REG - AEW UK REIT PLC - Half Yearly Results as at 30 September 2024
28/11/2024 07:00
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RNS Number : 9336N AEW UK REIT PLC 28 November 2024
28 November 2024
AEW UK REIT PLC
Interim Report and Financial Statements
for the six months ended 30 September 2024
AEW UK REIT PLC ("AEW UK REIT" or the "Company"), which holds a diversified
portfolio of 32 commercial investment properties throughout the UK, is pleased
to publish its Interim Report and Financial Statements for the six months
ended 30 September 2024.
Robin Archibald, Chairman of AEW UK REIT, commented: "Having joined the
Board of AEW UK REIT plc in the last year, I have been impressed by the
historic and current performance record of the portfolio, in terms of the
sustainability of income, and capital profits generated. This has been
achieved against a difficult market background for UK commercial property
since the Company's inception over nine years ago. The last six months have
been impressive, with an increase in net asset value of 6.2%, dividends
covered by earnings, and the completion of numerous asset management
initiatives by the AEW team. The sustained two pence per quarter dividend
(eight pence annualised) continues to be very attractive in comparison to
other income products."
Financial Highlights
● Net Asset Value ('NAV') of £172.76 million and of 109.05 pence per share
('pps') as at 30 September 2024 (31 March 2024: £162.75 million and 102.73
pps).
● NAV Total Return for the period of 10.05% (six months ended 30 September 2023:
4.30%).
● Operating profit before fair value changes of £8.90 million for the period
(six months ended 30 September 2023: £6.63 million).
● Profit Before Tax ('PBT')* of £16.64 million and earnings per share ('EPS')
of 10.30 pps for the period (six months ended 30 September 2023: £7.16
million and 4.52 pps). PBT includes a £7.03 million gain arising from changes
to the fair values of investment properties in the period (six months ended 30
September 2023: £0.16 million loss) and £1.48 million realised gains on
disposal of investment properties (six months ended 30 September 2023: £1.65
million gains).
● EPRA Earnings Per Share ('EPRA EPS') for the period of 4.43 pps (six months
ended 30 September 2023: 3.58 pps). See the full Half Year Report for the
calculation of EPRA EPS.
● Total dividends* of 4.00 pps declared in relation to the period (six months
ended 30 September 2023: 4.00 pps).
● Shareholder Total Return* for the period of 19.35% (six months ended 30
September 2023: 11.00%).
● The price of the Company's Ordinary Shares on the London Stock Exchange was
98.40 pps as at 30 September 2024 (31 March 2024: 85.80 pps).
● As at 30 September 2024, the Company had drawn £60.00 million (31 March 2024:
£60.00 million) of its £60.00 million (31 March 2024: £60.00 million) loan
facility with AgFe and was geared to 24.87% of GAV (31 March 2024: 28.97%).
See note 13 in the full Half Year Report for further detail.
● The Company held cash balances totalling £14.47 million as at 30 September
2024 (31 March 2024: £11.40 million).
Property Highlights
● As at 30 September 2024, the Company's property portfolio had a valuation of
£215.64 million across 32 properties (31 March 2024: £210.69 million across
33 properties) as assessed by the valuer((1)) and a historical cost of
£207.96 million (31 March 2024: £214.66 million).
● The Company acquired no properties during the period (year ended 31 March
2024: two properties for a total purchase price of £21.52 million, excluding
acquisition costs).
● The Company made one disposal during the period for gross sale proceeds of
£6.30 million (year ended 31 March 2024: five properties for gross sale
proceeds of £26.95 million).
● The portfolio had an EPRA vacancy rate** of 6.77% as at 30 September 2024 (31
March 2024: 6.38%).
● Rental income generated during the period was £9.57 million (six months ended
30 September 2023: £9.43 million).
● EPRA Net Initial Yield ('EPRA NIY')** of 8.13% as at 30 September 2024 (31
March 2024: 8.02%).
● Weighted Average Unexpired Lease Term ('WAULT')* of 4.49 years to break and
5.90 years to expiry (31 March 2024: 4.27 years to break and 5.60 years to
expiry).
(*) 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
11.
