
Factors for Company Reporting (2019) |
Electricity 2020 |
0.2333kgCO2e |
UK Government’s GHG
Conversion Factors for Company Reporting (2020) |
Gas |
0.184kgCO2e |
Energy Efficiency Actions
Environmental data management system
and quarterly reporting
Environmental data for the Company is collated by sustainability
consultants Evora Global, supported by their proprietary
environmental data management system SIERA. Energy, water, waste
and greenhouse gas emissions’ data are collected and validated for
all assets where the portfolio has operational control on a
quarterly basis.
Energy target, improvement programme
and net zero carbon
The Investment Manager has an energy and greenhouse gas
emissions performance reduction target to achieve an 18% reduction
in landlord-controlled energy consumption by 2020/21 (2015/16
baseline) across all UK-managed assets which includes assets of the
Company. This is accompanied by a target of a 32% reduction in
landlord-controlled greenhouse gas emissions by 2020/21 (2015/16
baseline); this target is inclusive of decarbonisation of the UK
electricity grid over recent years.
The Investment Manager together, with sustainability consultants
Evora Global and property manager MAPP, looks to identify and
deliver energy and greenhouse gas emissions reductions on a
cost-effective basis. The programme involves reviewing all managed
assets within the Company and identifying and implementing
improvement initiatives, where viable. The process is of continual
review and improvement.
Energy performance improvement initiatives undertaken at several
assets during the reporting period include boiler
replacements/upgrades, wall and roof insulation upgrades, upgrades
to Automatic Meter Readers for improved energy monitoring, LED
upgrades and installation of lighting and ventilation occupancy
sensors.
Recognising the need for the real estate industry to address its
carbon impact, the Investment Manager joined other members of the
Better Buildings Partnership (BBP) in September 2019 to sign the Member Climate Change
Commitment and in December 2020
published its ‘Pathway to Net Zero Carbon’ – which can be found
here:
https://www.schroders.com/en/sysglobalassets/email/uk/realestate/2020/schroder-real-estate-net-zero-carbon-pathway-december-2020_1621372_v1.pdf.
New energy and carbon targets will be established for the
Company in 2021 in the context of a net zero carbon ambition.
Renewable electricity tariffs and
carbon offsets
The Investment Manager has an objective to procure 100%
renewable electricity for all landlord-controlled supplies for
which it has responsibility, which includes the assets of the
Company, by 2025. As at 31 December
2020, 97% of the Company’s landlord-controlled electricity
was on renewable tariffs. No carbon offsets were purchased
during the reporting period.
Report of the Depositary to the Shareholders
Northern Trust (Guernsey)
Limited has been appointed as Depositary to Schroder Real Estate
Investment Trust Limited (the “Company”) in accordance with the
requirements of Article 36 and Articles 21(7), (8) and (9) of the
Directive 2011/61/EU of the European Parliament and of the Council
of 8 June 2011 on Alternative
Investment Fund Managers and amending Directives 2003/41/EC and
2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010
(the “AIFM Directive”).
We have enquired into the conduct of Schroder Real Estate
Investment Management Limited (the “AIFM”) for the year ending
31st March 2021, in our
capacity as Depositary to the Company.
This report, including the review provided below, has been
prepared for and solely for the Shareholders in the Company. We do
not, in giving this report, accept or assume responsibility for any
other purpose or to any other person to whom this report is
shown.
Our obligations as Depositary are stipulated in the relevant
provisions of the AIFM Directive and the relevant sections of
Commission Delegated Regulation (EU) No 231/2013 (collectively the
“AIFMD legislation”).
Amongst these obligations is the requirement to enquire into the
conduct of the AIFM and the Company and their delegates in each
annual accounting period.
Our report shall state whether, in our view, the Company has
been managed in that period in accordance with the AIFMD
legislation. It is the overall responsibility of the AIFM to comply
with these provisions. If the AIFM or their delegates have not so
complied, we as the Depositary will state why this is the case and
outline the steps which we have taken to rectify the situation.
The Depositary and its affiliates is or may be involved in other
financial and professional activities which may on occasion cause a
conflict of interest with its roles with respect to the Company.
