REG - AEW UK REIT PLC - Annual Financial Report <Origin Href="QuoteRef">AEWU.L</Origin> - Part 2
10/07/2017 07:05
- Part 2: For the preceding part double click ID:nRSJ5151Ka
Egbert H. Taylor & Company Limited 625 5.1
Odeon Cinemas 535 4.4
The Secretary of State for Communities and Local Government 511 4.2
Advance Supply Chain (BFD) Limited 428 3.5
Poundland Limited 414 3.4
HFC Prestige Manufacturing Limited 410 3.4
Go Outdoors Limited 400 3.3
Barclays Bank plc 375 3.1
ROM Group Limited 350 2.9
The chart below shows the lease expiry profile tenants and the percentage of passing rent expiring at various intervals.
http://www.rns-pdf.londonstockexchange.com/rns/5151K_2-2017-7-7.pdf
AEW UK Investment Management LLP
7 July 2017
Principal Risks and Uncertainties
The Company'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 carried out a robust assessment of the principal risks facing the Company, including those that would
threaten its business model, future performance, solvency or liquidity. Twice a year, the Audit Committee reviews the
adequacy and effectiveness of the Company's risk management system. Some risks are not yet known and some that are
currently not deemed material, could turn out to be material in the future. All principal risks are the same as detailed in
the 2016 Annual Report, with the exception of the inclusion of political/economic risks that have been added following the
EU referendum in June 2016 and a financial risk relating to the availability and cost of the credit facility. Financial
risk management and objectives and policies are further detailed in Note 20 of the Financial Statements.
An analysis of the principal risks and uncertainties is set out below:
Principal risks and their potential impact How risk is managed
REAL ESTATE RISKS
Tenant defaultFailure by tenants to comply with their rental obligations could affect the income that the properties earn and the ability of the Company to pay dividends to its Shareholders. Tenant covenant checks are carried out on new tenants where there are concerns as to their creditworthiness. Asset management team conducts ongoing monitoring and liaison with tenants to manage potential bad debt risk.
Asset management initiatives Asset management initiatives such as refurbishment works, may prove to be more extensive, expensive and take longer than anticipated. Cost overruns may have a material adverse effect on the Company's profitability, the NAV and Costs incurred on asset management initiatives are closely monitored against budgets and reviewed in regular presentations to the Investment Management Committee of the Investment Manager.
the share price.
Due diligence Due diligence may not identify all the risks and liabilities in respect of an acquisition (including any environmental, structural or operational defects) that may lead to a material adverse effect on the Company's profitability, the Net The Company's due diligence relies on the work (such as legal reports on title, property valuations, environmental, building surveys) outsourced to third parties who have expertise in their areas. Such third parties have Professional Indemnity cover in place.
Asset Value and the price of the Company's Ordinary Shares.
Fall in rental ratesRental rates may be adversely affected by general UK economic conditions and other factors that depress rental rates, including local factors relating to particular properties/locations (such as increased competition). Any fall in the The Company mitigates this risk through building a diversified property and tenant base with subsequent monitoring of concentration to individual occupiers (top 10 tenants) and sectors (geographical and sector exposure). Quarterly meetings are held with the Investment Strategy Committee of the Investment Manager and Board of Directors to assess whether any changes with the market present risks that should be addressed in our strategy.
rental rates for the Company's properties may have a material adverse effect on the Company's profitability, the NAV, the price of the Ordinary Shares and the Company's ability to meet interest and capital repayments on any debt facilities.
Property marketAny property market recession or future deterioration in the property market could, inter alia, (i) cause the Company to realise its investments at lower valuations; (ii) delay the timings of the Company's realisations. These risks could The Company has investment restrictions in place to invest and manage its assets with the objective of spreading and mitigating risk.
have a material adverse effect on the ability of the Company to achieve its investment objective.
Property valuationProperty and property-related assets are inherently difficult to value due to the individual nature of each property. There may be an adverse effect on the Company's profitability, the NAV and the price of Ordinary Shares in cases where The Company uses an independent valuer (Knight Frank) to value the properties at fair value in accordance with accepted RICS appraisal and valuation standards.
properties are sold whose valuations have previously been materially overstated.
FINANCIAL RISKS
Breach of borrowing covenantsThe Company has entered into a term credit facility. Material adverse changes in valuations and net income may lead to breaches in the LTV and interest cover ratio covenants. The Company monitors the use of borrowings on an ongoing basis through weekly cash flow forecasting and quarterly risk monitoring to monitor financial covenants.
Interest rate risesThe Company's borrowings through a term credit facility are subject to interest rate risk due to changing LIBOR rates. Any increases in LIBOR rates may have an adverse effect on the Company's ability to pay dividends. An interest rate cap of 2.5% is in place to mitigate the adverse impact of possible interest rate rises.
