Alternative Inc Regulatory News (AIRE)

AEW UK LONG LEASE REIT PLC (the 'Company')

Announcement of Interim Report and Financial Statements for the six months ended 31 December 2018

AEW UK Long Lease REIT plc ('the Company'), which directly owns a diversified portfolio of commercial investment properties, predominately in the alternative property sectors, is pleased to publish its interim report and financial statements for the six months from 1 July 2018 to 31 December 2018.

Steve Smith, Chairman of AEW UK Long Lease REIT, commented: "Over the past 6 months, the fund has continued to execute the strategy laid out at its IPO. In particular, the two most recent dividends declared have been in line with the target annual dividend of 5.5 pence per share, supported by the strong portfolio of assets acquired to date. The diversification of the portfolio by sector, tenants and geographical regions is generating attractive yields and predictable income streams through long leases, of which 92% of income has contractual exposure to inflation. We continue to see a number of interesting market opportunities and as such are focussed on raising additional equity to support future growth."

FINANCIAL HIGHLIGHTS

• Unaudited Net Asset Value ('NAV') of £78.46 million and of 97.46 pence per share as at 31 December 2018 (30 June 2018: £76.42 million and 94.93 pence per share).

• Operating profit before fair value changes of £2.67 million for the half year (18 April 2017 to 31 December 2017: £0.25 million).

• Profit before tax ('PBT') of £4.15 million and 5.15 pence per share for the half year (18 April 2017 to 31 December 2017: Loss of £4.24 million and of 6.51 pence per share for the half year, of which £4.56 million and 6.99 pence related to acquisition costs written off).

• EPRA Earnings per Share ('EPRA EPS') for the half year were 2.69 pence (18 April 2017 to 31 December 2017: 0.38 pence). See below for more details.

• Total dividends of 2.75 pence per share have been declared for the half year (18 April 2017 to 31 December 2017: 1.00 pence per share).

• The price of the Company's Ordinary Shares on the Main Market of the London Stock Exchange was 88.82 pence per share as at 31 December 2018 (30 June 2018: 90.24 pence per share).

• As at 31 December 2018, the Group had a £30 million loan facility with Canada Life Investments and was geared to 27.7% of the Gross Asset Value ('GAV') (30 June 2018: 27.7%).

• Since the half year end, the Group increased its loan facility by £11 million with its existing lender, Canada Life Investments, taking the total loan drawn down to £41 million. The weighted average interest cost of the Group's increased facility is 3.19% and the facility is repayable on 20 October 2025.

PROPERTY HIGHLIGHTS

• Weighted average unexpired lease term ('WAULT') of 21.5 years (30 June 2018: 21.8 years) to the earlier of break and expiry and 23.4 years to expiry (30 June 2018: 24.0 years). See below for more details.

• As at 31 December 2018, the Group's property portfolio had a fair value of £112.23 million (30 June 2018: £99.09 million).

• The assets acquired are fully let as at 31 December 2018 (30 June 2018: 99.7% occupancy).

• Rental and other income generated in the half year was £3.33 million (18 April 2017 to 31 December 2017: £0.67 million). The number of tenants as at 31 December 2018 was 23 (30 June 2018: 21).

• The portfolio has annualised contracted rental income of £6.55 million as at 31 December 2018 (30 June 2018: £5.64 million).

• The portfolio has an average Net Initial Yield ('NIY') of 5.41% (30 June 2018: 5.29%).

CHAIRMAN'S STATEMENT

Overview

I am pleased to present the unaudited interim consolidated results of the Group for the six-month period from 1 July 2018 to 31 December 2018 (the 'period').

As at 31 December 2018, the Group had invested £106.16 million (excluding purchase costs) in acquiring a diversified portfolio of 18 commercial investment properties throughout the UK. At the period end, the Group's property portfolio (the 'Portfolio') has been independently valued by Knight Frank LLP in accordance with the RICS Valuations - Professional Standards (the 'Red Book') at a fair value of £112.23 million, an increase of £6.07 million (or 5.72% before purchase costs) since IPO.