The Depositary will take reasonable care to ensure that the
performance of its duties will not be impaired by any such
involvement and that any conflicts which may arise will be resolved
fairly and any transactions between the Depositary and its
affiliates and the Company shall be carried out as if effected on
normal commercial terms negotiated at arm's length and in the best
interests of Shareholders.
Basis of Depositary Review
The Depositary conducts such reviews as it, in its reasonable
discretion, considers necessary in order to comply with its
obligations and to ensure that, in all material respects, the
Company has been managed (i) in accordance with the limitations
imposed on its investment and borrowing powers by the provisions of
its constitutional documentation and the appropriate regulations
and (ii) otherwise in accordance with the constitutional
documentation and the appropriate regulations. Such reviews vary
based on the type of Company, the assets in which a Company invests
and the processes used, or experts required, in order to value such
assets.
Review
In our view, the Company has been managed during the year, in
all material respects:
(i)
in accordance with the limitations imposed on the investment and
borrowing powers of the Company by the constitutional document; and
by the AIFMD legislation; and
(ii)
otherwise in accordance with the provisions of the constitutional
document; and the AIFMD legislation.
For and on behalf of
Northern Trust (Guernsey)
Limited
Glossary
Articles |
means the Company's articles of
incorporation, as amended from time to time. |
Companies Law |
means The Companies (Guernsey) Law,
2008. |
Company |
is Schroder Real Estate Investment
Trust Limited. |
Directors |
means the directors of the Company
as at the date of this document whose names are set out on page 49
of this document and “Director” means any one of them. |
Disclosure Guidance and
Transparency Rules |
means the disclosure guidance and
transparency rules contained within the FCA's Handbook of Rules and
Guidance. |
Earnings per share
(“EPS”) |
is the profit after taxation divided
by the weighted average number of shares in issue during the
period. Diluted and adjusted EPS per share are derived as set out
under NAV. |
Estimated rental value
(“ERV”) |
Is the Group’s external valuers’
reasonable opinion as to the open market rent which, on the date of
the valuation, could reasonably be expected to be obtained on a new
letting or rent review of a property. |
EPRA |
is the European Public Real Estate
Association. |
EPRA Net Tangible Assets |
is the IFRS equity attributable to
shareholders adjusted for items including deferred tax, the fair
value of financial instruments and intangible assets. |
EPRA Net Disposal Value |
is the IFRS equity attributable to
shareholders adjusted for items including goodwill as a result of
deferred tax and the fair value of interest rate debt |
FCA |
is the UK Financial Conduct
Authority. |
Gearing |
is the Group’s net debt as a
percentage of adjusted net assets. |
Group |
is the Company and its
subsidiaries. |
Initial yield |
is the annualised net rents
generated by the portfolio expressed as a percentage of the
portfolio valuation. |
Interest cover |
is the number of times Group net
interest payable is covered by Group net rental income. |
Listing Rules |
means the listing rules made by the
FCA under Part VII of the UK Financial Services and Markets Act
2000, as amended. |
Market Abuse Regulation |
means regulation (EU) No.596/2014 of
the European Parliament and of the Council of 16 April 2014 on
market abuse. |
MSCI |
(formerly Investment Property
Databank or ‘IPD’) is a Company that produces an independent
benchmark of property returns. |
Net Asset Value and NAV per
share |
is shareholders’ funds divided by
the number of shares in issue at the period end. |
NAV total return |
is calculated taking into account
both capital returns and income returns in the form of dividends
paid to shareholders. |
Net rental income |
is the rental income receivable in
the period after payment of ground rents and net property
outgoings. |
REIT |
is a Real Estate Investment
Trust. |
Reversionary yield |
is the anticipated yield which the
initial yield will rise to once the rent reaches the estimated
rental value. |
Notice of Annual General Meeting
Notice is hereby given that the Annual General Meeting of the
Company will be held at 1 London Wall Place, EC2Y 5AU on
9 September 2021 at 11a.m.
The Board takes the well-being of its Shareholders and
colleagues seriously and has been closely monitoring the evolving
Covid-19 pandemic. At present it is the intention of the Board to
hold this meeting with Shareholders given the option of attending
in person. In the event that the UK Government’s guidance on social
distancing and public gatherings nearer to the time of the AGM does
not permit this, the Board will make such arrangements as it deems
necessary to the format of the AGM to comply with Government
guidance and regulations.