Availability and cost of the credit facilityThe term credit facility expires in October 2020. In the event that RBSi does not renew the facility the Company may need to sell assets to repay the outstanding loan. Any increase in the financing costs of the The Company maintains a good relationship with the bank providing the term credit facility. The Company monitors the projected usage and covenants of the credit facility on a quarterly basis.
facility on renewal would adversely impact on the Company's profitability.
CORPORATE RISKS
Use of service providersThe Company has no employees and is reliant upon the performance ofthird party service providers. Failure by any service provider to carry out its obligations to the Company in accordance withthe terms of its appointment could have The performance of service providers in conjunction with their service level agreements is monitored via regular calls and face to face meetings and the use of Key Performance Indicators, where relevant.
a materially detrimental impact on the operation of the Company.
Dependence on the Investment Manager The Investment Manager is responsible for providing investment management services to the Company. The future ability of the Company to successfully pursue its investment objective and investment policy may, among other The Investment Manager has endeavoured to ensure that the principal members of its management team are suitably incentivised.
things, depend on the ability of the Investment Manager to retain its existing staff and/or to recruit individuals of similar experience and calibre.
Ability to meet objectivesThe Company may not meet its investment objective to deliver an attractive total return to shareholders from investing predominantly in a portfolio of smaller commercial properties in the United Kingdom. Poor relative total return The Company has an investment policy to achieve a balanced portfolio with a diversified tenant base. The Company also has investment restrictions in place to limit exposure to potential risk factors. These factors mitigate the risk of fluctuations in returns.
performance may lead to an adverse reputational impact that affects the Company's ability to raise new capital.
TAXATION RISKS
Company REIT statusThe Company has a UK REIT status that provides a tax-efficient corporate structure. If the Company fails to remain a REIT for UK tax purposes, its profits and gains will be subject to UK corporation tax. Any change to the tax status or The Company monitors REIT compliance through the Investment Manager on acquisitions; the Administrator on asset and distribution levels; the Registrar and Broker on shareholdings and the use of third-party tax advisors to monitor REIT compliance requirements.
UK tax legislation could impact on the Company's ability to achieve its investment objectives and provide attractive returns to shareholders.
POLITICAL/ECONOMIC RISKS
Political and macroeconomic events present risks to the real estate and financial markets that affect the Company and the business of our tenants. The level of uncertainty that such events bring has been highlighted in recent times, most pertinently The Board considers the impact of political andmacroeconomic events when reviewing strategy.
following the EU referendum vote (Brexit) in June 2016.
Portfolio
1 Bentalls, Pipps Hill Industrial Estate, Basildon
New 10 year lease, very strong occupational market
Property characteristics Adding value
Property type Industrial 1. The tenant has been in occupation since the 1990s and will be investing in improvements to the building over the next year. 2. The lease provides for annual rental uplifts of 2% per annum.
Area 32,932 sq ft
Purchase price
£2.1m (£65 per sq ft)
Purchase yield 8.8%
Constructed 1980s
Vendor Tenant
Lease Investment summary
Tenants New 10 year lease to MersonSigns Ltd. 1. Established industrial estate. 2. Lack of Grade A industrial floor space in the region has caused secondary rents to grow by c.10% over the past 12 months.
Rent Passing rent of £6 per sq ft.
349 Moorside Road, Swinton, Salford
Income longer than portfolio level WAULT, strong covenant
Property characteristics Adding value
Property type Industrial 1. The current lease provides a strong income stream.
Area 24,307 sq ft
Purchase price
£1.28m
Purchase yield 7.64%
Constructed 2010
Vendor Private
Lease Investment summary
Tenants Single let with an unexpired term of 6.3 years. Secured against National Crash Repair Centre Ltd. 1. Strong covenant. 2. Income longer than portfolio level WAULT. 3. Well located a short distance from the M60 Manchester Ring Motorway. 4. Modern building.
Rent Low passing rent of £4.25 per sq ft.
710 Brightside Lane, Sheffield
Long income, higher alternative use potential
Property characteristics Adding value
Property type Industrial 1. Potential to increase rent at review. 2. Potential for medium to long term redevelopment for higher value uses including trade counter and motor dealership.
Area 121,733 sq ft
Purchase price
£3.50m
Purchase yield 8.82%
Constructed 1960s
Vendor Property Company
Lease Investment summary
Tenants Single let for a further 12 years with a tenant break option in 9.5 years. 1. Prominent frontage to busy arterial route. 2. Tenant wedded to the location having significantly invested in the roof. 3. Low capital value per sq ft and low passing rent. 4. Long term income. 5. Surrounding sites currently being redeveloped for higher value uses.