( )
Enquiries
AEW UK
Henry Butt henry.butt@eu.aew.com (mailto:henry.butt@eu.aew.com)
AEW Investor Relations investor_relations@eu.aew.com (mailto:investor_relations@eu.aew.com)
+44 (0) 20 7016 4880
Panmure Liberum
Darren Vickers darren.vickers@panmureliberum.com
+44 (0) 20 3100 2222
Cardew Group AEW@cardewgroup.com (mailto:AEW@cardewgroup.com)
Ed Orlebar +44 (0) 7738 724 630
Tania Wild +44 (0) 7425 536 903
Henry Crane +44 (0) 7918 207 157
Chairman's Statement
Overview
I open my first Chairman's Statement by thanking the former Chairman, Mark
Burton, for his effective oversight of the Company since its inception, and to
thank him on behalf of all stakeholders.
With the UK and US elections behind us, and the Bank of England implementing
two rate cuts, there are plenty of political and economic events to digest,
some of which will have a direct, or at least indirect, impact on UK
commercial property in the short to medium term. There are always events to
respond to, which is why good investment management anticipates and responds
to these in an effective way.
The six-month period to September 2024 saw the economic and political
pressures that have constrained the UK commercial real estate market begin to
subside. The period commenced with April 2024 marking the end of an 11-month
run of consecutive valuation declines at the property level. The MSCI/AREF UK
PFI All Balanced Open-Ended Funds Quarterly Property Index ("the Index")
delivered a modest total return of 2.7% for the period, driven almost entirely
by an income return of 2.4%, which has been most evident in the retail
warehousing and industrial sectors. This same theme has been amplified in the
Company's portfolio, which delivered a strong income return of 4.5%. Despite
the relatively muted economic backdrop, the Company's portfolio has delivered
good capital growth of 4.4% during the same period, well exceeding the Index's
average of 0.4%. Overall, the Company has delivered a total return of 9.1% for
the period, significantly outperforming the benchmark.
The Company's underlying property performance has translated into a NAV total
return of 10.1% during the period, compared to the peer group average of
-1.3%. The Company's relative outperformance is testament to its value-focused
strategy of investing in mispriced assets where income can be grown, and value
created, through active asset management. This continues to be at the centre
of the Company's investment philosophy.
As a result of improved shareholder sentiment towards the UK real estate
sector, there has been a positive re-rating in the Company's share price. The
Company's shares produced a shareholder total return of 19.4% for the period,
strengthened by consistent payment of its two pence quarterly dividend, which
was fully covered by EPRA EPS for both quarters. The Company's shares traded
at an average discount to NAV of 12.8% during the period, compared to the UK
diversified REIT peer group average of 29.6%. We expect that the Company's
long-term track record of outperformance and robust strategy should continue
to assist its share price recovery, and relative discount to NAV versus its
peers, as market attitude continues to improve.
This has been a quiet period of transactional activity for the Company, with
no acquisitions being made, and only one disposal completing during the first
half of the year, being Oak Park Industrial Estate, Droitwich. This asset was
sold for £6.30 million, delivering a circa 33% premium to the 31 March 2024
valuation. The sale price achieved for Droitwich is encouraging for the
Company's other industrial holdings, where the average book value of £45 per
sq. ft. and an average passing rent of £3.71 per sq. ft. at 30 September 2024
are relatively low. The Company's industrial portfolio, with a reversionary
yield of 8.86%, versus an initial yield of 7.56%, is also well placed to
benefit from the ongoing trend of rental growth in the sector.
A distinct strength of the Company's active asset management approach is that
despite subdued transactional activity, symptomatic of wider commercial
property investment market conditions, the Company has been able to produce
strong capital and income growth by investing in the existing portfolio,
rather than relying on disposals and acquisitions to deliver this.
Investing in the existing portfolio has meant that the first half of the
financial year has been characterised by a number of significant lettings,
most notably at the Company's retail warehousing assets, with the sector
recording quarterly valuation increases of 5.34% and 8.87% in June and
September, respectively. Prominent examples include lettings to The Salvation
Army at Central Six Retail Park, Coventry; Tenpin at The Railway Centre,
Dewsbury; and Farmfoods at Barnstaple Retail Park. These three lettings have
increased the portfolio's annual contracted rent by £643,470 per annum, while
also mitigating potential void property costs. These lettings contributed to
the Company's excellent earnings growth during the period (2.17 pence for the
September quarter, versus 1.88 pence for the March quarter), and have also
been responsible for fuelling capital growth.
In accordance with the Company's strategy of delivering total return through
active asset management, capital cash reserves of circa £11.2m at period-end
have largely been allocated to further near-term asset management initiatives.
These are expected to drive further capital and income growth in several of
the portfolio's assets. Most of the cash reserves are being held in a
high-interest rate deposit account to minimise the impact of cash drag.