|
|
Resolution on
Form of Proxy |
Agenda
1. To elect a Chairman of the Meeting. |
|
To consider and, if thought
fit, pass the following Ordinary
Resolutions: |
Ordinary Resolution 1 |
2. To receive, consider and
approve the Consolidated Annual Report and Financial Statements of
the Company for the year ended 31 March 2021. |
Ordinary Resolution 2 |
3. To approve the Remuneration
Report for the year ended 31 March 2021. |
Ordinary Resolution 3 |
4. To re-elect Ms Lorraine
Baldry as a Director of the Company. |
Ordinary Resolution 4 |
5. To re-elect Mr Stephen Bligh
as a Director of the Company. |
Ordinary Resolution 5 |
6. To re-elect Mr Alastair
Hughes as a Director of the Company. |
Ordinary Resolution 6 |
7. To re-elect Mr Graham Basham
as a Director of the Company. |
Ordinary Resolution 7 |
8. To appoint Ernst and Young
LLP as Auditor of the Company until the conclusion of the next
Annual General Meeting. |
Ordinary Resolution 8 |
9. To authorise the Board of
Directors to determine the Auditor's remuneration. |
Ordinary Resolution 9 |
10. To
receive and approve the Company's Dividend Policy which appears on
page 51 of the Annual Report. |
|
To consider and, if thought
fit, pass the following Special Resolutions: |
Special Resolution 1 |
11.
That the Company be authorised, in accordance with section 315 of
The Companies (Guernsey) Law, 2008, as amended (the "Companies
Law"), to make market acquisitions (within the meaning of section
316 of the Companies Law) of ordinary shares in the capital of the
Company ("Ordinary Shares") either for retention as treasury
shares, insofar as permitted by the Law or cancellation, provided
that: |
|
a. the
maximum number of ordinary shares hereby authorised to be purchased
shall be 14.99% of the issued ordinary shares on the date on which
this resolution is passed; |
|
b. the minimum
price which may be paid for an ordinary share shall be £0.01; |
|
c. the
maximum price (exclusive of expenses) which may be paid for an
ordinary share shall be an amount equal to the higher of (i) 5%
above the average of the mid-market value of the ordinary shares
(as derived from the regulated market on which the repurchase is
carried out) for the five business days immediately preceding the
date of the purchase; and (ii) the higher of (a) the price of the
last independent trade; and (b) the highest current independent bid
at the time of purchase, in each case on the regulated market where
the purchase is carried out; |
|
d. such authority
shall expire at the conclusion of the annual general meeting of the
Company to be held in 2022 unless such authority is varied, revoked
or renewed prior to such date of the general meeting; and |
|
e. the Company
may make a contract to purchase ordinary shares under such
authority prior to its expiry which will or may be executed wholly
or partly after its expiration and the Company may make a purchase
of ordinary shares pursuant to any such contract. |
Special Resolution 2 |
12. That the
Directors of the Company be and are hereby empowered to allot
ordinary shares of the Company for cash as if the pre-emption
provisions contained under Article 13 of the Articles of
Incorporation did not apply to any such allotments and to sell
ordinary shares which are held by the Company in treasury for cash
on a non-pre-emptive basis provided that this power shall be
limited to the allotment and sales of ordinary shares: |
|
a. up
to such number of ordinary shares as is equal to 10% of the
ordinary
shares in issue (including treasury shares) on the date on which
this resolution is passed; |
|
b at
a price of not less than the net asset value per share as close as
practicable to the allotment or sale; |
|
provided that such power shall
expire on the earlier of the conclusion of the annual general
meeting of the Company to be held in 2022 or on the expiry of 15
months from the passing of this Special Resolution, except that the
Company may before such expiry make offers or agreements which
would or might require ordinary shares to be allotted or sold after
such expiry and notwithstanding such expiry the Directors may allot
or sell ordinary shares in pursuance of such offers or agreements
as if the power conferred hereby had not expired. |
|
Close of Meeting. |
By Order of the Board
For and on behalf of
Northern Trust International Fund Administration Services
(Guernsey) Limited
Secretary
1 June 2021
Notes
1. To be passed, an ordinary
resolution requires a simple majority of the votes cast by those
shareholders voting in person or by proxy at the AGM (excluding any
votes which are withheld) to be voted in favour of the
resolution.