Rent Average passing rent of £2.87 per sq ft
Apollo Business Park, Basildon
Low passing rents, very strong occupational market
Property characteristics Adding value
Property type Industrial 1. Low passing rents of £5.50 per sq ft compared to ERV of £6.25. 2. 50% of the income secured against a very strong covenant.
Area 68,813 sq ft
Purchase price
£4.6m (£66 per sq ft)
Purchase yield 7.8%
Constructed 1970s
Vendor Property Company
Lease Investment summary
Tenants Multi let to 4 tenants. WAULT of 3.4 years to breaks. Largest tenant is Amari PlasticsPlc (53% of passing rent). 1. Established industrial estate. 2. Lack of Grade A industrial floor space in the region has caused secondary rents to grow by c.10% over the past 12 months.
Rent Passing rent of £5.50 per sq ft.
Barbot Hall Industrial Estate Magham Road, Rotherham
Single let industrial unit in established location, reversionary potential
Property characteristics Adding value
Property type Industrial 1. Reversionary potential - ERV of c.£3.25 per sq ft. 2. Negotiate lease renewal on expiry of the current lease in December 2018. Sapa are wedded to the location due to their distribution network. 3. Established industrial location.
Area 81,979 sq ft
Purchase price
£2.17m
Purchase yield 8.50%
Vendor Property Company
Lease Investment summary
Tenants Single let to Sapa Components UK Ltd with a WAULT of 1.7 years to expiry. 1. Increasing levels of occupier demand within the surrounding area. 2. Lack of new development has created a shortage of competing stock. 3. Strong tenant covenant. 4. Low passing rent.
Rent Average passing rent of £2.38 per sq ft.
Brockhurst Crescent, Walsall
Three fully let industrial units, strategically located near the M6
Property characteristics Adding value
Property type Industrial 1. Fixed rental uplifts in 2017 taking the running yield to 11.0%. 2. Opportunity to negotiate a reversionary lease with an existing tenant to extend the income.
Area 136,171 sq ft
Purchase price
£3.85m
Purchase yield 9.80%
Vendor Property Company
Lease Investment summary
Tenants Multi-let to Tata Steel and Micheldever Tyres providing a WAULT of 4.9 years expiry. 1. Established industrial location just off the M6 at Junction 9. 2. Fully let. 3. Attractive net initial yield 4. Shortage of low rented industrial accommodation within the surrounding area.
Rent Average passing rent of £2.96 per sq ft.
Carrs Coatings, North Moons Industrial Estate, Redditch
Established industrial location, strong tenant demand
Property characteristics Adding value
Property type Industrial 1. The lease provides for annual RPI uplifts. 2. Strong demand from owner occupiers within the wider area due to lack of supply.
Area 37,992 sq ft
Purchase price
£2.00m
Purchase yield 9.5%
Vendor Property Company
Lease Investment summary
Tenants Carrs Coatings Limited 11.3 years unexpired term. 1. Attractive initial yield. 2. Long income providing annual fixed uplifts in line with RPI. 3. Located within a very well established industrial location. 4. Purchase price c.85% underpinned by vacant possession value.
Rent Average passing rent of £5.35 per sq ft.
Clarke Road, Milton Keynes
Income longer than portfolio level WAULT, strong covenant
Property characteristics Adding value
Property type Industrial 1. The current lease provides a strong income stream.
Area 28,348 sq ft
Purchase price
£1.53m
Purchase yield 7.66%
Constructed 1980s
Vendor Private
Lease Investment summary
Tenants Single let with an unexpired term of 6.3 years. Secured against National Crash Repair Centre Ltd. 1. Strong covenant. 2. Income longer than portfolio level WAULT. 3. South east location.
Rent Average passing rent of £4.73. per sq ft.
Cleaver House, Runcorn
Attractive yield, improving industrial location
Property characteristics Adding value
Property type Industrial 1. The location is set to benefit from the completion of the Mersey Gateway Project in 2017 which will link Runcorn with the M56 to M62. 2. The unit was acquired following the acquisition by the Company of the wider Sarus Court estate. Cleaver House therefore assists in providing a more efficient control of estate management. 3. Potential for rental growth against an ERV of £5.25 per sq ft.
Area 16,154 sq ft
Purchase price
£0.91m
Purchase yield 7.92%
Constructed 1990s
Vendor Private
Lease Investment summary
Tenants Single let with an unexpired term of 3.9 years, 10 months to break. 1. Established industrial location. 2. High quality, modem accommodation compared to the competing offer. 3. Fully let.
Rent Passing rent of £4.71 per sq ft.
Cranbourne House, Bessemer Road, Basingstoke
Modern, single let industrial unit in prime South East location
Property characteristics Adding value
Property type Industrial 1. Removal of tenant break option has provided an additional two years term certain. 2. Assignment to new group parent company provides a more robust covenant.
