REG - AEW UK REIT PLC - Half Yearly Results
22/11/2023 07:15
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RNS Number : 2051U AEW UK REIT PLC 22 November 2023
22 November 2023
AEW UK REIT PLC
Interim Report and Financial Statements
for the six months ended 30 September 2023
AEW UK REIT PLC ("AEW UK REIT" or the "Company"), which holds a diversified
portfolio of 35 commercial investment properties throughout the UK, is pleased
to publish its Interim Report and Financial Statements for the six months
ended 30 September 2023.
Mark Burton, Chairman of AEW UK REIT, commented: "We have been encouraged by
the Company's performance this period with NAV total return of 4.30%. All
sectors of the Company's portfolio outperformed the MSCI index, demonstrating
the benefits of our active asset management style in delivering performance
throughout market cycles. I am pleased to report significant progress towards
the Company's strategic objective of reinvesting surplus capital into higher
yielding assets which are expected to deliver NAV growth over time. The
purchases of NCP, York, and Cambridge House, Bath, have returned the portfolio
to being materially fully invested, with EPRA earnings growing accordingly.
NAV grew by 0.49%, driven by two successive quarters of positive valuation
movement and accretive asset sales, where values were felt to have been
maximised over the medium term. This momentum in activity has helped to create
a healthy near-term outlook and we are pleased to have confirmed continued
payment of the Company's market-leading 2p quarterly dividend, which has now
been paid for 32 consecutive quarters."
Financial Highlights
● Net Asset Value ('NAV') of £167.93 million and of 106.00 pence per share
('pps') as at 30 September 2023 (31 March 2023: £167.10 million and 105.48
pps).
● NAV Total Return for the period of 4.30% (six months ended 30 September 2022:
4.35%).
● Operating profit before fair value changes of £6.63 million for the period
(six months ended 30 September 2022: £5.25 million).
● Profit Before Tax ('PBT')* of £7.16 million and earnings per share ('EPS') of
4.52 pps for the period (six months ended 30 September 2022: £8.32 million
and 5.25 pps). PBT includes a £0.16 million loss arising from changes to the
fair values of investment properties in the period (six months ended 30
September 2022: £6.51 million loss) and £1.65 million realised gains on
disposal of investment properties (six months ended 30 September 2022: £10.83
million gains).
● EPRA Earnings Per Share ('EPRA EPS') for the period of 3.58 pps (six months
ended 30 September 2022: 2.58 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 2022: 4.00 pps).
● Shareholder Total Return* for the period of 11.00% (six months ended 30
September 2022: -18.53%).
● The price of the Company's Ordinary Shares on the London Stock Exchange was
98.43 pps as at 30 September 2023 (31 March 2023: 92.10 pps).
● As at 30 September 2023, the Company had drawn £60.00 million (31 March 2023:
£60.00 million) of its £60.00 million (31 March 2023: £60.00 million) loan
facility with AgFe and was geared to 27.35% of GAV (31 March 2023: 28.06%).
See note 15 in the full Half Year Report for further detail.
● The Company held cash balances totalling £6.44 million as at 30 September
2023 (31 March 2023: £14.32 million).
Property Highlights
● As at 30 September 2023, the Company's property portfolio had a valuation of
£219.36 million across 35 properties (31 March 2023: £213.83 million across
36 properties) as assessed by the valuer(1) and a historical cost of £231.38
million (31 March 2023: £224.03 million).
● The Company acquired two properties during the period for a total purchase
price of £21.52 million, excluding acquisition costs (year ended 31 March
2023: five properties for £32.05 million).
● The Company made three disposals during the period for gross sale proceeds of
£20.85 million (year ended 31 March 2023: five properties for gross sale
proceeds of £44.41 million).
● The portfolio had an EPRA vacancy rate** of 6.98% as at 30 September 2023 (31
March 2023: 7.83%).
● Rental income generated during the period was £9.43 million (six months ended
30 September 2022: £8.41 million).
● EPRA Net Initial Yield ('EPRA NIY')** of 7.85% as at 30 September 2023 (31
March 2023: 7.65%).
