Schroder European Real Estate (SERE)
12/12/2024
Results analysis from Kepler Trust
Intelligence
Schroder
European Real Estate has reported a NAV total return of 0.4% for
the year ending 30/09/2024, having paid dividends per share of 5.92
euro cents. The dividend was 103% covered by EPRA earnings, which
were up 3% on the previous year thanks to rental growth outpacing
interest costs.
Dividends
offset a decline in the portfolio value of 3.6%, due primarily to
outward yield movement in the first half of the year. The manager
notes that recent evidence suggests a stabilisation of values, and
has observed an increase in investment volumes for smaller lot
sizes in desirable cities.
During the
year, the company strengthened its balance sheet, completing all
near-term refinancings which means the average interest cost is
just 3.2%. No debt is due to expire until June
2025.
The
loan-to-value is a modest 25% net of cash, and the manager has c.
€25 million of cash available for investment or other uses.
Management is working on the disposal of Seville, which if
successful, will reduce gearing to 22% net of
cash.
Over the
period, SERE's discount has narrowed but still stands at an
attractive c. 33%. This compares to a c. 21% average for the AIC
Property - Europe sector and 22% for the AIC Property - UK
Commercial sector.
Kepler
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Schroder European Real
Estate's (SERE) main attraction is the high yield which is
magnified by the current wide discount. The fully-covered dividend
would equate to a c. 7.2% yield on the share price at the time of
writing. This is backed by a portfolio which is 96% occupied, and
after 100% of rent due was collected for the year. Management
completed 16 new leases or re-gears over the 12 months under review
with a weighted average life of 8 years.
A small decline in the value
of the property portfolio over the period was expected and modest,
but hopefully reflects the end of a tough period for real estate
amid high inflation and interest rates. Almost all the write-down
was taken in the first half ending in March, which therefore
pre-dates the ECB's rate cuts which began in June and have taken
the key lending rate from 4.5% to 3.4%. It is encouraging to hear
from the manager his observations that a pick up in activity seems
underway, and further rate cuts are widely expected which should
improve the backdrop even more.
There are concerns around the
outlook for European economies, but SERE should benefit from a
relatively defensive positioning in high quality locations and
properties. Approximately 33% of the portfolio by value is
offices, which are in supply-constrained locations and leased off
affordable rents. The industrial exposure of 30% is a mixture of
distribution warehouses and light industrial accommodation in
growth cities within France and The Netherlands. The retail
exposure is limited to 17% and comprises DIY and grocery
investments rather than fashion and other discretionary
sectors. SERE also has 9% of the portfolio allocated to the
alternatives sector, comprising a mixed-use data centre and a car
showroom. Substantial cash on the balance sheet provides firepower
for asset management initiatives, buybacks or other
measures.
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