Financial Results
Six months ended 30 September Six months ended 30 September Year ended 31 March
2024 2023 2024
Operating profit before fair value changes and gains on disposals (£'000) 8,904 6,627 13,363
Operating profit (£'000) 17,417 8,110 10,861
Profit before tax (£'000) 16,638 7,162 9,090
Earnings per share (basic and diluted) (pence)* 10.30 4.52 5.71
EPRA Earnings per share (basic and diluted) (pence)* 4.43 3.58 7.29
Ongoing Charges (%) 1.54 1.50 1.60
Net Asset Value per share (pence)* 109.05 106.00 102.73
EPRA Net Tangible Assets per share (pence)* 109.05 106.00 102.73
* see note 9 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 market leading performance and practices
have been recognised in three awards received during the period. The Company
has once again been awarded by EPRA, the European Public Real Estate
Association, a gold medal for its high standard of financial reporting, and
for the first time, a gold medal for standards of sustainability reporting,
improving on the previously awarded silver medal. The Company also won the
'Listed Funds' category in the 2023 MSCI UK Property Investment Awards, an
award given to the listed fund displaying the highest annualised three-year
total property return for the three years to 31 December 2023.
These awards recognise the skill, hard work and dedication that is put into
running the Company, particularly by the Company's Investment Manager, AEW.
Outlook
The Board and Investment Manager are confident that the Company is well
positioned to benefit from the recent improvement in sentiment towards the UK
real estate sector. We are pleased to have delivered two successive quarters
of fully covered dividends during the period, evidencing the effectiveness of
the Company's active asset management approach in delivering strong rental
income growth, while also managing costs.
We expect that the portfolio will continue to be resilient, despite a
prolonged period of macroeconomic uncertainty. We continue to have conviction
in the Company's investment strategy, especially in its ability to identify
and execute cross-sector counter-cyclical moves, and translate them into
sustainable shareholder value.
Earnings performance remains a focus for the coming quarters. Ongoing asset
management initiatives at Union Street, Bristol, and Sarus Court, Runcorn, are
expected to provide further support to income streams in the future. Value and
earnings enhancement derived from capital recycling of lower yielding asset
sales, or properties where asset management initiatives have concluded, into
higher yielding assets, continues to be an opportunity for the Company, and
will hopefully be supported by improving market conditions.
In the near term, the Board and Investment Manager will adopt a cautious
approach towards managing the Company, while markets digest the recent UK and
US elections, as well as the Autumn Budget. With two interest rate cuts
actioned by the Bank of England this year, the outlook for commercial property
values is broadly more positive than it was a year ago, and we will ensure
that the Company is optimally positioned to capitalise on this for the benefit
of its shareholders.
Robin Archibald
Chairman
27 November 2024
Investment Manager's Report
Property Market Outlook
Despite uncertainty continuing in the wider economy, values in UK commercial
property remained largely stable during the six months to 30 September 2024,
with some yield tightening across all the retail sub-sectors, as well as
industrials. There continues to be pricing discovery for offices, with most
investors ruling the sector out of favour. There has been a noticeable
increase in activity and improvement in investor sentiment post the general
election. With the Bank of England making its first cuts to interest rates in
August and November, and with the US election now behind us, investment
volumes, and subsequently valuations, are expected to increase in H2 2024.
There remains strong continued investor focus on rental growth and assets
which satisfy ESG requirements. Positive rental growth across all market
sectors should enhance UK property total returns going into 2025.
Industrial
Investor confidence is returning and there is a renewed ability to
successfully target and place capital in the sector. H1 2024 investment
volumes totalled £4.3 billion and although below H1 2023, this represents a
32% improvement on H2 2023 and is higher than the 10-year pre-pandemic H1
average. This momentum is expected to continue into 2025, with investors
buoyed by the stability of the occupational market and the rental growth
story, which despite being more moderate than that enjoyed in recent years, is
still forecast to be circa 3% per annum for 2025 (IPF Consensus Retail Growth
Forecast, May 2024). We believe that the Company's industrial portfolio, with
a low average passing rent of £3.71 per sq. ft. and a reversionary yield of
8.86% (initial yield of 7.56%), will be well placed to benefit. The Company
completed its only sale during the period from the sector, being Oak Park
Industrial Estate in Droitwich, for a 33% premium to the March 2024 valuation.
Retail
Values in the retail sector, in particular out-of-town retail and food stores,
fared well during the period, highlighting the continued divergence in
performance between the high-street and shopping centres. The Company's retail
warehousing sector recorded quarterly valuation uplifts in June and September
of 5.34% and 8.87% respectively, principally driven by asset management gains.
