Schroder European well positioned for further income and growth
Schroder European Real Estate Inv Trust Plc published its annual financial report for the year ended 30 September 2016.
- EUR166.5 million (GBP121.7 million) raised at IPO and two placings
- Acquired seven commercial property assets yielding 5.6% in initial target growth cities within Germany and France
- NAV of EUR157.8 million (GBP136.7 million) at 30 September 2016 (130.2 cps/112.8 pps)
- Dividends of 1.7 cps declared relating to the year to 30 September 2016 - of which 0.9 cps to be paid by way of second interim dividend in January 2017
Good progress with assembly of high quality portfolio in winning cities:
- Invested in seven retail and office properties with attractive long term growth characteristics
- Portfolio valued at EUR148.2 million as at 30 September 2016, reflecting an uplift on purchase price of approximately 5%
- 100% let with 6.5 years average lease term
- Portfolio to benefit from growth trends of urbanisation, demographics and infrastructure improvements
- Post period end, a further EUR16.8 million (GBP15 million) raised through equity placing; and contracts exchanged on an office investment in Paris for EUR30.1 million yielding 9.5%
Debt strategy accretive to returns
- Low cost, long duration debt financing at 22% LTV
- Annual interest cost of 1.19% vs 5.6% property yield generates geared income return of 7.7% (pre costs and tax)
Well placed to deliver target 5.5% Euro dividend and 8-10% property total return once fully invested
- Existing portfolio and attractive investment pipeline on target to meet performance objectives
- EUR60 million investment capacity for further accretive acquisitions
Significant progress has been made in the ten months since the IPO. The equity raised at IPO has been invested in institutional grade, income producing commercial real estate in identified growth markets of Continental Europe, helping the Company achieve its initial objective of building a diversified portfolio generating regular and attractive income returns and positioning the Company to deliver its 5.5% dividend target.
Income returns have been enhanced by applying leverage against assets where borrowing terms are most accretive; the average cost of our debt is 1.19% which compares favourably with property acquisition yields of 5.6%. The Company now has leverage of 22% LTV.
Moving forward, the Company has an identified pipeline of investment opportunities which are under consideration by the Investment Manager and the Board and which fit with the stated investment objectives.
The Company's strategic focus on large and established continental European conurbations is based on the continuing demand/supply imbalance for good quality space and the ongoing structural changes such as urbanisation and infrastructure improvement taking place in those markets. We believe it will also position the Company well to take advantage of potential occupier shifts that are likely to arise following the result of the UK referendum on membership of the EU in June. Growing the Company in a disciplined way that enhances liquidity, economies of scale and performance prospects for shareholders is an important objective for next year and beyond. To this end, on 28 October 2016 the Company raised a further GBP15 million of equity under the placing programme established at IPO. The first acquisition using these proceeds was of a new office in Paris at a net initial yield of 9.5%. As stated at IPO the Company is targeting significant growth from its current capitalisation and further capital raisings will be an important component of this strategy, in order that the Company can take advantage of both existing and new investment opportunities.
Following a concerted period of investment, the Company now owns a portfolio of seven properties valued at EUR148.2 million as at 30 September 2016, reflecting an increase of approximately 5% on the purchase price. The assets are all 100% let on strong covenants, generating EUR8.7 million of annual rental income. The average unexpired lease term is 6.5 years to first break and 8.2 years to expiry. All leases are indexed, which is a positive characteristic supporting the ability to meet the dividend.
The asset in Paris the Company has committed to acquire post period end is expected to complete in January 2017. Increasing the portfolio value to about EUR178 million.
The Company is targeting an annualised euro dividend yield of 5.5% based on the euro equivalent of the issue price as at Admission.
The Company paid its first dividend of 0.8 euro cents per share in September 2016. Directors have declared a second interim dividend in respect of the period to 30 September 2016 of 0.9 euro cents per share based on the number of shares in issue as at the publishing date of this Report. This represents an annualised rate of 2.6% based on the Euro equivalent of the issue price as at Admission.
Sir Julian Berney, Non-Executive Chairman of the Company, commented, "The Company's strategic focus is on track. The acquisition of well located commercial real estate in large, liquid and established continental European conurbations is expected to generate long term income and capital growth for the Company. The key drivers are the demand/supply imbalance of institutional grade assets, along with ongoing structural changes such as urbanisation and infrastructure improvement. We are pleased with the progress we have made to date, both in building our initial portfolio, as well as our debt strategy, which is very accretive to shareholder returns. Looking forward, the Company will look to maximise investment performance from its current portfolio, meet the dividend target and grow in a disciplined manner. As one of the few public UK companies with a solely Continental European commercial real estate portfolio, the Company is ideally positioned to offer investors access to growth markets, significant portfolio diversification and a solid income return. Our ability to leverage the strong track record of the Schroder European investment platform located in the target markets, coupled with current market conditions support our strategic ambitions. This underpins our optimism for the future prospects for the Company as we look to deliver attractive investments and shareholder value."