Trust results round-up: SDCL Energy, Schroder European Reit, Sequoia, Real Estate Credit
SDCL Energy Efficiency Income (SEIT )
Performance
SDCL reported a net asset value (NAV) total return of 7.1% over the year to the end of March, buoyed by a 6.32p dividend. The £609m portfolio supplies locally generated power to companies and helps them to become more energy-efficient. Its 50 projects were valued at £1.2bn in annual results published last week.
Portfolio activity
The fund, which is run by Sustainable Development Capital’s Purvi Sapre, invested £172m during the year, mainly supporting the growth of Onyx, a company working to reduce greenhouse emissions in the energy sector.
Disposals were few and far between as rising economic and geopolitical uncertainties impacted the market and made it more difficult to value businesses. US, European and UK deals stalled. SEIT had expected to sell part of its investment in Onyx but it has not yet signed an acceptable deal.
Corporate activity
Although SEIT shares’s are up 28% over the past month, the fund still trades on a wide discount of 38%. The board acknowledged that the discount means ‘the status quo is clearly unsustainable’. SEIT chair Tony Roper added that the board is ‘considering all strategic options to deliver value for all shareholders in an effective and efficient manner.’
What the manager says
Jonathan Maxwell, chief executive of Sustainable Development Capital and manager of the trust, said ‘structural trends such as persistently high energy prices and increasingly unstable grids reinforced the value’ of the SEIT strategy.
Although market dynamics have impacted prices in the infrastructure and renewables sector, he said the fund had ‘intensified efforts to position SEIT’s assets for NAV growth, and the company’s balance sheet has been optimised’.
‘We are also progressing opportunities across the portfolio to release liquidity, reduce gearing and recycle capital, as we seek to protect and crystallise shareholder value,’ said Maxwell.
SEIT currently yields 11%.
Schroder European Real Estate (SERE )
Performance
The real estate investment trust’s (Reit) NAV increased 0.3% over the year to the end of March once dividends of 2.96 euro cents per share are included. However, the overall value of the portfolio declined 1.4%.
A 4% increase in Schroder European Real Estate’s industrial portfolio, which witnessed a slight tightening of yields, was offset by declines in other sectors, particularly European offices.
Ongoing strength in rents helped to offset the falls in capital values. The 14 assets in the portfolio generated rental income of €16.3m (£14m) a year. The estimated rental value (ERV) of the portfolio was €15.6m, SERE announced last Thursday.
Portfolio activity
SERE manager Jeff O’Dwyer completed six new leases. He also renegotiated existing lease agreements, which generated €300,000 a year of rent.
After the end of the reporting period, he renegotiated a 12-year lease with DIY specialist Hornbach in Berlin above ERV. It is now the second largest tenant in the portfolio, representing 11% of income.
The fund’s Frankfurt grocery asset was sold for €11.8m, in line with the 30 September 2024 valuation.
Corporate activity
The board acknowledged the fund’s small size (with a market cap of £90m) and the associated potential liquidity challenges. This perhaps reflects SERE’s wide discount of 30%. It said it has been looking at ways to address the discount, ‘including share buybacks and a transition towards thematic or sector-specific investments’.
Chair Julian Berney ackowledged the ‘heightened corporate activity that has been seen in the wider Reit market in recent months’.
What the manager says
‘From a market perspective, we foresee positive developments for the European commercial real estate sector as interest rates and inflation continue to decline,’ said O’Dwyer.
‘While improvements may be gradual for the rest of 2025, we anticipate that strengthening conditions will become more pronounced throughout 2026.’
SERE currently yields 7%.
Sequoia Economic Infrastructure Income (SEQI )
Performance
The £1.3bn investor in infrastructure debt saw its NAV decline by 1.3% over the year to the end of March, announced in annual results last Wednesday. However, once the dividend is factored in the NAV total return was 6.1%.
The dividend of 6.875p per share was in line with its target and matched last year’s payout. It was 100% covered versus 104% last year, which was down to the timings of payments, cash drag, and a share buyback (which is accretive to NAV but dilutive for dividend cash cover).
Writedown
The lower NAV reflected a further writedown on an undisclosed loan collateralised by a landmark US educational building, which managers Randall Sandstrom and Steve Cook said was adversely impacted by government cuts that reduced the likelihood of finding a new tenant.
The writedown had an adverse impact on leasing negotiations with prospective tenants.
Other challenges
SEQI started legal proceedings on assets equating to 0.6% of NAV, now classed as non-performing. The loan is backed by a recently revalued asset and is marked in line with a conservative estimate of a recovery backed by that asset.
The number of non-performing loans has fallen to 1% of NAV, from 5.4% the previous year.
Corporate activity
The board bought back 70.4m shares over the year at a cost of £55.9m, and has purchased 213.2m shares via its buyback programme.
What the manager says
After marking SEQI’s 10-year anniversary, Sandstrom said demand for infrastructure funding remained ‘significant’ and is expected to increase, driven by the global mega-trends of decarbonisation, digitalisation, and deglobalisation.
‘Private debt has a vital role in bridging the persistent funding gaps, as regulatory constraints have reduced the capacity of banks to meet borrower needs,’ he said.
‘This is encouraging for the fund’s pipeline and future performance.’
What the analysts say
Stifel analyst Iain Scouller said the ‘key attraction’ of SEQI was its 8% yield and high weighting to fixed rate assets that ‘should provide some steady revenue at a time of falling interest rates’.
‘However, we are wary of the low dividend cover (currently 100%) which could fall further if interest rates continue to decline, with floating revenues declining,’ he added.
Real Estate Credit Investment (RECI )
Performance
The portfolio of subordinated tranches of asset-backed securities grew its NAV by 7.7% over the year to the end of March, bolstered by a 12p dividend.
However, in its annual results published last Wednesday, the board noted the dividend remains uncovered at just 0.8 times earnings.
Cheyne Capital Management’s Ravi Stickney, who manages the trust, is hoping to improve dividend cover by shifting into higher rate investments.
Portfolio activity
The £290m fund continued to migrate to an all-senior loans book, which make up 90% of the book versus 86% last year. While the average life of the loans has been increasing, it is currently 0.8 years and this means there will be significant turnover in the coming year.
Chair Andreas Tatuscher said the deal pipeline is creating opportunities to lend at returns over 10%, which should enhance portfolio returns and dividend cover.
There were no additional challenged loans declared over the year, with the fund already battling two Parisian offices and one retail position.
The fund invested £139.8m back into existing investments over the year, versus £95.2m in the previous year. RECI also received cash repayments and interest of £113.6 million over the period, which compares to £134.2m the year before.
What the chair says
Tautscher said easing inflation should result in further interest rate cuts, albeit at a slower rate than was previously expected, particularly in the UK.
‘Nonetheless, a gradual shift towards a lower interest rate environment, even if it does not reach the ultra-low levels of recent years, should prove supportive for RECI as it continues to provide investors with a highly attractive and sustainable yield,’ he said.
RECI currently yields 9%.