Despite the narrative suggesting an easing of consumer pressure and improving
confidence, with inflation returning to more 'normalised' levels, increasing
spending power did not translate into retail sales, which were disappointing.
Improving occupational dynamics and growing confidence in fair and reflective
pricing is driving investor sentiment, with this trend expected to continue
into 2025. This bodes well for the Company, with 40% of the portfolio
allocated to the retail sector. The period saw significant lettings at the
Company's retail warehousing parks in Coventry, Dewsbury and Barnstaple, and
high-street asset in Bristol, amounting to a combined total annual rent of
£738,470. Two of these four lettings were to leisure operators (Tenpin and
Roxy Lanes), illustrating the benefits of a more flexible planning system in
facilitating a wider variety of uses in town and city centres.
Offices
Across the national office market, transaction volumes totalled £337 million
in Q2 2024. This was 5% below volumes in Q1 2024, 53% below Q2 2023, and for
the second quarter running, represents the lowest quarterly volume recorded
since 2009. Some entrepreneurial buyers are calling the bottom of the market,
while most of the investor market continues to rule the sector out of favour.
Occupational uncertainty remains across the sector, as businesses continue to
transition to new working patterns. Tenants have also become more discerning,
with occupiers now wishing to benefit from strong sustainability credentials
as well as surrounding amenities and top-quality space. With the focus on a
relatively narrow section of the market, competition has pushed prime rental
values across many regional markets. Bristol, where the Company holds one
office asset in Queen's Square, has seen year-on-year rental growth of 27%.
This is encouraging, with the Company due to commence a refurbishment project
of the reception and part of the offices in H2. Serviced office providers have
been active in H1 2024, accounting for 10% of total take-up. Greater demand
for short-term serviced space is chiefly being generated by occupiers
deferring decisions while considering a longer-term occupational strategy..
Alternatives
Across the alternative sectors, visibility of performance in trading updates
is key to investor demand. With hospitality and leisure spend stronger than
retail according to Barclaycard data, it is unsurprising that we are seeing
expansion within the sector. During the period, the Company completed two new
leisure lettings at Dewsbury, where Tenpin took a 25-year lease, and Union
Street, Bristol, where Roxy Lanes expanded its existing space into the first
floor. The billing of three years of Hollywood Bowl's turnover rent, amounting
to £276,120, at London East Leisure Park, Dagenham, is also testament to the
current popularity of bowling and the corresponding attractiveness of bowling
operators as tenants, with bowling being a market leader for experiential
leisure spend in the post-Covid era. We find the leisure 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 2024 was £172.76 million or 109.05 pps
(31 March 2024: £162.75 million or 102.73 pps). This represents an increase
of 6.32 pps or 6.15% over the six-month period, with the underlying movement
in NAV set out in the table below:
NAV Reconciliation
NAV as at 1 April 2024 102.73
Portfolio acquisition costs (0.03)
Profit on sale of investments 0.94
Capital expenditure (1.27)
Valuation change property 5.74
EPRA Earnings 4.94
Dividends paid (4.00)
NAV as at 30 September 2024 109.05
EPRA EPS for the period was 4.43 pence, which based on dividends paid of 4.00
pps, reflects a dividend cover of 110.75%. The increase in dividend cover
compared to the prior six-month period has arisen due to the recognition of
indemnity income (note 3), as well as the completion of numerous
earnings-accretive asset management transactions, which have resulted in
income generation and void cost mitigation.
The Company's near-term focus continues to be progressing its pipeline of
asset management initiatives which are expected to drive further capital and
income growth in several of the portfolio's assets.
Financing
As at 30 September 2024, the Company has a £60.00 million loan facility with
AgFe, in place until May 2027, the details of which are presented below:
30 September 2024 31 March 2024
Facility £60.00 million £60.00 million
Drawn £60.00 million £60.00 million
Gearing (Loan to GAV) 24.87% 28.97%
Gearing (Loan to NAV) 34.73% 36.87%
Interest rate 2.959% fixed 2.959% fixed
Property Portfolio
In the year to 30 September 2024, 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 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:
Summary by Sector as at 30 September 2024
Gross Gross Like- Like-
passing passing for-like for-like
Number of Vacancy WAULT to rental rental Rental rental rental
assets Valuation Area by ERV break income income ERV ERV income growth* growth*
Sector (£m) (sq ft) (%) (years) (£m) (£psf) (£m) (£psf) (£m) (£m) %
Industrial 13 75.82 1,692,187 7.19 3.02 6.28 3.71 7.74 4.58 3.11 (0.22) (6.96)
Retail warehouses 5 53.68 444,973 1.41 6.53 4.55 10.22 4.55 10.23 2.33 0.41 21.35
Standard retail 6 31.82 243,960 10.80 3.50 3.27 13.39 3.36 13.76 1.53 (0.35) (18.72)
Alternatives 5 29.07 228,171 0.00 7.03 3.13 13.72 2.47 10.84 1.64 (0.19) (12.18)
Office 3 25.25 125,318 15.63 2.25 2.06 16.49 2.75 21.92 0.96 (0.12) (11.11)
Portfolio 32 215.64 2,734,609 6.77 4.49 19.29 7.06 20.87 7.63 9.57 (0.47) (4.90)
Summary by Geographical Area as at 30 September 2024
Gross Gross Like- Like-
passing passing for-like for-like
Number of Vacancy WAULT to rental rental Rental rental rental
Geographical Area assets Valuation Area by ERV break income income ERV ERV income growth* growth*
(£m) (sq ft) (%) (years) (£m) (£psf) (£m) (£psf) (£m) (£m) %
South West 7 57.50 635,587 15.31 3.47 4.97 7.82 6.28 9.88 2.48 (0.29) (10.47)
West Midlands 4 43.83 416,451 1.80 4.76 3.59 8.62 3.56 8.54 2.05 0.19 11.24
Yorkshire and Humberside
7 34.84 570,563 3.79 5.49 3.25 5.70 3.68 6.46 1.41 (0.06) (4.08)
Eastern 4 21.05 326,419 0.81 2.29 2.00 6.13 2.06 6.32 0.93 0.01 1.09
North West 3 18.65 235,268 13.11 4.89 1.36 5.78 1.77 7.50 0.66 (0.10) (13.16)
Wales 2 14.97 319,010 0.00 8.48 1.27 4.00 1.36 4.27 0.61 (0.03) (4.69)
Rest of London 1 11.00 102,400 0.00 8.28 1.09 10.63 0.78 7.66 0.69 (0.15) (26.79)
South East 2 8.10 74,351 0.00 1.22 1.13 15.26 0.78 10.47 0.45 (0.01) (2.17)
East Midlands 1 3.60 28,219 0.00 2.94 0.41 14.46 0.38 13.44 0.19 (0.03) (13.64)
Scotland 1 2.10 26,341 0.00 3.64 0.22 8.26 0.22 8.26 0.10 - -
Portfolio 32 215.64 2,734,609 6.77 4.49 19.29 7.06 20.87 7.63 9.57 (0.47) (4.90)
*like-for-like rental growth excludes turnover rents and is for the six months
ended 30 September 2024.
Source: Knight Frank/AEW, 30 September 2024.
Individual Property Classifications
Market Value
Property - Top 10 Sector Region Range (£m)
1 Central Six Retail Park, Coventry Retail warehouses West Midlands 25.0 - 30.0
2 Gresford Industrial Estate, Wrexham Industrial Wales 10.0 - 15.0
3 Northgate House, Bath Standard retail South West 10.0 - 15.0
4 Cambridge House, Bath Other offices South West 10.0 - 15.0
5 London East Leisure Park, Dagenham Other Rest of London 10.0 - 15.0
6 40 Queen Square, Bristol Other offices South West 10.0 - 15.0
7 Tanner Row, York Other Yorkshire and Humberside 10.0 - 15.0
8 Arrow Point Retail Park, Shrewsbury Retail warehouses West Midlands 7.5 - 10.0
9 Apollo Business Park, Basildon Industrial Eastern 5.0 - 7.5
10 Barnstaple Retail Park, Barnstaple Retail Warehouses South West 5.0 - 7.5
The Company's top ten properties listed above comprise 54.5% of the total
value of the portfolio.