2. To be passed, a special
resolution requires a majority of at least 75% of the votes cast by
those shareholders voting in person or by proxy at the AGM
(excluding any votes which are withheld) to be voted in favour of
the resolution.
3. A member who is entitled to
attend and vote at the meeting is entitled to appoint one or more
proxies to exercise all or any of their rights to attend, speak and
vote instead of him or her. A proxy need not be a member of the
Company. More than one proxy may be appointed provided that each
proxy is appointed to exercise the rights attached to different
shares held by the member.
4. A form of proxy is enclosed for
use at the meeting and any adjournment thereof. The form of proxy
should be completed and sent, together with the power of attorney
or other authority (if any) under which it is signed, or a
notarially certified copy of such power or authority, so as to
reach the Company’s Registrars, Computershare Investor Services
(Guernsey) Limited, at The
Pavilions, Bridgwater Road, Bristol, BS99 6ZY at least 48 hours before the
time of the AGM (excluding any part of a day that is not a working
day).
5. Completing and returning a form
of proxy will not prevent a member from attending in person at the
meeting and voting should he or she so wish.
6. To have the right to attend and
vote at the meeting or any adjournment thereof (and also for the
purpose of calculating how many votes a member may cast on a poll)
a member must have his or her name entered on the register of
members not later than at close of business of 23 September 2020.
7. Pursuant to Article 41 of the
Uncertificated Securities (Guernsey) Regulations 2009, entitlement to
attend and vote at the meeting and the number of votes which may be
cast thereat will be determined by reference to the register of
members of the Company at close of business on 23 September
2020. Changes to entries in the register of members of the
Company after that time shall be disregarded in determining the
rights of any member to attend and vote at such meeting.
Corporate Information
Registered Address
PO Box 255
Trafalgar Court
Les Banques
St. Peter Port
Guernsey GY1 3QL
Directors (all Non-executive)
Lorraine Baldry (Chairman)
Graham Basham
Stephen Bligh
Alastair Hughes
Investment Manager and Accounting Agent
Schroder Real Estate Investment Management Limited
1 London Wall Place
London
EC2Y 5AU |
Independent Auditor
Ernst & Young LLP
PO Box 9
Royal Chambers
St. Julian’s Avenue
St. Peter Port
Guernsey GY1 4AF
Property Valuer
Knight Frank LLP
55 Baker Street
London
W1U 8AN
Sponsor and Brokers
J.P. Morgan Securities plc
25 Bank Street
Canary Wharf
London E14 5JP
|
Secretary and Administrator
Northern Trust International Fund Administration Services
(Guernsey) Limited
PO Box 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey GY1 3QL
Depositary
Northern Trust (Guernsey) Limited
PO Box 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey GY1 3QL |
Tax Advisors
Deloitte LLP
2 New Street Square
London EC4A 3BZ
Receiving Agent and UK Transfer/Paying Agent
Computershare Investor Services (Guernsey) Limited
13 Castle Street
St Helier
Jersey
JE1 1ES |
Solicitors to the Company
as to English Law:
Stephenson Harwood LLP
1 Finsbury Circus
London EC2M 7SH
FATCA GIIN
5BM7YG.99999.SL.831 |
as to Guernsey Law:
Mourant Ozannes (Guernsey) LLP
Royal Chambers
St Julian’s Avenue
St. Peter Port
Guernsey GY1 4HP
|
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[1] Winning Cities defined as higher growth locations - Source:
Oxford Economics/Schroders.
[2]Source: MSCI property level returns gross of fees on a
like-for-like basis including direct and indirect property
investments. Past performance is not a guide to future performance
and may not be repeated.
[3] This is an APM, please see page 105 for details.
[4] Winning Cities defined as higher growth locations - Source:
Oxford Economics/Schroders.
[5] This is an APM, please see page 105 for details.
