Aew Uk Reit Regulatory News (AEWU)

27 July 2022

AEW UK REIT Plc

NAV Update and Dividend Declaration

AEW UK REIT plc (LSE: AEWU) (the "Company"), which directly owns a value-focused portfolio of 37 regional UK commercial property assets, announces its unaudited Net Asset Value ("NAV") and interim dividend for the three-month period ended 30 June 2022.

Highlights

· NAV of £200.40 million or 126.50 pence per share as at 30 June 2022 (31 March 2022: £191.10 million or 120.63 pence per share).

· NAV total return of 6.53% for the quarter (31 March 2022 quarter: 7.37%).

· 4.49% like-for-like valuation increase for the quarter (31 March 2022 quarter: 4.74%), driven by a 17.62% like-for-like increase from the office sector associated with the anticipated sale of Eastpoint Business Park in Oxford.

· EPRA earnings per share ("EPRA EPS") for the quarter of 1.50 pence (31 March 2022 quarter: 1.55 pence). This is expected to return to the Company's target level of 2.00 pence per quarter once the sales of both Eastpoint Business Park, Oxford and Bath Street, Glasgow, complete during August and sales proceeds have been reinvested.

· Interim dividend of 2.00 pence per share for the three months ended 30 June 2022, in line with the targeted annual dividend of 8.00 pence per share. 

· New £60 million debt facility with AgFe priced at a fixed total interest cost of 2.959% for five years. Following this refinancing, the existing RBSi loan facility has been repaid in full.

· Loan to NAV ratio at the quarter end was 29.94% (31 March 2022: 28.26%). The Company had a cash balance of £4.51 million and its loan facility was fully drawn.

· Acquisition of Railway Station Retail Park in Dewsbury for a purchase price of £4.70 million, a capital value of £82 per sq. ft. The price reflects a net initial yield of circa 9.4%. 

· Attractive investment pipeline of value-orientated assets showing net initial yields between 6.75% and 10% is under exclusivity. 

· Post quarter end, contractually committed disposal of Eastpoint Business Park, Oxford for £29.0 million, a 16% premium to the asset's value within the published NAV. Completion of the sale will take place on 8th August 2022. As a result of the transaction having exchanged post quarter end, a further 2.5p is expected to be realised in the Company's Net Asset Value per share.

· Post quarter end, exchanged contracts for disposal of Moorside Road, Swinton for £1.71 million, at a 58% premium to the acquisition price, reflecting a net initial yield of circa 6.6% and a capital value of £75 psf. Completion is due to take place prior to the end of July.

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

"The portfolio's strong capital performance continues this quarter, with the majority of the assets demonstrating continued resilience. The office sector value gains seen in the portfolio of late, following a period of strong performance by our industrial assets in previous quarters, demonstrate the benefits of the strategy's ability to invest across market sectors to maximise value at different times. It is also an indicator of the positive NAV impact our proactive approach to portfolio management can have. In a value portfolio such as this, active asset management can continue to drive defensive capital performance at times when values in general may be experiencing increased volatility. Asset management activity this quarter demonstrates this point, with value accretive transactions seen in all major market sectors."

Portfolio Manager's Review

Capital growth in the Company's office assets was driven in the most part this quarter by the Eastpoint Business Park in Oxford which has now been formally revalued for the first time since being placed under offer for sale in April. The value of the asset rose 43% during the quarter although, due to the sale having exchanged post quarter end, further NAV uplift equating to 16% of the 30 June 2022 valuation is expected to follow. This is expected to add a further 2.5p to the Company's Net Asset Value per share.

Following a refinancing in May, the Company now benefits from a fixed cost of debt for the next five years, putting it at a significant advantage to those competitors still paying floating rates. The Company has been able to lock in a cost of debt below 3% due to its tactical decision to refinance at this time. Debt finance is also deployed at a modest level of circa 30%, limiting risk in future cycles.

The high yielding nature of the AEWU portfolio provides significant headroom against rising interest rates that have started to impact prime yields in some sectors. The portfolio's low capital values also provide a defensive starting point due to their correlation with replacement costs and optionality for alternative uses. 

Earnings for the quarter of 1.50 pence per share are below target, predominantly due to the continued impact of vacancy at Bath Street, Glasgow. Following the completed sales of Glasgow and Oxford, which are both due during August, earnings are expected to return to the Company's target level of 2.00 pence per share per quarter once sales proceeds have been reinvested. The Company's 12-month backward looking dividend cover currently sits at 77% and total historic dividend cover at 97%.

