22 November 2023

AEW UK REIT PLC

Interim Report and Financial Statements

for the six months ended 30 September 2023

AEW UK REIT PLC ("AEW UK REIT" or the "Company"), which holds a diversified portfolio of 35 commercial investment properties throughout the UK, is pleased to publish its Interim Report and Financial Statements for the six months ended 30 September 2023.

Mark Burton, Chairman of AEW UK REIT,?commented: "We have been encouraged by the Company's performance this period with NAV total return of 4.30%. All sectors of the Company's portfolio outperformed the MSCI index, demonstrating the benefits of our active asset management style in delivering performance throughout market cycles. I am pleased to report significant progress towards the Company's strategic objective of reinvesting surplus capital into higher yielding assets which are expected to deliver NAV growth over time. The purchases of NCP, York, and Cambridge House, Bath, have returned the portfolio to being materially fully invested, with EPRA earnings growing accordingly. NAV grew by 0.49%, driven by two successive quarters of positive valuation movement and accretive asset sales, where values were felt to have been maximised over the medium term. This momentum in activity has helped to create a healthy near-term outlook and we are pleased to have confirmed continued payment of the Company's market-leading 2p quarterly dividend, which has now been paid for 32 consecutive quarters."

Financial Highlights

Property Highlights

^* See KPIs in the full Half Year Report for definition of alternative performance measures.
^** See glossary in the full Half Year Report for definition of alternative performance measures.
¹ The valuation figure is reconciled to the fair value under IFRS in note 12.

Chairman's Statement

Overview

Despite the lacklustre economic headlines, we were encouraged to see the portfolio's performance return to positive territory in the first half of the year, following a tumultuous period for UK property valuations. During the period, the Company achieved NAV growth of 0.49%, with two successive quarters of positive valuation movements and numerous NAV accretive sales having been completed. Positive like-for-like valuation movement was seen in all sectors of the Company's portfolio, with the exception of offices, which are still stabilising. All sectors of the Company's portfolio outperformed the MSCI index during the period, demonstrating the benefits of an actively managed portfolio. Quarterly EPRA earnings per share ('EPS') grew by 4% during the period, with EPS reaching 1.84pps for the quarter ending 30 September 2023. Further growth in earnings and NAV are expected in the near term.

The commercial property investment market remained subdued during the period, with transaction volumes in all sectors well below historic averages. Despite the depressed transactional activity, the Company has identified plentiful pipeline opportunities. Less direct competition and a greater prevalence of mispricing have resulted in value investment opportunities being more numerous.

To exploit these opportunities, the Company has undertaken a strategy of selective capital recycling, in order to benefit from the attractive locations and advantageous pricing in its pipeline. Assets have been sold where their values have been maximised over the medium term and their earnings are below those seen in the Company's pipeline. During the period, the Company undertook three sales where offers had been received at levels that maximised asset value over the short to medium term. These sales included two industrial assets in Leeds and Bradford, sold as a package for a blended net initial yield of 6.2%, far below the Company's achieved average purchase yield during the period of 8.6%, demonstrating the Company's ability to crystallise asset management gains by selling out of lower yielding assets and recycling them into higher yielding assets, thereby enhancing earnings. The sale prices exceeded the assets' valuations prior to disposal by an average of 14%. The third sale was of an industrial property in Deeside, which was sold vacant for an 8% premium to the prior valuation. The asset was sold in order to avoid a costly refurbishment programme. These sales added to the Company's existing strong track record of crystallising net gains on disposal. The resulting capital profit will be utilised, where needed, to supplement earnings in the payment of the Company's market leading dividend, which has now been paid for 32 consecutive quarters.

I am pleased to report significant progress towards the Company's strategic objective of reinvesting capital generated from sales into higher yielding assets in core urban locations. The purchases of NCP, York, and Cambridge House, Bath, utilised most of the capital available for deployment and have strengthened earnings with a combined initial yield of 8.6%. Both assets have robust reversionary potential, each offering yields in excess of 10%, thus furthering their potential accretion to earnings over time. Despite the short-term negative impact on NAV of acquisition costs, these purchases are expected to deliver NAV growth over the medium term. Critical to these acquisitions were the strong locations of the assets, both of which occupy attractive central pitches in cities with a tight supply of land.