[6] Excluding one-off refinancing costs related to the Canada
Life loan of £27.4m in the year ended 31
March 2020.
[7] As reconciled to valuation reports from Knight Frank for the
portfolio and BNP for the joint ventures. Does not include any IFRS
adjustments for lease incentives nor the fair value of leasehold
adjustments.
[8] Adjusted EPRA earnings is an APM and please see page 105 for
details.
[9] As per third party valuation reports unadjusted for IFRS
lease incentive amounts
[10] Source: Oxford Economics, Schroders March 2021.
[11] Reconciles to the valuation reports from Knight Frank for
the direct portfolio and BNP for the Joint Ventures. Does not
include any IFRS adjustments for lease incentives nor the fair
value of the leasehold adjustment for The Galaxy, Luton.
[12] Represents the annualised contracted income as at
31 March 2021 of the portfolio,
including rents from joint venture assets.
[13] Represents the ERV of the portfolio as estimated by the
valuers, including rents for the joint venture assets.
[14] Source: MSCI Quarterly Version of Balanced Monthly Index
Funds including joint venture investments on a like-for-like basis
as at 31 March 2021.
[15] This is an Alternative Performance Measure (“APM”). EPRA
calculations are included in the EPRA Performance measures section
on page 102.
[16] This is an APM. EPRA calculations are included in the EPRA
Performance measures section on page 101.
[17] This is an APM. Details are included in the APM section on
page 105.
[18] This is an APM. Details are included in the APM section on
page 105. The prior year figure represents the NAV total return
excluding one-off refinancing costs of £27.4m. NAV total return
including finance costs in the prior year of -9.4%
[19] This is an APM. EPRA calculations are included in the EPRA
Performance measures section on page 105.
[20] On-balance sheet borrowings reflect the loan facilities
with Canada Life and RBS without the deduction of unamortised
finance costs of £0.7m.
[21] This is an APM. Details are included in the APM section on
page 105.
[22] This is an APM. Details are included in the APM section on
page 105.
[23] This is an APM. Details are included in the APM section on
page 105.
[24] Please note that this is net of all capital expenditure,
acquisition costs and movement in IFRS16 lease incentives.
[25] Includes £0.5m relating to JV capital expenditure
[26] Net revenue is equal to EPRA earnings as per the
reconciliation on page 103.
[27] Calculation of pence per share is based on shares in issue
as at 31 March 2020 to enable
comparison to 31 March 2020 data
[28] Calculation of pence per share is based on shares in issue
as at 31 March 2021
[29] Note Central London is defined by MSCI as City, Mid-Town,
West End and Inner London.
[30] The Company listed in July
2004.
[31] Loan balance divided by property value as at 31 March 2021.
[32] For the quarter preceding the Interest Payment Date
(‘IPD’), ((rental income received – void rates, void service charge
and void insurance)/interest paid).
[33] The projected ICR covenant for contracted the four quarters
following the IPD deducting assumed non-recoverable costs (void
rates, void service charge and void insurance)/interest paid) based
on average of the past four quarters
[34] Fixed total interest rate for the loan term.
[35] Loan balance divided by property value as at 31 March 2021.
[36] For the quarter preceding the Interest Payment Date
(‘IPD’), ((rental income received – void rates, void service charge
and void insurance)/interest paid).
[37] The projected ICR covenant for contracted the four quarters
following the IPD deducting assumed non-recoverable costs (void
rates, void service charge and void insurance)/interest paid) based
on average of the past four quarters
[38] Facility drawn at 31 March
2021 from a total available facility of £52.5 million.
[39] Total interest rate as at 31 March
2021 comprising 3 months LIBOR of 0.09% and the margin of
1.6% at an LTV below 60% and a margin of 1.90% above 60% LTV.
[40] This covenant drops to 60% after year three of the
five-year term.
[41] The Carbon Risk Real Estate Monitor (CRREM) tool converts
internationally agreed climate change mitigation goals (e.g. Paris
Agreement) into geography and sector-specific carbon emission and
energy intensity minimum performance benchmarks.
[42] The BBP is an industry association of leading UK commercial
property owners committed to improving building sustainability.
[43] Excludes refinancing costs of £27.4m