We have placed a significant pipeline of attractive assets under exclusivity and endeavour to complete acquisitions promptly in order to return the portfolio to a fully invested and maximum income producing position. These pipeline assets have been sourced based upon the same value investment principles as the existing portfolio, with net initial yields ranging between 6.75% and 10%. Further announcements regarding investment transactions are expected in the coming weeks. Following both of these planned sales, the Company's office exposure is projected to reduce to 8% of the portfolio.

As mentioned above, the Manager has completed several value accretive asset management transactions this quarter. These have been undertaken across all major property sectors, highlighting that tenant activity continues where market appropriate levels of ERV have been applied. This has been particularly reassuring in the high street retail and leisure sectors where tenants on the whole remain keen to secure suitable premises to ensure the future of their businesses, despite the backdrop of a gloomier economic outlook. From our experience, this applies to both large national multiples, with whom we are currently engaging in respect of vacant accommodation, and smaller emerging chains, as demonstrated by the letting discussed below in Portsmouth to Kokoro which has been achieved 15% ahead of our independent valuer's estimated rental value.

Occupational demand also continues to be strong in the industrial and warehousing sectors, contrary to the turbulence seen in the share prices of some of the major listed REITs in these sectors. The portfolio is well placed to benefit from this demand with an average passing rent psf in the Company's warehousing portfolio of £3.40 psf. The Company has also continued to crystallise profit in the sector having exchanged contracts for the sale of Moorside Road in Swinton, the portfolio's smallest industrial asset, for £1.71m, 58% ahead of its purchase price in 2015, post quarter end.

Another excellent outcome for the portfolio this quarter has been the completion of Konica Minolta's agreement for lease at Queens Square, Bristol. The letting will secure a new high rent of £40 psf in this building which has already seen significant rental growth of 29% since its purchase.

In retail warehousing, a lease renewal with Charlie's Stores at Arrow Point, Shrewsbury has been completed at a level 50% ahead of estimated rental value. The portfolio's holdings within this sector are expected to provide an ongoing source of value and income creation as various key business plans make headway.

Valuation movement

As at 30 June 2022, the Company owned investment properties with a fair value of £255.65 million. The like-for-like valuation increase for the quarter of £10.78 million (4.49%) is broken down as follows by sector:

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

Net Asset Value

The Company's unaudited NAV at 30 June 2022 was £200.40 million, or 126.50 pence per share. This reflects an increase of 4.87% compared with the NAV per share at 31 March 2022. The Company's NAV total return, which includes the interim dividend of 2.00 pence per share for the period from 1 January 2022 to 31 March 2022, was 6.53% for the three-month period ended 30 June 2022.

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

Rent Collection

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

For the rental quarter commencing on 24 June 2022, approximately 89% of rent 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, who are 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 April 2022 to 30 June 2022. The dividend payment will be made on 31 August 2022 to shareholders on the register as at 5 August 2022. The ex-dividend date will be 4 August 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 9 August 2022.

The dividend of 2.00 pence per share will be designated 1.50 pence per share as an interim property income distribution ("PID") and 0.50 pence per share as an interim ordinary dividend ("non-PID").

The Company has now paid a 2.00 pence quarterly dividend for 27 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 secured a new £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 existing RBSi loan facility, which was priced at a floating rate according to SONIA, was due to mature in October 2023 and has been repaid in full by the new loan facility. Simultaneous to the funding, the Company's interest rate cap was sold for proceeds of £743,000. In the current inflationary environment, the Company considers it prudent to fix the loan now, rather than run the risk of further rising rates. The Company intends to utilise borrowings to enhance returns over the next five years.

The Company had borrowings of £60.0 million at 30 June 2022, producing a Loan to NAV ratio of 29.94%. The loan is now fully drawn.

Investment Update

During the quarter the Company completed the following investment transaction:

Railway Station Retail Park, Dewsbury (retail warehouse) - In June, the Company completed the acquisition of a 6.04-acre Railway Station Retail Park in Dewsbury for a price of £4,700,000. The purchase price reflects a low capital value of £82 psf and provides an attractive net initial yield of 9.4%. The park occupies a prominent location on the edge of the town centre within an established retail and leisure area. Neighbouring occupiers include Sainsburys, Aldi, Matalan, Pets at Home and Iceland, as well as a council operated library and sports facility. Dewsbury has a tight supply of retail warehousing stock, with no current vacancies within the town.