To date, the Group has delivered on its targets at the time of the Company's IPO. The portfolio has a NIY of 5.41%, a WAULT to break of 21.5 years and a WAULT to expiry of 23.4 years, and 92% of the income is linked to inflation (RPI or CPI).

Financial Results

The Group has ongoing charges of 1.5% for the period (31 December 2017: 0.93%; 30 June 2018: 1.36%), which are a measure of annualised fund level operating costs for the period as a percentage of NAV.

Financing

As at 31 December 2018, the Group had utilised all of its £30 million fixed-interest loan facility with Canada Life Investments.

In December 2018, the Group agreed an increase of £11 million to its loan facility with existing lender Canada Life Investments, taking the total loan facility to £41 million. The weighted average interest cost of the Group's £41 million facility is 3.19% and the facility is repayable on 20 October 2025. The additional £11 million loan facility was fully drawn on 11 January 2019, and was used to fund the £6.65 million acquisition of Nailsea, Bristol.

As at 31 December 2018, the unexpired term of the facility was 6.8 years and the Loan to Value ('LTV') was 27.7% (as calculated on the Gross Asset Value ('GAV').

Dividends

The Company is now fully invested and during the period has begun to pay dividends of 1.375 pence per share, in line with the annual target of 5.5 pence per share and the stated dividend policy set out in the Company's Prospectus.

Please refer to Note 8 below for details on the dividends paid.

Outlook

The Group has executed its strategy since the IPO and delivered on its stated objectives. In particular, the two most recent dividends declared have been in line with the target annual dividend of 5.5 pence per share.

A strong portfolio of assets has been acquired, diversified by sector, tenants and geographical regions, at attractive yields that generate predictable income streams through long leases, of which 92% of income has contractual exposure to inflation.

Since 31 December 2018, the Group completed on the acquisition of Nailsea, Bristol for £6.65 million (net of purchase costs) that generates a further £0.41 million per annum in passing rent. This acquisition was financed using the Canada Life Investments facility extension of £11 million. The Group has a further property under offer which, if purchased, will also be funded through the debt facility.

Following the recent acquisitions, the Board and the Investment Manager, taking full account of the regressive impact of acquisition costs, believe that we have delivered a competitive total return over the period and with inflationary rent escalation will be competitive in potentially turbulent markets in the coming period.

Our current focus is to continue to grow the Company by raising additional equity, to enable the Company to gain economies of scale in its fixed cost base and to allow the Investment Manager to capitalise on the interesting market opportunities it sees.

I would like to thank our shareholders, my fellow Directors and AEW UK for their continued support.

Steve Smith

Chairman

26 February 2019

UMAUDITED KEY PERFORMANCE INDICATORS ('KPIs')

EPRA UNAUDITED PERFORMANCE MEASURES

Detailed below is a summary table showing the EPRA performance measures of the Group

INVESTMENT MANAGER'S REPORT

Market Outlook

UK Economic Outlook

In the second half of 2018, inflation slowed to 2.2% per annum (RPI/CPI) as both import cost-linked inflation and oil price appreciation were moderate. This is in line with our expectations that inflation is to gradually move towards the Bank of England inflation target of 2%. This will enable the Group to continue to grow its rental income stream as 92% of its rental income as at 31 December 2018 is inflation linked.

UK GDP growth for Q4 2018 is now expected at 0.3%, down from 0.6% in Q3 2018. This brings the full-year 2018 growth expectation to 1.4%, down from 1.8% earlier in the year. GDP growth is, however, forecast to rebound to 2% by 2020, based on a strong chance that the current political indecision could lead to a softer Brexit and an extension of the date on which the UK leaves the EU. That said, the real possibility of a no-deal Brexit remains and, with the UK government looking increasingly unstable, it is expected that GDP growth in this eventuality would remain subdued, albeit in positive territory.

The UK labour market remains strong with unemployment remaining at a more than 40-year low of 4.1% in October 2018. The tightening labour market has finally lifted annual pay growth to 3.3% in the three months to October 2018. Combined with 2.2% inflation for 2018, this does provide for some real pay improvement. Despite this, consumer spending is expected to slow slightly to 1.4% in 2019 from 1.7% projected for 2018.