Market Value
Property Sector Region Range(£m)
11 Units 1001-1004, Sarus Court, Runcorn Industrial North West 5.0 - 7.5
12 15-33 Union Street, Bristol Standard retail South West 5.0 - 7.5
13 Storey's Bar Road, Peterborough Industrial Eastern 5.0 - 7.5
14 Cuerden Way, Preston Retail warehouses North West 5.0 - 7.5
15 Brockhurst Cresent, Walsall Industrial West Midlands 5.0 - 7.5
16 Westlands Distribution Park, Weston Super Mare Industrial South West 5.0 - 7.5
17 The Railway Centre, Dewsbury Retail warehouses Yorkshire and Humberside 5.0 - 7.5
18 Mangham Road, Rotherham Industrial Yorkshire and Humberside 5.0 - 7.5
19 Walkers Lane, St Helens Industrial North West 5.0 - 7.5
20 Diamond Business Park, Wakefield Industrial Yorkshire and Humberside 5.0 - 7.5
21 Next, Bromley Standard retail South East 5.0 - 7.5
22 710 Brightside Lane, Sheffield Industrial Yorkshire and Humberside < 5.0
23 Odeon Cinema, Southend Other Eastern < 5.0
24 Pearl House, Nottingham Standard retail East Midlands < 5.0
25 Cedar House, Gloucester Other offices South West < 5.0
26 Eagle Road, Redditch Industrial West Midlands < 5.0
27 Pipps Hill Industrial Estate, Basildon Industrial Eastern < 5.0
28 69-75 Above Bar Street, Southampton Standard Retail South East < 5.0
29 Bridge House, Bradford Industrial Yorkshire and Humberside < 5.0
30 JD Gyms, Glasgow Other Scotland < 5.0
31 Pryzm, Cardiff Other Wales < 5.0
32 11/15 Fargate, Sheffield Standard Retail Yorkshire and Humberside < 5.0
Sector and Geographical Allocation by Market Value as at 30 September 2024
Sector Allocation
Sector %
Industrial 35
Retail warehouses 25
Standard retail 15
Alternative 13
Offices 12
Geographical Allocation
Location %
South West 27
West Midlands 20
Yorkshire and Humberside 16
Eastern 10
North West 8
Wales 7
South East 4
Rest of London 5
East Midlands 2
Scotland 1
Source: Knight Frank valuation report as at 30 September 2024.
Top Ten Tenants
Tenant Sector Property Passing % of
Rental Portfolio
Income Total
(£'000) Contracted
Rental
Income
1 Plastipak UK Limited Industrial Gresford Industrial Estate, Wrexham 975 5.1
2 NCP Other Tanner Row, York 733 3.8
3 Walstead Peterborough Limited Industrial Storey's Bar Road, Peterborough 725 3.8
4 Next Retail Next, Bromley 697 3.6
5 Matalan Retail warehouse Matalan, Preston 651 3.4
6 Mecca Bingo Ltd Other London East Leisure Park, Dagenham 584 3.0
7 Odeon Cinemas Other Odeon Cinema, Southend-on-sea 535 2.8
8 Poundland Ltd Retail Various 516 2.7
9 Bath Northgate House Centre Ltd Retail Northgate House, Bath 491 2.5
10 Senior Architectural Systems Ltd Industrial Mangham Road, Rotherham 410 2.1
The Company's top ten tenants, listed above, represent 32.8% of the total
passing rental income of the portfolio.
Source: Knight Frank valuation report as at 30 September 2024.
Investment Update
Acquisitions - There were no acquisitions completed during the period.
Disposals - On 24 July 2024, the Company completed on the sale of Oak Park
Industrial Estate for £6.30 million, reflecting a net initial yield of 7.95%
and a capital value of £33 per sq ft. A sale at this price represents a circa
33% premium to the 31 March 2024 valuation.
Following three new lettings, which added £272,000 of annual rental income,
the property was fully let. The business plan put in place for the property
had been completed, and the decision was made to sell the asset as we believed
that value over the medium term had been maximised.
The industrial estate was bought in December 2015 for £5,625,000, reflecting
a 10.4% net initial yield and a capital value of £30 per sq ft. The estate
was originally single let to Egbert H Taylor & Co Limited (trading as
Taylor Bins), a strong tenant covenant with a WAULT to expiry of approximately
seven years. The tenant has since downsized on the estate.
Asset Management Update
Barnstaple Retail Park, Barnstaple (retail warehouse) - The Company completed
a new letting of Unit 2, formerly let to Sports Direct, to Farmfoods Limited.
Farmfoods have taken a 15-year lease, with a tenant break option at the expiry
of the tenth year, at a rent equivalent to an ERV of £125,000 per annum
(£13.00 per sq ft).
There will be an open market rent review at the end of the fifth and tenth
years. No rent-free incentive was given, but the unit's externals were
refurbished by the Company, with the cost anticipated to be recovered through
a dilapidations settlement with the former tenant.
Carr Coatings, Redditch (industrial) - The Company settled Carrs Coatings
Ltd's August 2024 annual uncapped RPI rent review at £304,809 per annum
(£8.02 per sq ft), representing a £10,461 per annum (circa 3.6%) increase.