This has been a fruitful period for the Company's active asset management capabilities, with high numbers of leasing transactions completing that have fuelled earnings growth and bolstered NAV. The Company's portfolio has seen robust occupational activity across all major market sectors, with a particular concentration of activity in retail sectors, where the Company has focused much of its recent purchases. This activity is testament to the Investment Manager's expertise in stock selection and proactive asset management, both of which have driven the strong total return performance achieved by the portfolio's assets.

Further benefits to earnings and values from asset management transactions are expected to be realised over coming periods, with a number of key negotiations ongoing. As at the period end, the Company had a reversionary yield of 8.72%, as independently assessed by the valuer, Knight Frank, versus an initial yield of 7.31%. This is a measure of the inherent potential for future income growth that the current portfolio provides. Given the portfolio retains a low average passing rent of £6.29 per sq ft, this represents a conservative starting point for value protection and income growth.

Financial Results

* see note 10 of the Financial Statements for the corresponding calculations. See the Investment Manager's Report for further explanation of performance in the period.

Awards

I am delighted that the Company's performance and practices have been recognised in four awards received during the period. The Company has once again been awarded a gold medal by EPRA, the European Public Real Estate Association, for its high standard of financial reporting and a silver medal for standards of sustainability reporting. These awards are testament to the Company's robust governance and transparency.

The Company also won the Citywire investment trust award in the 'UK Property' category for the fourth successive year, as well as winning the 'Property' category at the Investment Week Investment Company of the Year awards.

Board Changes

As announced previously, I am very pleased to confirm the appointments of Mr Robin Archibald and Mrs Liz Peace as independent Non-Executive Directors to the Board of the Company, effective 1 October 2023. As part of orderly succession planning, Robin has been appointed as Chairman-elect and will succeed as Chairman of the Board upon my retirement at the Company's 2024 AGM. I am delighted that Robin and Liz are joining the Board and I am confident that their experience and range of skills will complement and further strengthen the existing Board for many years to come. Their collective extensive knowledge and experience in property and investment companies will be of great benefit. I look forward to working closely with Robin to ensure a smooth handover until September 2024.

On 30 September 2023, Mr Bim Sandhu retired from the Board as Chairman of the Audit Committee, having reached the end of his nine-year tenure as a Director of the Company. As first announced on 10 November 2022, Mr Mark Kirkland was appointed as Chairman-designate of the Audit Committee and has now succeeded Mr Sandhu as Audit Committee Chairman. On behalf of the Board, I thank Bim for his invaluable contribution since the IPO of the Company, and wish him well for his future endeavours.

Outlook

We are pleased by the Company's progress in continuing to invest capital into attractive pipeline assets, where market conditions have enabled attractive pricing levels. These purchases have returned the Company's portfolio to being materially fully invested and as a result, income levels have grown accordingly. We are reassured by the occupational resilience that the portfolio has shown during a period of ongoing uncertainty. The quantum of asset management activity completed during the period is testament to the Investment Manager's proactive approach and to the quality of assets held in the portfolio. This activity has also boosted earnings and creates a healthy near-term outlook for further growth.

The Board believes that the ongoing relevance of the Company's strategy is highlighted by its consistent outperformance of the MSCI benchmark, with a five-year annualised outperformance of 6.66%. The Company has identified a plentiful pipeline, which has presented excellent opportunities for a diversified, value-focused investment strategy that is nimble in making cross-sector and often, counter-cyclical moves, thereby delivering optimal value to Shareholders. We believe that the relevance of this strategy is highlighted by the robustness of the Company's share rating, whose discount to NAV has consistently been the narrowest of its peers in the UK diversified peer group.

The Board and Investment Manager will continue to take a prudent approach to the ongoing management of the Company, alongside considering opportunities for investment, growth and capital recycling, as they arise.

Mark Burton

Chairman

21 November 2023

Investment Manager's Report

Property Market Outlook

Despite uncertainty remaining in the wider economy, values in UK commercial property largely stabilised during the six months to 30 September 2023. UK property is expected to offer healthy return prospects over the coming periods, with consensus forecasts showing an expected return to positive rental growth across all major market sectors by 2025, and all UK property total returns to average 5.6% per annum over the next five years (2023-2027).

Industrial

During the period, the industrials sector remained robust having been the sector which saw the steepest value declines at the end of 2023. Supported by resilient levels of occupational demand, the sector has continued to see the highest levels of rental growth and although this is expected to slow in coming years, it is expected to remain in positive territory, showing expected average annual growth of 3.3% between 2023 and 2027. We believe that the Company's industrial portfolio, with a low average passing rent of £3.60 per sq ft, will be well placed to benefit. The Company has completed several sales from the sector during the period, where sales yields have compressed significantly compared to pipeline assets, due to vendors' positive expectations on rental growth.