UK Real Estate Outlook

Both in absolute terms and relative to other markets, UK property market returns continue to show a healthy spread over 10-year government bond yields. Strong investor demand for commercial property continues and for the time being we continue to see yields remaining stable in the most sought after areas of the market, predominantly in large logistics assets, prime industrial, and in the long-leased market.

On the tenant demand side, we see a rather polarised position highlighting to managers and investors alike the importance of robust and informed stock selection. Despite an uncertain outlook surrounding the UK's exit from the EU, we have seen strong take up in the industrial sector leading to rental growth of 4.2% throughout 2018 according to MSCI, down slightly from 5.3% in 2017, but outperforming other major property sectors for the ninth consecutive quarter. The regional office sector has also recorded healthy recent performance with GVA reporting a 4.3% rise in net effective rents over the year to September 2018 across the 9 largest centres. Take up for Q3 2018 exceeded 2 million sq ft which is 63% ahead of the ten-year quarterly average.

A contrast to this is seen across the majority of the retail sector, where the impact of declining footfall continues to hit the headlines, with the exception of a few large dominant centres where rental growth has been recorded at modest levels.

We are conscious that there is strong competition amongst investors looking to buy in the limited universe of long-let inflation-linked income properties and we have seen this first hand when acquiring properties. This has led to yield compression of our own assets.

We have seen a couple of higher profile REIT flotations being cancelled in recent months that highlight the difficulty in raising and deploying capital in the current UK market. Nevertheless, we are optimistic that we can continue to build an attractive portfolio with the properties in our pipeline and deliver compelling returns to our shareholders.

Financial Results

Net rental income earned from the portfolio for the six months ended 31 December 2018 was £3.33 million (18 April 2017 to 31 December 2017: £0.67 million; 18 April 2017 to 30 June 2018: £3.60 million), contributing to an operating profit before fair value changes of £2.67 million (18 April 2017 to 31 December 2017: £0.25 million; 18 April 2017 to 30 June 2018: £2.45 million).

The portfolio has seen a gain of £1.98 million in fair value of investment property over the period (18 April 2017 to 31 December 2017: loss of £4.49 million; 18 April 2017 to 30 June 2018: loss of £2.85 million).

Administrative expenses, which include the Investment Manager's fee and other costs attributable to the running of the Group, were £0.66 million for the period (18 April 2017 to 31 December 2017: £0.41 million; 18 April 2017 to 30 June 2018: £1.15 million).

The Group incurred finance costs of £0.50 million during the period (18 April 2017 to 31 December 2017: £0.01 million; 18 April 2017 to 30 June 2018: £0.49 million).

The total PBT for the period of £4.15 million (18 April 2017 to 31 December 2017: loss before tax of £4.24 million; 18 April 2017 to 30 June 2018: loss before tax of £0.89 million) equates to a basic earnings per share of 5.15 pence per share (18 April 2017 to 31 December 2017: loss of 6.51 pence per share; 18 April 2017 to 30 June 2018: loss of 1.25 pence per share).

The Group's NAV as at 31 December 2018 was £78.46 million or 97.46 pence per share (18 April 2017 to 31 December 2017: £74.28 million; 18 April 2017 to 30 June 2018: £76.42 million). This is an increase of 2.52 pence per share or 2.66% over the six months, with the underlying movement in NAV set out in the table below:

EPRA EPS for the six-month period was 2.69 pence per share which, based on dividends declared of 2.75 pence per share, reflects a dividend cover of 97.82%.

Dividend

Refer to Note 8 below for details.

Financing

As at 31 December 2018, the Group had fully utilised its £30 million loan facility with Canada Life Investments (30 June 2018: fully utilised). This term facility, which expires in October 2025, allows up to 35% loan to property value, provided on a portfolio basis.

On 14 December 2018, the Group extended the amount of the facility by £11 million to a total of £41 million. The Group fully utilised this £11 million on 11 January 2019.