The unit is single-let to Carrs Coatings Ltd until August 2028. The lease was
entered into as a sale and leaseback in 2008 at an initial starting rent of
£170,300 per annum (£4.50 per sq ft).
Central Six Retail Park, Coventry (retail warehousing) - The Company completed
a lease with new tenant, Salvation Army Trading Company Ltd, for Unit 12.
The tenant entered a new lease expiring in November 2032, with a tenant only
break option in year five, at a rent of £140,000 per annum (£13.97 per sq
ft). The letting includes a nine-month rent-free incentive.
London East Leisure Park, Dagenham (leisure)- Following a protracted exchange
of correspondence with The Original Bowling Company Limited (trading as
Hollywood Bowl), three years of turnover rent has been billed for 2021, 2022
and 2023 equating to £276,120 (£92,040 per annum).
Pearl House, Nottingham (retail) - The company completed a lease renewal with
MSR Newsgroup, whose lease expired in December 2023.
A five-year lease extension was agreed with no incentive at £14,000 per
annum, versus an ERV of £12,250 per annum.
Sarus Court, Runcorn (industrial) - The Company completed a speculative
refurbishment project of units 1001 and 1003, formerly let to CJ Services.
The works comprised roof improvements, respraying of external elevations,
internal strip-out and decoration, and replacing M&E services to improve
the EPC ratings to a B.
The cost of the works was £807,742, excluding professional fees. It is
anticipated that the Company will crystalise significant rental growth from
the previous rent following the units being re-let.
Storey's Bar, Peterborough (industrial) - The Company settled Walstead
Peterborough Limited's three-yearly RPI rent review (2% collar and 4% cap) at
£724,861 per annum (£3.94 per sq ft), an £80,462 per annum (12.5%) increase
on the previous passing rent of £644,399 per annum (£3.50 per sq ft).
Despite this notable uplift, the single-let industrial unit is still
considered under-rented with an ERV greater than £4.00 per sq ft.
The Railway Centre, Dewsbury (retail warehouse) - Having previously exchanged
an agreement for lease with leisure operator, Tenpin Limited, to take a new
25-year lease of the former Mecca Bingo space, the Company completed the lease
on 17 September.
The lease is guaranteed for the duration of the term by Tenpin Entertainment
Limited, previously Ten Entertainment Group plc, which was acquired by US
private equity firm, Trive Capital, in February 2024 for £287 million. The
lease has a tenant break option in year 17.5, at a rent of £378,470 per annum
(£13.59 per sq ft), with five-yearly compounded CPI reviews (1% collar and 3%
cap).
At the time of Mecca Bingo vacating, the unit had an ERV of £8.00 per sq ft.
A £1,565,000 capital contribution was given as a tenant incentive, with the
Company carrying out £653,000 of landlord strip-out and enabling works
(£368,000 net of the Mecca dilapidations settlement).
Tenpin comprises 53 venues across the UK and provides customers with a diverse
range of activities including bowling, video arcades, escape rooms, karaoke,
laser tag, pool, table tennis, and soft play. The quarterly valuation uplift
was 59% following completion of the letting.
Union Street, Bristol (retail) - Having completed subdivision works to the
former Wilko unit, separating the ground and basement levels from the first
floor, the Company completed a new letting to Roxy Lanes (Bristol) Ltd (Roxy),
who already occupy the second floor of the building.
Roxy entered into a new lease until 2036, conterminous with their existing
lease of the second floor, with no tenant break options. The rent, which will
be reviewed to RPI (1.50% collar and 4.0% cap, compounded annually) in 2026
and 2031, is £95,000 per annum (£10.55 per sq ft) and is guaranteed by Roxy
Leisure Holdings Ltd.
Roxy was granted a 12-month rent free period and a £95,000 capital
contribution as a letting incentive. The remaining ground and basement levels
of the former Wilko continue to be marketed.
Westlands Distribution Park, Weston-Super-Mare (industrial) - The company
completed a lease renewal with a gym operator, The Hench Fish Ltd, at Unit 3.
A three-year lease extension was agreed with mutual break options in the first
and second year. The new rent agreed is £15,500 per annum, an uplift of
£5,500 per annum (55%) on the previous passing rent of £10,000 per annum.
ESG Update
The Company has maintained its two stars Global Real Estate Sustainability
Benchmark ('GRESB') rating for 2024, as well as increasing its score from 67
to 68 (GRESB Peer Group Average-69). A large portion of the GRESB score
relates to performance data coverage where, due to the high percentage of
single-let assets with tenant procured utilities, the Company does not score
as well as Funds with a smaller holding of single-let assets and a higher
proportion of multi-let assets, where the landlord is responsible for the
utilities and can therefore gather the relevant data.
We continue to implement our plan to improve overall data coverage and data
collection for all utilities through increased tenant engagement at our
single-let assets. This includes a current project to automate tenant data
collection via online platforms such as Perse and Metrey, therefore reducing
reliance on manual data collection.
Where the opportunity presents itself through a lease event, we endeavour to
include green clauses in leases, covenanting landlord and tenant to
collaborate over the environmental performance of the property. Green clauses
seek to improve data coverage by ensuring tenants provide regular and
appropriate utility consumption data.
Other key GRESB improvement opportunities to action for H2 2024 include
expanding the Company's tenant and community engagement programs and measures,
such as fit-out and refurbishment programs that are ESG-minded.
We continue to assess and strengthen our reporting and alignment against the
framework set out by the TCFD with further disclosure provided in the 2024
annual report and accounts. We are pleased to report that the Company has
improved its rating for EPRA Sustainability Best Practices Recommendations
('sBPR') for ESG disclosure and transparency from a silver rating to a gold
rating.
The Company has an Asset Sustainability Action Plan ('ASAP') initiative,
tracking ESG initiatives across the portfolio on an asset-by-asset basis for
targeted implementation of ESG improvements. In doing so, we ensure all
possible sustainability initiatives are considered and implemented where
physically and economically viable. As at 30 September 2024, 280 initiatives
have been completed within the portfolio, with a further 100 actions planned
or in progress. Current feasibility assessments include the installation of a
wellbeing garden at 40 Queen Square and PV panels at London East Leisure Park.
Following a significant emissions reduction from assets within the portfolio
during 2023 (-33.8% vs. the 2018 baseline), we took the decision to increase
the reduction target from 15% to 40% by 2030, equating to a planned saving of
roughly 76 extra tonnes of carbon. Emissions for the first half of 2024
reflect further progress, with a 12% reduction vs. the same period during
2023. All managed assets and units have been contracted to High Quality Green
Tariffs, ensuring that electricity supply is from renewable sources and
contributing to the continued reduction in emissions.
The Company is committed to ensuring compliance with MEES regulations which
first came into effect from April 2018, when it became unlawful to grant new
leases of commercial property with an EPC of below an 'E' rating. From 1 April
2023, existing leases certified with an 'F' or 'G' rating also became
unlawful, even if the lease was granted prior to the MEES Regulations coming
into effect. As at the end of the period, the Company had five units with
draft EPC 'G' ratings, with the majority of the Company's assets
(approximately 93% based on the portfolio's ERV) being MEES compliant. Three
of these five G-rated units are anticipated to become vacant shortly, with
their demolition planned in the medium term to enable open storage lettings.
The remaining two units are currently vacant and are therefore not in breach
of MEES. To mitigate future MEES risk, the Company will continue to undertake
its gap analysis, identifying assets that fall below the MEES regulations, and
will either need an improvement plan implemented to achieve an 'E' rating or
better, or an exemption lodged, where applicable. The Company regards its
relatively short WAULT (to break and expiry) as an opportunity to proactively
engage with its existing tenants at lease events to improve the energy
performance of its assets, as well as in the event of a vacancy.
We have recently completed the refurbishment of two industrial units at Sarus
Court, Runcorn comprising approximately 30,000 sq. ft. together. The
refurbishment works have comprised: removing the gas supply, installing new
LED lighting throughout both units controlled by PIR sensors, installing split
system air-conditioning units within the office accommodation and installing
new electric panel heaters within the circulation and welfare facilities. The
EPC scores for the two units prior to the refurbishment works being undertaken
are C58 and D83. Following the works completing, the units have been
reassessed with the EPC ratings improving to B34 and B47 respectively.
Lease Expiry
Profile
Approximately £3.66 million of the Company's current contracted income stream
is subject to an expiry or break within the 12-month period commencing 1
October 2024. We will proactively manage these leases nearing expiry, looking
to unlock capital upside, whether that be through lease regears/renewals, or
through refurbishment/capex projects and new lettings.
Source: Knight Frank valuation report as at 30 September 2024.
AEW UK Investment Management LLP
27 November 2024
AEW UK REIT PLC's interim report and financial statements for the period ended
30 September 2024 will be available today on www.aewukreit.com.
It will also be submitted shortly in full unedited text to the Financial
Conduct Authority's National Storage Mechanism and will be available for
inspection at data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) in accordance with
DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance and
Transparency Rules.
LEI: 21380073LDXHV2LP5K50
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