Area 58,445 sq ft
Purchase price
£3.39m
Purchase yield 10.00%
Vendor Property Company
Lease Investment summary
Tenants Fully let to HFC Prestige Manufacturing Ltd with a WAULT of 2.7 years to break and expiry. 1. Established South East industrial location. 2. Modern accommodation. 3. Increasing levels of occupier demand. 4. Lack of new development. 5. Strong tenant covenant.
Rent Average passing rent of £7.01 per sq ft.
Euroway, Bradford
Located just off the M62, low passing rent
Property characteristics Adding value
Property type Industrial 1. Previous owner completed £400,000 of works to the roof and yard. 2. Tenant has been in occupation since2009 and has recently extended the lease, creating an unexpired term of 8 years.
Area 143,765 sq ft
Purchase price
£4.95m (£34 per sq ft)
Purchase yield 8.1%
Constructed 1980s
Vendor Property Company
Lease Investment summary
Tenants Fully let to Advanced ProcessingLtd with 8 years unexpired. 1. Strong distribution location providing excellent access to the motorway network. 2. Located directly adjacent to regional hub for Marks & Spencer. 3. Low passing rent of £3 per sq ft is well below ERV due to lack of available stock in the area.
Rent Passing rent of £3 per sq ft.
Lea Green Industrial Estate, Walkers Lane, St Helen's
Single let industrial unit, long term income stream
Property Characteristics Adding value
Property type Industrial 1. Minimal asset management required due to long lease. 2. Some reversionary potential at review.
Area 93,588 sq ft
Purchase price
£3.44m
Purchase yield 8.24%
Vendor Property Company
Lease Investment summary
Tenants Single let to Kverneland GroupUK Ltd with a WAULT of 8.4 years to expiry with no break option. 1. Established industrial location. 2. New lease to embedded tenant. 3. Attractive WAULT. 4. Strong tenant covenant.
Rent £3.25 per sq ft.
Oak Park, Rylands Lane, Elmley Lovett, Droitwich
Industrial complex let to a strong covenant
Property characteristics Adding value
Property type Industrial 1. Investment value strongly underpinned by underlying site value. 2. Potential future change of use to residential, subject to planning.
Area 188,555 sq ft
Purchase price
£6.62m
Purchase yield 10.40%
Vendor Receivership sale
Lease Investment summary
Tenants Single let to Taylor Bins (trading name) providing a WAULT of 5.5 years to expiry. 1. Established industrial location. 2. Fully let to a strong covenant. 3. High yielding and stable income stream.
Rent Average passing rent of £3.29 per sq ft.
Sarus Court, Runcorn
Attractive yield, improving industrial location
Property characteristics Adding value
Property type Industrial 1. The location is set to benefit from the completion of the Mersey Gateway Project in 2017 which will link Runcorn with the M56 to M62. 2. The Company has since acquired two further units on the same estate, to provide more efficient control of estate management. 3. Potential for rental growth against an ERV of £5.25 per sq ft.
Area 56,123 sq ft
Purchase price
£3.37m
Purchase yield 8.00%
Vendor Property Company
Lease Investment summary
Tenants Multi-let to two tenants providing a WAULT of 3.7 years to break and 4.4 years to expiry. 1. Established industrial location. 2. High quality, modern accommodation compared to the competing offer. 3. Fully let.
Rent Average passing rent of £4.80 per sq ft.
Units 16 and 16a, Langthwaite Business Park, South Kirkby
High yielding industrial units
Property characteristics Adding value
Property type Industrial 1. Negotiations under way with the current tenant to extend the lease due to their requirement to remain within the local area. 2. High yielding industrial units located in Yorkshire, as short distance from the A1(M).
Area 230,850 sq ft
Purchase price
£5.80m
Purchase yield 11.00%
Vendor Property Company
Lease Investment summary
Tenants Fully let to Ardagh Glass Ltd witha WAULT of 4 months to breaksand 6 months to expiry. 1. Strategically located for the tenant due to other nearby facilities. 2. Low capital value. 3. Shortage of availability in the local market. 4. 5A1 covenant strength (Dun & Bradstreet).
Rent Average passing rent of £2.95 per sq ft.
Waggon Road, Mossley, Ashton Under Lyne
Income longer than portfolio level WAULT, strong covenant
Property characteristics Adding value
Property type Industrial 1. The current lease provides a strong income stream.
Area 12,836 sq ft
Purchase price
£0.28m
Purchase yield 11.1%
Constructed 1980s
Vendor Private
Lease Investment summary
Tenants Single let with an unexpired term of 6.3 years. Secured against National Crash Repair Centre Ltd. 1. Strong covenant. 2. Income
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