Retail

Values in the retail sector also faired robustly during the period, buoyed by positive sector indicators. Retail sales volumes increased 0.3% over the three months to August 2023 and the proportion of online retail sales fell marginally in the month to August. These figures, however, mask a divergence in performance of the underlying retail sectors, with retail warehousing remaining more robust on a total return basis than its high street equivalent. Vacancy levels across retail warehousing have fallen to 4.7%, the lowest level seen since 2018. Performance on the high street remains significantly polarised from town to town, with the top tiers remaining robust and those now deemed to be lower quality struggling, both for occupational and investor demand.

The period saw the failure of Wilko, which affected both high street and retail warehousing locations. Tenant failures and CVAs have not been as common as compared to the more regular occurrence seen during the Covid pandemic, however we remain cautious of further distress in the sector.

Office

The Office sector saw a stronger post-Covid recovery in 2022 than some may have expected, with office-based employment growing in 2022. This trend started to reverse during 2023, resulting in negative capital growth seen across most locations. Occupational uncertainty remains across the sector, as businesses continue to transition to new working patterns. Tenants have also become more discerning in recent years, with occupiers now wishing to benefit from strong sustainability credentials as well as surrounding amenities and top-quality space. This is particularly the case for large corporate tenants, but it is increasingly becoming a key factor for smaller businesses too. As a result of all these factors, we have seen investor demand for the sector remain light, with investors further deterred by the high costs associated with delivery.

Alternatives

Across alternative sectors, visibility of performance in trading updates is key to investor demand and where these have remained robust, despite the squeeze on consumer discretionary spend, investment volumes have held up. Generally, leisure has historically fared relatively defensively during periods of economic uncertainty. Operators carrying unsustainably high levels of debt are seen as a concern, however. We find the sector attractive on a selective basis, particularly for assets that offer a superior income return and occupy larger land holdings, or sites in urban areas that can often be underpinned by alternative use values, most likely residential.

Financial Results

The Company's NAV as at 30 September 2023 was £167.93 million or 106.00 pps (31 March 2023: £167.10 million or 105.48 pps). This represents an increase of 0.52 pps or 0.49% over the six-month period, with the underlying movement in NAV set out in the table below:

EPRA EPS for the period was 3.58 pence which, based on dividends paid of 4.00 pps, reflects a dividend cover of 89.50%. The increase in dividend cover compared to the prior six-month period has largely arisen due to the completion of key asset management transactions. Our portfolio has gradually been reducing its industrial exposure over the past 18 months, and although this may not continue at the same rate going forward, it has allowed us to crystallise profits made in the sector and concurrently recycle the resulting capital into high yielding assets in our pipeline, mostly within other market sectors. We believe that this ability to move nimbly between property sectors in order to extract maximum value from our portfolio is a key strength of our strategy.

Further gains in EPS are expected in the coming quarters as the ongoing programme of new lettings should provide a boost to income streams and a reduction in void costs. The Company's focus for the deployment of capital continues to be further accretive investment opportunities, alongside re-investment into the existing portfolio where capex is needed in order to drive future performance gains.

Rent collection rates have reached 99% for both the March 2023 and June 2023 quarters respectively, with further payments expected to be received under longer-term payment plans. Of the outstanding arrears, the Company has made a £1.27 million expected credit loss provision, given the challenging economic outlook. The Company will continue to pursue all outstanding arrears.

The ongoing charges ratio has increased during the period as a result of the decline in the valuation of the portfolio rather than an increase in the Company's underlying cost base.

Financing

The Company holds a £60.00 million five-year term loan facility, maturing in May 2027. The loan is held with AgFe, a leading independent asset manager specialising in debt-based investments. It is priced as a fixed rate loan with a total interest cost of 2.959%. In the current inflationary environment, the Company considered it prudent to fix the loan and interest, rather than run the risk of further interest rate rises during the loan term.

The details of the loan facility are as follows:

Property Portfolio

In the year to 30 September 2023, the Company outperformed the benchmark in total return terms across all property sectors, demonstrating the benefits of an actively managed portfolio. This was driven by capital growth outperformance in all sectors aside from retail, and income return outperformance in all sectors aside from offices.

The following tables illustrate the composition of the portfolio in relation to its properties, tenants and income streams: