Aew Uk Reit Regulatory News (AEWU)

15 August 2016

NAV Update and Dividend Declaration for the three months to 31 July 2016

AEW UK REIT plc (LSE: AEWU) ("the Company"), which owns a diversified portfolio of 27 regional UK commercial property assets, announces its quarterly unaudited Net Asset Value ("NAV") and interim dividend for the period ended 31 July 2016.

Key points

· Fair value independent valuation of the property portfolio increased to £125.48 million (30 April 2016: £114.34 million) following the acquisition of two properties during the period for a total of £13.2 million (net of £0.95 million acquisition costs which have been written off).

· On a like-for-like basis the valuation of the property portfolio decreased slightly by 1.81% over the quarter, mainly as a result of market uncertainty before and after the EU referendum, which also led to a reduction in the value of the Company's investment into the AEW UK Core Property Fund to £8.65 million (30 April 2016: £10.11 million).

o The value of the REIT's interest in the AEW UK Core Property Fund ("the Core Fund") is now 14.4% below its value as at 30 April 2016 despite the underlying fall in value of the property held by the Core Fund being only 2.6% down. This is predominantly a result of the Manager's movement of the fund's swinging single price from offer to bid and also the application of a further dilution levy of 5% to the funds overall pricing. As a result, the value of the Company's holding in the Core Fund is now 6.4% below the current NAV of the Core Fund as at 31 July 2016.

· Fourth interim dividend of 2.0 pence per share declared on 31 May 2016, paid on 30 June 2016 reflecting a dividend yield of 8.4% based on the share price as at 31 July 2016.

· NAV per share of 94.57 pence (30 April 2016: 99.03 pence).

· Earnings per share (excluding revaluation gains and losses on fair value of investments and calculated on weighted average of shares in issue) for the three month period ending 31 July 2016 of 1.98 pence per share.

· Gross Loan to Value of 19.8% (30 April 2016: 11.5%) and Net Loan to Value of 16.7% (30 April 2016: 5.1%), remaining prudent following the two acquisitions in the period.[i]

· Strong asset management progress continues to deliver shareholder value. Highlights include:

o A 21,560 sq ft letting, on a 15 year lease, to Smyths Toys at Valley Retail Park in Belfast, which has helped AEW UK increase the WAULT from 3.6 years to 10.5 years to break and occupancy from 78% to 100%, leading to a 51% increase in valuation to £10.75 million since purchase in August 2015.

o Signing three 10 year leases at 40 Queen Square in Bristol for c45,000 sq ft in aggregate to commercial law firm, Beale & Company; planning consultancy, Turley; and commercial building consultants, Malcom Hollis resulting in the property being 80% let or pre-let.

Alex Short, Portfolio Manager, AEW UK REIT, commented:

"It is still early days since the referendum, but we are encouraged by the performance of the AEW UK REIT portfolio, as well as by the wider UK commercial property market since 24 June 2016, with the occupier market remaining active. While valuers continue to caveat heavily their assessments, AEW UK REIT is the first of its immediate peer group to announce a NAV that covers some of the post referendum period and the minimal reduction of 1.81% over this period is testament to the resilient and diversified nature of the portfolio, as well as the success of its ongoing asset management initiatives.

"There continues to be increasing tenant demand, particularly for business space assets in strategic regional locations and regional cities across the UK, as they increasingly become location choices away from London for established financial and professional services and technology, media and telecoms businesses. This, coupled with an acute shortage of good quality supply, which is leading to rental price uplifts, gives confidence and provides assurance in AEW UK's current investment strategy.

"With the expectation that Central London property valuations may prove to be more volatile in current market conditions, the outlook for commercial property returns in strong UK regional locations remains positive for the foreseeable future. AEW UK REIT's low level of gearing and the strength of its covenants gives us confidence that, by continuing to focus on income producing assets, it can continue to deliver on its stated dividend policy across the portfolio and generate market-leading total returns to shareholders."

Net Asset Value

The Company's unaudited NAV as at 31 July 2016 was £111.13 million, or 94.57 pence per share. This reflects a decrease of 4.50% per share compared with the NAV as at 30 April 2016, or a reduction in the NAV total return of 2.49%, including the fourth interim dividend of 2.0 pence per share for the period from 1 February 2016 to 30 April 2016. As at 31 July 2016, the Company owned investment properties with a fair value of £125.48 million. The Company's investment in the AEW UK Core Property Fund is valued at £8.65 million and the Company had cash balances of £4.12 million, of which £1.57 million is available for capital investment.

The NAV attributable to the ordinary shares has been calculated under International Financial Reporting Standards and incorporates the independent portfolio valuation as at 31 July 2016 and income for the period, but does not include a provision for the interim dividend for the period to 31 July 2016.

Following the EU referendum result, and in common with other independent valuers, Knight Frank has stated that there is still a shortage of comparable evidence of arm's length transactions since the Referendum. Knight Frank have, therefore, had to exercise a greater degree of judgement than would be applied under more liquid market conditions. The probability of their opinion of value exactly coinciding with the price achieved, were there to be a sale, has reduced.

The value of the Company's investment in the AEW UK Core Property Fund has also been affected by the same valuation movement resulting from market uncertainty following the EU referendum result. Following a modest demand for liquidity from some investors in the Core Fund, its independent Governance Committee, sub Pricing Committee has recommended the manager moves the fund's swinging single price from offer to bid and also applies a further dilution levy of 5%. The Company's auditors, KPMG, advise that this price should be used to value the Company's holding in the Core Fund, which is 6.4% below the current NAV of the Core Fund as at 31 July 2016. The value of the REIT's Core Fund interest is now 14.4% below its value as at 30 April 2016 despite the underlying fall in value of the property held by the Core Fund being only 2.6% down. This has the effect of reducing the Company's overall NAV by 1.3%. It is anticipated that the Core Fund pricing will swing back as markets stabilise and the dilution levy will be removed.

Dividend

The Company today announces an interim dividend of 2.0 pence per share for the period from 1 May 2016 to 31 July 2016. The dividend payment will be made on 30 September 2016 to shareholders on the register as at 26 August 2016. The ex-dividend date will be 25 August 2016.

The actual earnings per share for this period were 1.98 pence as earnings were depressed due to a number of one-off expenses which fell due this quarter. However, the Board of Directors continue to express confidence in the Company's continued ability to meet the 2p per quarter target dividend payment from property income based upon the existing assets. In addition, a number of asset management initiatives continue to add to the Company's income stream. Investors should note that this target is for illustrative purposes only, based on current market conditions and is not intended to be, and should not be taken as, a profit forecast or estimate. Actual returns cannot be predicted and may differ materially from this illustrative figure. There can be no assurance that the target will be met or that any dividend or total return will be achieved.

The dividend of 2.0 pence per share will be designated as an interim property income distribution.

Financing

Equity

The Company's issued share capital consists of 117,510,000 shares.

Debt

The Company completed an amendment of its existing £40 million five-year term loan facility with RBS International on 18 May 2016. The terms of the facility limit have increased from 20% to 30% of NAV measured at drawdown. This will enable the Company to utilise the facility up to an amount calculated as the equivalent of 25% of the Gross Asset Value (measured at drawdown).

The Board notes that the maximum gearing limit and anticipated level of total borrowing for the Company remain as set out in the Prospectus dated 23 April 2015:

"The Company intends to utilise borrowings to enhance returns over the medium term. Borrowings will be utilised on a limited recourse basis for each investment or all or part of the total Portfolio and will not exceed 25 per cent. of Gross Asset Value (measured at drawdown) of each investment or Portfolio. It is currently anticipated that the level of total borrowings will typically be at the level of 20 per cent. of Gross Asset Value (measured at drawdown)."

As at 31 July 2016, the Company had utilised an additional £12.26 million from its £40 million facility with RBS International, thereby bringing its total facility drawdown to £26.51 million, representing 19.1% of Gross Asset Value. The loan attracts interest at LIBOR + 1.4%. To mitigate the interest rate risk that arises as a result of entering into a variable rate linked loan, the Company entered into an additional interest rate cap on £12.26 million of the loan at a strike rate of 2.5% on 20 July 2016 for five years, thereby bringing its total interest rate caps to £26.51 million or 100% hedged.

Portfolio activity and asset management

During the quarter, the Company acquired two properties for a total of £13.2 million (net of acquisition costs) and with a weighted net initial yield of 9.1%, as described below.

The acquisition of a retail and office mixed use property in Nottingham for £8.15 million, which is located on Wheeler Gate with frontage to Old Market Square, within the retailing core of the City Centre. The property provides a total of 71,260 sq ft and is let to six retail tenants, including Poundland, Costa and Lakeland, and nine office tenants, providing a WAULT of approximately 4.5 years to break and 5.2 years to expiry. The acquisition provides an initial yield of 9.0%, a reversionary yield of 9.9% and a capital value per sq ft of £114.

The second acquisition was a retail asset in Blackpool, which was bought for £5.05 million and is prominently located directly adjacent to the famous Blackpool Tower. The property comprises 100,079 sq ft and has three retail units at ground floor and basement levels, which are let on strong covenants to Poundland, Sports Direct and J D Wetherspoons, providing a WAULT of approximately 7.5 years to break and 10 years to expiry. The upper three floors of the property are currently vacant and have been de-listed for rating purposes but offer strong potential for alternative uses, which the Company is currently investigating in order to extract maximum value. The acquisition provides an initial yield of 9.5%, a reversionary yield of 8.4% and a capital value per sq ft of £50.

Taking into account the above acquisitions, the sector weighting by value of the direct investment portfolio as at 31 July 2016 was 27.62% offices, 37.96% retail, 30.03% industrial and 4.40% other, presenting a well-diversified and defensively positioned portfolio mix.

A number of notable asset management initiatives have further strengthened the Company's portfolio during the period.

A 21,560 sq ft unit at Valley Retail Park in Belfast was let to Smyths Toys, which trades from over 60 stores across the UK, on a 15 year lease. In the 12 months since acquisition in August 2015, asset management activity undertaken by the manager has taken the property WAULT from 3.6 years to break at purchase to 10.5 years to break and 13.1 years to expiry. Following the 46,513 sq ft letting to Go Outdoors, which is the retailer's first store in Northern Ireland, the retail park is now 100% occupied and the purchase price of £7.1 million compares to a current valuation of £10.75 million.

At Sandford House, an office building that occupies a prime location in Solihull opposite the Touchwood shopping centre, the current tenant, the Secretary of State, did not operate its break option, resulting in an increase in the WAULT from 0.75 years to 2.6 years. At lease expiry the asset is a candidate for refurbishment or wholescale redevelopment, including potential intensification of the site, subject to planning. A full refurbishment of the building to Grade-A specification has been factored in to the existing property valuation.

At 40 Queen Square in Bristol, which totals 38,301 sq ft over four floors of Grade-A office space, the Company completed a 10 year lease with commercial law firm Beale & Company for 3,850 sq ft; a 10 year lease with the planning consultancy firm Turley for 3,100 sq ft; and a 10 year lease with commercial building consultants Malcom Hollis for 3,500 sq ft, at a total rental of £230,000 per annum. The building is now 80% pre-let, with three suites remaining, one of which is currently under offer, measuring 1,500 sq ft, while the two remaining suites are 2,000 sq ft and 5,500 sq ft.

The Company has exchanged contracts for the disposal of five floors, totalling 23,303 sq ft, located above its nine retail units at Fargate in Sheffield. The vacant office space is being acquired by a developer with a view to converting it into student housing. The area being disposed of was being held at nil cost to the Company and the proceeds of the sale will be approximately three times the assumed valuation apportionment at purchase. The Company will continue to hold the retail units, comprising 16,826 sq ft, at an attractive net running yield of over 10%.

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 £10 million), on shorter occupational leases, in strong commercial locations across the United Kingdom.

Since its IPO in May 2015, the Company has invested just over £123 million in 27 properties, including £9.75 million in AEW UK's Core Property Fund, 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 the income stream. Whilst occupational demand in strategic locations remains, securing tenants on shorter leases allows the Company to crystallise value through rent reviews and lease re‐gears.

The Company is currently paying a dividend of 8p per share p.a. and targets a total annual return, over the medium term, in excess of 12% on the IPO issue price, net of all fees.

Real estate investment specialist AEW UK Investment Management LLP is a joint venture between the management team, which together has an average of 25 years of real estate experience, and AEW Europe, which has €48.1 billion of real estate assets under management. AEW UK Investment Management LLP has a strong and expert asset management team, with a proven record of identifying and delivering value from real estate assets across all sectors.