Schroder European Reit dishes out special Paris dividends

Real estate investment trust pays a second special dividend of €6.4m (£5.5m) as it rewards shareholders with the bumper profits it made selling a Paris office two years ago.

Schroder European (SERE ) is to pay a second special dividend of €6.4m (£5.5m) as it continues to reward shareholders with the bumper profits it made selling an office in the Boulogne-Billancourt district in Paris nearly two years ago.

The real estate investment trust’s declaration of a 4.75 euro cents per share payment this week comes six months after a similar distribution to mop up some of the extraordinary €70m gains it expected to make on the transaction in October 2020.

The special is on top of two quarterly dividends of 1.85c for the half-year to 31 March, that on their own put the £139m investment company on a 5.8% yield. The special and the second quarter dividends will be paid in sterling in August to UK investors. The trust was forced to temporarily halve its quarterly dividend in the pandemic.

The latest ordinary dividends were only half covered by earnings, but the company is using proceeds from the sale to meet the shortfall in income as the Paris office is redeveloped and fund manager Jeff O’Dwyer looks to redeploy the capital. 

At yesterday’s close of 104p, SERE shares stood on a 19% discount below their estimated net asset value (NAV) of 113.1p, according to the trust’s broker, Numis Securities. Over three years the shares have provided a 19.7% total return.

Including the quarterly and second special dividends, the Reit achieved a total investment return of 5.5% over the six months to the end of March, though excluding these NAV dipped 0.2%.

An underlying 4% rise in the valuation of its 13 properties – which are spread across cities including Berlin, Stuttgart, Rennes and locations in the Netherlands – was underpinned by further growth in industrial and warehouse properties, which have experienced soaring demand from e-commerce since the pandemic.

O’Dwyer warned the sector had ‘come back’ as yields compressed and prices rose in the competitive market.

‘Although demand for warehouses is likely to remain strong, we expect rental growth to slow slightly to 3% per annum over the next three years, as logistics developers ramp up activity,’ he said.

However, O’Dwyer is interested in ‘urban logistics’, where he expects rental growth to grow faster than the overall sector.

‘I would like to add some light industrials in hub locations, urban industrials, and selected offices in selected cities,’ he said.

The fund manager is also eyeing the life sciences sector as a potential ‘diversifier’ in the portfolio. ‘You see the investment that has gone into the sector and how the pandemic has been a driver in showing how important it is,’ he said.

‘There are links to strong universities and access to smart graduates, and strong labour forces. Often the universities are in tier two cities as well.’

O’Dwyer said new acquisitions will ‘provide further diversification and help maintain the attractive dividend as we target full cover from sustainable rental income and seek to maximise shareholder returns’.

He added that the income provides a ‘strong hedge against inflation given the underlying annual indexation clauses’.

Rental contracts in the UK are often linked to inflation although capped at a certain level, but O’Dwyer said the system is different in continental Europe. ‘European leases are subject to annual indexing, with the only nuance being in Germany where you have to reach a hurdle rate,’ he said.

‘We do not have any caps [in our contract] and so we may start to see some occupants start to negotiate rents.’

While negotiation of rents is expected, O’Dwyer is not worried that inflation will force tenants to default on their rental payments because he said the rents are set at ‘affordable rates’.

‘We feel comfortable about the affordability of our rents,’ he added.

He believed that the polarisation of returns seen in rents and returns from different sectors over the past few years will grow less acute as underperforming sectors such as offices and retail continue to bounce back.

‘We are seeing growth in retail, and in retail parks in particular,’ he said.

However, one asset that is unlikely to make a quick recovery is the Metromar shopping centre in Seville, which has been written down to zero. A loan made to the asset ‘remains in a cash trap’ and the managers are trying to find a buyer.

‘We have written the equity to nil,’ said O’Dwyer. ‘It is a very tough sub-market and it will depend on the availability of finance as to the price that is paid. It is appropriate to keep it valued at zero.’


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