6%-yielding Schroder European Reit rallies on dividend hope despite Seville setback

Seville's Metromar shopping centre is a black spot in Schroder European Real Estate's portfolio as its lender assesses a likely covenant breach, but the shares have advanced as investors eye a restored dividend.

Schroder European Real Estate (SERE ) has suffered another setback with its troubled Seville shopping centre, which it says is probably in breach of its bank loan agreement after a recent recent slide in value. However, dividend hopes have seen the trust’s depress share price rally in the past six weeks.

The real estate investment trust, which aims to invest in ‘winning cities’, this week said the main lender to the Metromar centre - in which it has a 50% stake - planned to instruct a new valuation. Fund manager Jeff O’Dwyer said this was likely to show the covenant restricting the loan from accounting for more than 60% of the property’s value had been breached.

‘The loan is secured solely against the Seville investment, with no recourse back to the group or any other property,’ O’Dwyer told shareholders.

The move reflected ‘the increase in vacancy, declining estimated rental values, and increase in risk to trading at shopping centres from the pandemic in general, which has increased pressure on the yield of the Seville asset as well’.

Most of the decline in Metromar, the only one of the trust’s investments to retain a pandemic ‘material uncertainty’ clause from valuers, was revealed by SERE last month when it published its net asset value (NAV) for 31 December. This showed the retail centre had declined to 2.9% of the portfolio from 3.6% three months before.

However, valuation increases in its other key investments, including a Hamburg office, Dutch industrial assets and its Paris Boulogne-Billancourt project, ensured the portfolio grew 2.8%,  or €7.5m, to €276.1m in the fourth quarter of last year.

This week’s update showed the portfolio valuation slipped 0.6%, or €1.8m, to €274.3m in the first quarter. The decline was 1.2% including the €1.4m SERE spent refurbishing the Boulogne-Billancourt office as part of its ‘transformational’ £95m sale last autumn.

Once again there was good news on the industrial assets, which represent 19% of the portfolio by value, which grew 3.9%. The Berlin DIY store - whose residential conversion potential O’Dwyer discussed at a Citywire virtual event last year - rose 4%, helping to offset the downward pressure from Seville.

There was also good news on rent collection which improved to 93% from 89% in the previous two quarters.

The shares, up 1.4p to 101p today, have rallied 13.5% from 89p when the end-of-year NAV was announced on 3 March and the company declared a 1.57 euro cents first quarter dividend, which offered a a 6.3% forward yield.

Although dividend cover from rental income will fall to 70% while the Paris office is empty and is refurbished, the board said it would use some of the sale proceeds to cover the shortfall. It also stated its intention to increase the quarterly dividend back to the 1.85 cents.

If that is achieved the annualised 7.4 cents dividend will still offer a forward yield of 6.4% at today’s share price equivalent of 116 cents. The uncertainty of that outcome means the shares can be bought on a 26% discount to their estimated NAV of 134.3p, according to the trust’s broker, Numis Securities.  

‘Although the Seville asset continues to be a detractor from performance for SERE, we take comfort that the investment will not impact current income expectations, and the issues relating to the asset are more than reflected in the significantly wide discount of 25% that the shares are trading at,’ said Numis analysts.

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