20 October 2022

AEW UK REIT plc

NAV Update and Dividend Declaration

AEW UK REIT plc (LSE: AEWU) ("AEWU" or the "Company"), which directly owns a value-focused portfolio of 35 regional UK commercial property assets, announces its unaudited Net Asset Value ("NAV") and interim dividend for the three-month period ended 30 September 2022.

Highlights

·    NAV of £193.08 million or 121.88 pence per share as at 30 September 2022 (30 June 2022: £200.40 million or 126.50pence per share).

·      NAV total return of -2.07% for the quarter (30 June 2022 quarter: 6.53%).

·      3.71% like-for-like valuation decrease for the quarter (30 June 2022 quarter increase: 4.49%).

·      EPRA earnings per share ("EPRA EPS") for the quarter of 1.08 pence (30 June 2022 quarter: 1.50 pence).

·     Interim dividend of 2.00 pence per share for the three months ended 30 September 2022, paid for 28 consecutive  quarters and in line with the targeted annual dividend of 8.00 pence per share. 

·     Loan to NAV ratio at the quarter end was 31.07% (30 June 2022: 29.94%). The Company had capital available for deployment of £38.28 million and its loan facility was fully drawn.

·      Cost of debt fixed at 2.959% in May 2022 for the next five years.

·      Share price total return of -16.89% for the quarter (30 June 2022 quarter: -2.86%).

·      Acquisition of JD Gyms, Glasgow, for a purchase price of £2.60 million, representing a capital value of £99 per sq. ft. The price reflects a net initial yield of circa 7.4%. 

·     Completed sale of Moorside Road, Swinton, for £1.71 million, resulting in a circa 13% IRR over the hold period. The sales price reflects a net initial yield of circa 6.6% and a capital value of £75 per sq. ft.  

·      Completed sale of Bath Street, Glasgow, for £9.30 million, following completion of a long running business plan.

·      Completed sale of Eastpoint Business Park, Oxford, for £29.0 million, producing an IRR in excess of 22%.

·      New ten-year lease to Senior Architectural Systems Ltd at Mangham Road, Rotherham, providing a rent of £410,000  per annum representing a significant uplift in income against the previous passing rent of £275,000 per annum.

Laura Elkin, Portfolio Manager, AEW UK REIT, commented:

"With its low fixed cost of debt and value investment style, we believe that the Company's portfolio is robustly positioned to withstand the challenges presented by current market conditions. We expect the number and extent of value investment opportunities in the direct property market to increase against this economic backdrop. The Company's current high weighting of cash and the fact that its strategy is unconstrained by sector leave it well placed to benefit from upcoming investment opportunities. In addition, we are seeing resilience in occupational demand from the Company's tenants. Following full investment of capital available for deployment, the Company's earnings are expected to return to full cover of its dividend, which has now been paid for 28 consecutive quarters."

Portfolio Manager's Review

Having taken the opportunity to complete a number of key sales during the summer, including realising significant profit from the disposal of Eastpoint Business Park in Oxford, the Company currently benefits from a high cash weighting, leaving it advantageously positioned to select assets from the increased number of investment opportunities that are expected to present in the near term. We are currently analysing a pipeline of potential acquisitions, including those assets that the Company had placed under exclusivity over the summer, albeit these are being re-evaluated against today's pricing. The focus of the Company's investment strategy remains to return to full investment and to full cover of its dividend. We believe that balancing the Company's upcoming investment rate against current and prospective pipeline opportunities will be beneficial to shareholder total returns.

The Company's current weighting to cash is reflected in low earnings for the quarter, which are depressed by lost rental income from disposals as well as one-off costs associated with improvement works being undertaken at a number of the portfolio's holdings. These works include those detailed below in Bristol and Rotherham which are both associated with new lettings that will be accretive to the Company's earnings going forward. The Company's prudent accounting provision for doubtful debtors has also been increased this quarter, given the deteriorating economic outlook. The Company will continue to pursue all outstanding arrears.  Our prudent projections indicate a return to full dividend cover during the third quarter of 2023, following the Company's intended return to full investment during the first half of the year.

We believe that the Company and its portfolio are defensively positioned to weather higher interest rates for a number of reasons. The Company took the prudent decision to complete a full refinancing of its loan in May 2022, fixing its cost of debt below 3% for the next five years. This will protect the Company from the impact of rising interest rates on its cost of borrowing. We also believe that high yielding assets, such as those in the Company's portfolio, will be more resilient to the valuation impact of rising interest rates. As yields re-adjust to the current market conditions, it is those assets at the most prime end of the spectrum that have suffered more acutely to date. With higher "starting" yields, the portfolio's current book values are closer to long term value fundamentals, such as vacant possession values, alternative use values and replacement cost. 

Although the outlook from a capital market perspective is one of increased volatility, we are not seeing this reflected in the uptake by tenants of the portfolio's occupational space. Active asset management is a key driver of value and income resilience within AEWU and, during the quarter, we agreed terms with three key tenants to take space, all of which were in line with the rental estimates of our independent valuer, Knight Frank. 

Several of these lettings have been in the portfolio's industrial assets, including the letting in Rotherham to Senior Architectural Systems Ltd. This letting will deliver a rental income to the Company that is 49.09% higher than the previous tenant had been paying and growth within the lease term is also ensured by inflation-linked reviews. The letting secured a capital uplift for the asset of 14.58% during the quarter. This activity highlights the ongoing demand from industrial occupiers at a time when the sector's capital values have generally declined. AEWU's industrial holdings show an average passing rent of £3.37 per sq. ft. and, despite the expectation of some medium-term volatility in capital values, are expected to continue to deliver growth over the long term from this low starting point.

Valuation movement

As at 30 September 2022, the Company owned investment properties with a fair value of £214.25 million. The like-for-like valuation decrease for the quarter of £8.15 million (3.71%) is broken down as follows by sector:

* This is the overall weighted average like-for-like valuation decrease of the portfolio.

Net Asset Value

The Company's unaudited NAV at 30 September 2022 was £193.08 million, or 121.88 pence per share. This reflects a decrease of 3.65% compared with the NAV per share at 30 June 2022. The Company's NAV total return, which includes the interim dividend of 2.00 pence per share for the period from 1 April 2022 to 30 June 2022, was -2.07% for the three-month period ended 30 September 2022.

The NAV attributable to the ordinary shares has been calculated under International Financial Reporting Standards. It incorporates the independent portfolio valuation at 30 September 2022 and income for the period, but does not include a provision for the interim dividend for the three-month period to 30 September 2022.

Share price and Discount

The closing share price reflects a decrease of 18.3% compared with the share price at 30 June 2022. The Company's share price total return, which includes the interim dividend of 2.00 pence per share for the period from 1 April 2022 to 30 June 2022, was -16.89% for the three-month period ended 30 September 2022.

The closing ordinary share price at 30 September represented a discount to the NAV per share of 23.2%. In line with other companies in the sector, the Company's discount widened significantly during volatile market conditions at the end of September.

Rent Collection

The Company has achieved very high rent collection levels, which stand at over 98%¹ for each quarter since March 2020 (excluding the current quarter as rent continues to be collected).

For the rental quarter commencing on 29 September 2022, approximately 94% of rent demanded has been collected, with 98% expected to be received prior to quarter end. The remainder of rents owed will continue to be pursued.

¹Excluding rent arrears from Outfit Retail Properties Limited, Central Six Retail Park, Coventry, which is in administration, with the unit having been vacant since acquisition (November 2021).

Dividend

Dividend declaration

The Company today announces an interim dividend of 2.00 pence per share for the period from 1 July 2022 to 30 September 2022. The dividend payment will be made on 28 November 2022 to shareholders on the register as at 28 October 2022.  The ex-dividend date will be 27 October 2022. The Company operates a Dividend Reinvestment Plan ("DRIP"), which is managed by its registrar, Link Group. For shareholders who wish to receive their dividend in the form of shares, the deadline to elect for the DRIP is 7 November 2022.

The dividend of 2.00 pence per share will be designated 1.00 pence per share as an interim property income distribution ("PID") and 1.00 pence per share as an interim ordinary dividend ("non-PID").

The Company has now paid a 2.00 pence quarterly dividend for 28 consecutive quarters¹, providing income consistency to our shareholders.

¹For the period 1 November 2017 to 31 December 2017, a pro rata dividend of 1.33 pence per share was paid for this two-month period, following a change in the accounting period end.

Dividend outlook

It remains the Company's intention to continue to pay dividends in line with its dividend policy and this will be kept under review. In determining future dividend payments, regard will be given to the circumstances prevailing at the relevant time, as well as the Company's requirement, as a UK REIT, to distribute at least 90% of its distributable income annually.

Financing

Equity

The Company's share capital consists of 158,774,746 Ordinary Shares, of which 350,000 are currently held by the Company as treasury shares.

Debt

The Company completed a refinancing of its debt facility in May 2022. The Company has a £60.00 million, five-year term loan facility with AgFe, a leading independent asset manager specialising in debt-based investments. The loan is priced as a fixed rate loan with a total interest cost of 2.959%. The Company intends to utilise borrowings to enhance returns over the next five years.

The Company had borrowings of £60.0 million at 30 September 2022, producing a Loan to NAV ratio of 31.07%. The loan is now fully drawn.

Investment Update

During the quarter the Company completed the following investment transactions:

Disposals:

Bath Street, Glasgow (office) - Following the expiry of the three-month planning judicial review period, the Company completed on the sale of the property for £9.30 million (£109 per sq. ft.). The sale realises a long-term change of use strategy for the asset, with contracts for the sale having been exchanged with a subsidiary company of IQ Student Accommodation in October 2020. The sale agreement required AEW to negotiate with tenants to bring the asset to vacancy and, as a result, following its sale, the occupancy rate for AEWU's portfolio increased to 92.3% from 87.0%, as at 30 September 2022. At the time of purchase in 2016, the Company intended to keep the asset producing income as a multi-let office however, due to weakening in the occupier market conditions in this location, an alternative use strategy was then pursued.

Eastpoint Business Park, Oxford (office) - The Company completed on the sale of the property for £29.0 million (£388 per sq. ft.). The property was acquired in May 2015 for £8.20 million reflecting a net initial yield of over 9%. The sale price crystallises significant profit, exceeding both the valuation level immediately prior to the sale by 16% and the acquisition price by 254%. The asset has delivered an IRR to the Company in excess of 22% during its hold period. Due to prior valuation increases, the asset was producing an income yield of circa 1.0% and therefore reinvested proceeds from the sale, in assets producing net initial yields between 6.75% and 10%, will be significantly accretive to the Company's earnings. 

349 Moorside Road, Swinton (industrial) - The Company completed the sale of the property for £1.71 million. A sale at this price reflects a net initial yield of circa 6.6% and a capital value of £75 per sq. ft. The freehold property comprises 22,831 sq. ft. of modern industrial accommodation on a 1.4-acre site. The property was acquired in September 2015 for £1,071,577 reflecting a 9.0% net initial yield. A sale at £1.70 million represents a 58% premium to the acquisition price. 

Purchases:

JD Gyms, Glasgow (leisure) - The Company completed the purchase of a high yielding leisure asset in Glasgow for £2.60 million reflecting a low capital value of £99 per sq. ft. and a net initial yield of 7.4%. The property comprises a standalone leisure and retail warehousing unit let to JD Sports Gym Ltd, which operates 74 gyms in the UK and is a subsidiary of JD Sports Fashion Plc. The lease provides an unexpired lease term of 10.4 years, benefitting from five-yearly upward-only reviews. The site also contains a vacant plot of land which may be suitable for redevelopment over the medium term, subject to planning.

Asset Management Update

During the quarter the Company completed the following asset management transactions:

40 Queen Square, Bristol (office) - The Company completed an agreement for lease with existing tenant Konica Minolta Marketing Services Ltd on the third floor. The tenant will enter into a new ten-year lease with a five-year tenant break option at a rent of £218,840 per annum, reflecting a new high rental tone for the building of £40 per sq. ft. The letting is subject to landlord refurbishment works including roof, lift and reception upgrades at a cost of £1.07 million plus eleven months' rent-free incentive. Landlord works commenced during the quarter and are due to complete before the end of the year.

Mangham Road, Rotherham (industrial) - The Company has completed a new ten-year ex-Act lease to Senior Architectural Systems Ltd at a rent of £410,000 per annum reflecting a rent of £5 per sq. ft.  This shows a significant uplift to the rent paid by previous tenant, Hydro Components, at £275,000 per annum. The lease provides for five-yearly rent reviews to the higher of open market rent or RPI, with collar and cap at 2% & 4% per annum, respectively. There was no rent-free incentive granted to the tenant, however the landlord undertook works to upgrade the building at a cost of £964,700. These works were completed during the quarter and are expected to improve the asset's energy efficiency. The tenant benefits from a break option at the end of year five.

Bank Hay Street, Blackpool (retail / leisure) - Repair works at the property which commenced in 2020 have now reached practical completion. The total cost of these works amounted to circa £2.40 million, of which approximately £800,000 is expected to be recovered from tenants. The recoverable elements of this expenditure have been raised within the service charge budget and all tenants are up to date with payments.

Notes to Editors

About AEW UK REIT

AEW UK REIT plc (LSE: AEWU) aims to deliver an attractive total return to shareholders by investing predominantly in smaller commercial properties (typically less than £15 million), on shorter occupational leases in strong commercial locations across the United Kingdom. The Company is currently invested in office, retail, industrial and leisure assets, with a focus on active asset management, repositioning the properties and improving the quality of income streams.  AEWU is currently paying an annualised dividend of 8p per share. 

The Company was listed on the Official List of the Financial Conduct Authority and admitted to trading on the Main Market of the London Stock Exchange on 12 May 2015. www.aewukreit.com

LEI: 21380073LDXHV2LP5K50

About AEW UK Investment Management LLP

AEW UK Investment Management LLP employs a well-resourced team comprising 29 individuals covering investment, asset management, operations and strategy. It is part of AEW Group, one of the world's largest real estate managers, with €87.7bn of assets under management as at 30 June 2022. AEW Group comprises AEW SA and AEW Capital Management L.P., a U.S. registered investment manager and their respective subsidiaries. In Europe, as at 30 June 2022, AEW Group managed €39.7bn of real estate assets on behalf of a number of funds and separate accounts with over 470 staff located in 12 locations.

www.aewuk.co.uk