The weighted average interest cost of the Group's £41 million facility is 3.19% and the facility is repayable on 20 October 2025.

Portfolio Activity during the Period

During the period, the Group's property portfolio was subject to a total like-for-like valuation uplift of 2.41%.

The Group acquired an industrial warehousing property located on the Eurolink Industrial Estate, Sittingbourne for £3.94 million. This property comprises two warehouse buildings totalling 43,636 sq ft and is fully let to Dore Metals Services Southern Ltd, which has had its headquarters on the site since 2007. The lease provides a new 15-year term expiring in September 2033 and also has 5-yearly rental uplifts in line with RPI. The transaction reflected an attractive NIY of 6.3%. To the end of the period, the asset had already seen a valuation uplift of 4.2%.

During the period, the Group also exchanged unconditionally on a purchase agreement to acquire a 62-room, purpose-built care home located in affluent Nailsea approximately 8 miles south west of Bristol. The purchase completed on 15 January 2019. The property is fully let, on a new 30-year lease, operated by Handsale Ltd, an established national provider of care services for the elderly. A new 30-year fully repairing and insuring lease has been granted by the Group from the date of the acquisition providing the Group with annual rental uplifts in line with RPI, with a minimum uplift level of 1% and a cap of 4%. The facilities of the home and its care provision have been rated as being 'Good' by the Care Quality Commission and, in addition, the home has a history of high occupancy rates combined with a high percentage of private pay residents. The acquisition was funded through the extension of the Group's debt facility.

Property Portfolio as at 31 December 2018

Summary by Sector

Summary by Geographical Area

The tables below illustrate the sector and geographical weightings of the Group's property portfolio as at 31 December 2018, based on valuations as at that date.

Geographical Allocation

Sector Allocation

Income Allocation by Type

Income by Credit Risk

Top Ten Tenants

The Group's top ten tenants, listed above, represent 75.6% of the total passing rental income of the portfolio.

PRINCIPAL RISKS AND UNCERTAINTIES

The Group's assets consist primarily of UK commercial property. Its principal risks are therefore related to the commercial property market in general, but also to the particular circumstances of the individual properties and the tenants within the properties.

The Board has overall responsibility for reviewing the effectiveness of the systems of risk management and internal control which is operated by the Investment Manager. The Group's ongoing risk management process is designed to identify, evaluate and mitigate the significant risks the Group faces.

Twice each year, the Board undertakes a risk review with the assistance of the Audit Committee, to assess the adequacy and effectiveness of the Investment Manager's risk management and internal control processes.

The Audit Committee considers that the principal risks and uncertainties as presented on pages 26 to 31 of our 2018 Annual Report have changed as follows:

KEY PERFORMANCE INDICATORS ("KPIs")

RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE INTERIM FINANCIAL REPORT

We confirm that to the best of our knowledge:

- the consolidated condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

- the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the consolidated condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Company during that period; and any changes in the related party transactions described in the last annual report that could do so.

A list of the Directors is maintained on the Company's website at www.aewukllreit.com.

Steve Smith

Chairman

26 February 2019

FINANCIAL STATEMENTS

Consolidated Condensed Statement of Comprehensive Income

for the six months ended 31 December 2018

The accompanying notes form an integral part of these consolidated condensed financial statements.

*Although not required by IAS 34, the comparative figures for the preceding full reporting period and related notes have been included on a voluntary basis.

Consolidated Condensed Statement of Changes in Equity

for the six months ended 31 December 2018

The accompanying notes form an integral part of these consolidated condensed financial statements.

*Although not required by IAS 34, the comparative figures for the preceding full reporting period and related notes have been included on a voluntary basis. 

Consolidated Condensed Statement of Financial Position

as at 31 December 2018

The accompanying notes form an integral part of these consolidated condensed financial statements.

*Although not required by IAS 34, the comparative figures for the preceding full reporting period and related notes have been included on a voluntary basis.

The financial statements were approved by the Board of Directors on 26 February 2019 and were signed on its behalf by:

Steve Smith

Chairman

AEW UK Long Lease REIT plc

Company number: 10727886

Consolidated Condensed Statement of Cash Flows

for the six months to 31 December 2018

The accompanying notes form an integral part of these consolidated condensed financial statements.

* Although not required by IAS 34, the comparative figures for the preceding full reporting period and related notes have been included on a voluntary basis.

NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

for the six months to 31 December 2018

1. Corporate information

The Company is a closed-ended Real Estate Investment Trust ('REIT') incorporated on 18 April 2017 and domiciled in the UK. The registered office of the Company is located at 6th Floor, 65 Gresham Street, London, EC2V 7NQ.

The Company's Ordinary Shares were listed on the Official List of the UK Listing Authority and admitted to trading on the Main Market of the London Stock Exchange on 6 June 2017.

The comparative information for the nine month period ended 31 December 2017 does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006.

2. Accounting policies

2.1 Basis of preparation

These interim consolidated condensed unaudited financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU, and should be read in conjunction with the Group's last financial statements for the fifteen-month period ended 30 June 2018. These consolidated condensed unaudited financial statements do not include all information required for a complete set of financial statements proposed in accordance with IFRS as adopted by the EU ('EU IFRS'), however, selected explanatory notes have been included to explain events and transactions that are significant in understanding changes in the Group's financial position and performance since the last financial statements.

The comparative figures disclosed in the consolidated condensed unaudited financial statements and related notes have been presented for both the nine-month period ended 31 December 2017 and fifteen-month period ended 30 June 2018 and as at 31 December 2017 and 30 June 2018.

Although not required by IAS 34, the comparative figures as at 31 December 2017 for the Consolidated Condensed Statement of Financial Position and for the fifteen-month period ended 30 June 2018 for the Consolidated Condensed Statement of Comprehensive Income, Consolidated Condensed Statement of Changes in Equity and Consolidated Condensed Statement of Cash Flows and related notes have been included on a voluntary basis.

These consolidated condensed unaudited financial statements have been prepared under the historical-cost convention, except for investment property that has been measured at fair value. The consolidated condensed unaudited financial statements are presented in Sterling and all values are rounded to the nearest thousand pounds (£'000), except when otherwise indicated.

Basis of consolidation

The consolidated condensed unaudited financial statements for the six months ended 31 December 2018 incorporate the financial statements of the Company and its subsidiaries (the 'Group'). Subsidiaries are entities controlled by the Group, being AEW UK Long Lease REIT 2017 Limited and AEW UK Long Lease REIT Holdco Limited. IFRS 10 outlines the requirements for the preparation of consolidated financial statements, requiring an entity to consolidate the results of all investees it is considered to control. Control exists where an entity is exposed to variable returns and has the ability to affect those returns through its power over the investee.

New standards, amendments and interpretations

There are a number of new standards and amendments to existing standards which have been published and are mandatory for the Group's accounting periods beginning on or after 1 January 2019.

The following is the most relevant to the Group:

• IFRS 16 (Leases) issued in January 2016 and is effective for annual periods beginning on or after 1 January 2019

The impact of the adoption of new accounting standards issued and becoming effective for accounting periods beginning on or after 1 July 2018 has been considered and is not deemed to be significant. The IFRS 16 disclosure requirements will be considered in due course.

2.2 Significant accounting judgements and estimates

The preparation of financial statements in accordance with IAS 34 requires the Directors of the Group to make judgements, estimates and assumptions that affect the reported amounts recognised in the financial statements. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability in the future.

i) Valuation of investment property

The Group's investment property is held at fair value as determined by the independent valuer on the basis of fair value in accordance with the internationally accepted Royal Institution of Chartered Surveyors ('RICS') Appraisal and Valuation Standards.

2.3 Segmental information

In accordance with IFRS 8, the Directors are of the opinion that the Group is engaged in one main operating segment, being investment property in the UK.