The park is fully let with a low average passing rent of £8.28 psf, which the Manager believes provides strong potential for rental growth. Tenants include Sports Direct, Mecca Bingo, Fieldrose Ltd, trading as KFC, and the Danish furniture retailer, Jysk.

Post quarter end, the Company undertook the following investment transaction:

Eastpoint Business Park, Oxford (office) - During July, the Company exchanged contracts to sell the Eastpoint Business Park in Oxford for the price of £29 million. The asset was acquired in May 2015 for £8.2 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.

In 2018, the Company signed a new 25-year lease with specialist healthcare provider Genesis Care. The lease provided for 5 yearly rental uplifts in line with RPI which increased the asset's value by £2.0m. As a condition of this letting, the Manager sought planning consent for change of use away from the asset's existing office use setting a precedent for healthcare and life science use in the location.

Since this time, investor demand in the healthcare and life science sectors has increased and this is reflected in the sale pricing now achieved. Since announcing an agreed sale price of £37 million on the 25 April, the rising cost of debt combined with a more uncertain economic outlook impacted the potential purchasers' assessment of the development risk and required returns associated with the project, resulting in them withdrawing from the transaction altogether. The Company received a number of offers for the asset and accordingly the property went under offer to another party and ultimately will complete at a reduced price of £29 million, with contracts having now been exchanged.

The sale is due to complete on 8 August 2022 and the Company will receive income from the asset until this date. Subsequent to this, the Manager intends to reinvest the sale proceeds in assets producing net initial yields between 6.75% and 10% and has exclusively secured a pipeline of attractive assets with further announcements in this regard expected imminently. Due to recent valuation increases, Oxford is currently producing an income yield of circa 1.0% and therefore, reinvested proceeds from the sale will be significantly more accretive to the Company's earnings. 

Due to the exchange of the sale post quarter end, a further 2.5p is expected to be realised in the Company's Net Asset Value per share.

349 Moorside Road, Swinton (industrial) - Post quarter end, the Company has exchanged on 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 psf. 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% initial yield. A sale at £1.7 million represents a 58% premium to the acquisition price. Completion of the sale is due to take place prior to the end of July. 

Asset Management Update

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

Arrow Point, Shrewsbury (retail warehouse) - During May, the Company completed the renewal of Charlie's Stores' lease on straight 10-year term at a rent of £385,000 per annum reflecting £11 psf, versus an ERV of £7.50 psf. Charlie's Stores is the scheme's anchor tenant, so this is an important letting for the property. Only 9 months' rent-free incentive was given. The valuation consequently rose by £300,000 to £10 million, having already increased by £1.35 million on the 2021 purchase price of £8.35 million.

40 Queens Square, Bristol (office) - The Company has completed an agreement for lease with Konica Minolta Marketing Services Ltd on the third floor. The tenant will enter into a new 10-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 psf. The letting is subject to the Company undertaking landlord works comprising a comprehensive Cat A refurbishment and roof, lift and reception works at a cost of £1.07 million plus 11 months' rent-free incentive. The headline rent demonstrates the strong location and property fundamentals of the asset.

Commercial Road, Portsmouth (high street retail) - During May, the Company completed a new 15-year lease to Kokoro UK Limited, a Japanese-Korean restaurant. The agreed rent is £52,500 per annum versus an ERV of £45,750 per annum. The tenant has the benefit of a 12-month rent free period and a tenant only break option at the end of the tenth year.

Diamond Business Park, Wakefield (industrial) - During June, the Company completed a new letting of Units 8 and 9 to Wow Interiors, an existing tenant on the estate already occupying Unit 7. Wow have taken a new six-year lease with a tenant break option at the end of the third year. The commencing rent of £3 psf will increase to £3.50 psf in years 2 and 3, and subsequently £3.75 psf from year 4 onwards. In doing so, the Company has also completed a lease regear on Unit 7, removing Wow's 2022 tenant break option and agreeing a 3-year reversionary lease with a tenant break option mirroring Units 8 and 9.

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 26 individuals covering investment, asset management, operations and strategy. It is part of AEW Group, one of the world's largest real estate managers, with €85.2bn of assets under management as at 31 March 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 31 March 2022, AEW Group managed €39.5bn 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