2.4 Going concern

The Directors have made an assessment of the Group's ability to continue as a going concern and are satisfied that the Group has the resources to continue in business for at least 12 months. Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt upon the Group's ability to continue as a going concern. Therefore, the consolidated condensed unaudited financial statements have been prepared on the going concern basis.

2.5 Summary of significant accounting policies

The principal accounting policies applied in the preparation of these consolidated condensed unaudited financial statements are consistent with those applied within the Group's Annual Report and Financial Statements for the fifteen-month period to 30 June 2018 except for the changes as detailed in note 2.1.

3. Rental income

4. Expenses

5. Finance expense

6. Taxation

The Group obtained REIT status on 13 October 2017, at which point any gains or losses arising from property business have been extinguished. As such, no deferred tax asset or liability has been recognised in the six month period.

Factors that may affect future tax charges

Due to the Group's status as a REIT and the intention to continue meeting the conditions required to retain approval as a REIT in the foreseeable future, the Group has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.

7. Earnings/(loss) per share and NAV per share

EPS amounts are calculated by dividing the profit/(loss) for the period attributable to ordinary equity holders of the Company by the weighted average number of Ordinary Shares in issue during the period. EPRA NAV and EPRA NNNAV are equal to the NAV presented in the Consolidated Condensed Statement of Financial Position under IFRS and there are no adjusting items. As such, a reconciliation between these measures has not been presented.

8. Dividends paid

9. Investments

9.1) Investment property

Valuation of investment property

Valuation of investment property is performed by Knight Frank LLP and Savills (UK) Limited, accredited independent external valuers with recognised and relevant professional qualifications and recent experience of the location and category of the investment property being valued. Of the £112.23 million valuation, £105.58 million was provided by Knight Frank LLP and £6.65 million by Savills (UK) Limited.

The valuation of the Group's investment property at fair value is determined by the external valuer on the basis of market value in accordance with the internationally accepted RICS Valuation - Professional Standards (incorporating the International Valuation Standards).

The determination of the fair value of investment property requires the use of estimates such as future cash flows from assets (such as lettings, tenants' profiles, future revenue streams, capital values of fixtures and fittings, plant and machinery, any environmental matters and the overall repair and condition of the property) and discount rates applicable to those flows.

9.2) Fair value measurement hierarchy

The following table provides the fair value measurement hierarchy for non-current assets:

* before adjustments to fair value for straight lining of lease income.

Explanation of the fair value hierarchy:

Level 1 - Quoted prices for an identical instrument in active markets;

Level 2 - Prices of recent transactions for identical instruments and valuation techniques using observable market data; and

Level 3 - Valuation techniques using non-observable data.

Sensitivity analysis to significant changes in unobservable inputs within Level 3 of the hierarchy

The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the entity's portfolios of investment properties are:

1) Estimated Rental Value ('ERV')

2) Equivalent yield

Increases/(decreases) in the ERV (per sq ft per annum) in isolation would result in a higher/(lower) fair value measurement. Increases/(decreases) in the discount rate/yield in isolation would result in a lower/(higher) fair value measurement.

The significant unobservable inputs used in the fair value measurement, categorised within Level 3 of the fair value hierarchy of the portfolio of investment property and investments are:

Where possible, sensitivity of the fair values of Level 3 assets are tested to changes in unobservable inputs to reasonable alternatives.

Gains and losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierarchy are attributable to changes in unrealised gains or losses relating to investment property held at the end of the reporting period.

The carrying amount of the assets and liabilities, detailed within the Consolidated Condensed Statement of Financial Position, is considered to be the same as their fair value.

Gains and losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierarchy are attributable to changes in unrealised gains or losses relating to investment property and investments held at the end of the reporting period.

There have been no transfers between Level 1 and Level 2 during any of the periods nor have there been any transfers in or out of Level 3.

10. Receivables and prepayments

The aged debtor analysis of receivables which are past due is as follows:

11. Payables and accrued expenses

* Represents amount payable (including purchase costs) for Nailsea, Bristol. This property exchanged unconditionally on 21 December 2018 and completed on 17 January 2019. See Note 19 for further details.

12. Interest bearing loans and borrowings