● Weighted Average Unexpired Lease Term ('WAULT')* of 4.45 years to break and
5.72 years to expiry (31 March 2023: 3.05 years to break and 4.33 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 12.
( )
Enquiries
AEW UK
Laura Elkin Laura.Elkin@eu.aew.com (mailto:Laura.Elkin@eu.aew.com)
Nicki Gladstone Nicki.Gladstone-ext@eu.aew.com (mailto:Nicki.Gladstone-ext@eu.aew.com)
+44(0) 771 140 1021
Liberum Capital Darren.Vickers@liberum.com (mailto:Darren.Vickers@liberum.com)
Darren Vickers +44 (0)20 3100 2218
TB Cardew AEW@tbcardew.com (mailto:AEW@tbcardew.com)
Ed Orlebar +44(0) 7738 724 630
Tania Wild +44(0) 7425 536 903
Chairman's Statement
Overview
Despite the lacklustre economic headlines, we were encouraged to see the
portfolio's performance return to positive territory in the first half of the
year, following a tumultuous period for UK property valuations. During the
period, the Company achieved NAV growth of 0.49%, with two successive quarters
of positive valuation movements and numerous NAV accretive sales having been
completed. Positive like-for-like valuation movement was seen in all sectors
of the Company's portfolio, with the exception of offices, which are still
stabilising. All sectors of the Company's portfolio outperformed the MSCI
index during the period, demonstrating the benefits of an actively managed
portfolio. Quarterly EPRA earnings per share ('EPS') grew by 4% during the
period, with EPS reaching 1.84pps for the quarter ending 30 September 2023.
Further growth in earnings and NAV are expected in the near term.
The commercial property investment market remained subdued during the period,
with transaction volumes in all sectors well below historic averages. Despite
the depressed transactional activity, the Company has identified plentiful
pipeline opportunities. Less direct competition and a greater prevalence of
mispricing have resulted in value investment opportunities being more
numerous.
To exploit these opportunities, the Company has undertaken a strategy of
selective capital recycling, in order to benefit from the attractive locations
and advantageous pricing in its pipeline. Assets have been sold where their
values have been maximised over the medium term and their earnings are below
those seen in the Company's pipeline. During the period, the Company undertook
three sales where offers had been received at levels that maximised asset
value over the short to medium term. These sales included two industrial
assets in Leeds and Bradford, sold as a package for a blended net initial
yield of 6.2%, far below the Company's achieved average purchase yield during
the period of 8.6%, demonstrating the Company's ability to crystallise asset
management gains by selling out of lower yielding assets and recycling them
into higher yielding assets, thereby enhancing earnings. The sale prices
exceeded the assets' valuations prior to disposal by an average of 14%. The
third sale was of an industrial property in Deeside, which was sold vacant for
an 8% premium to the prior valuation. The asset was sold in order to avoid a
costly refurbishment programme. These sales added to the Company's existing
strong track record of crystallising net gains on disposal. The resulting
capital profit will be utilised, where needed, to supplement earnings in the
payment of the Company's market leading dividend, which has now been paid for
32 consecutive quarters.
I am pleased to report significant progress towards the Company's strategic
objective of reinvesting capital generated from sales into higher yielding
assets in core urban locations. The purchases of NCP, York, and Cambridge
House, Bath, utilised most of the capital available for deployment and have
strengthened earnings with a combined initial yield of 8.6%. Both assets have
robust reversionary potential, each offering yields in excess of 10%, thus
furthering their potential accretion to earnings over time. Despite the
short-term negative impact on NAV of acquisition costs, these purchases are
expected to deliver NAV growth over the medium term. Critical to these
acquisitions were the strong locations of the assets, both of which occupy
attractive central pitches in cities with a tight supply of land.
This has been a fruitful period for the Company's active asset management
capabilities, with high numbers of leasing transactions completing that have
fuelled earnings growth and bolstered NAV. The Company's portfolio has seen
robust occupational activity across all major market sectors, with a
particular concentration of activity in retail sectors, where the Company has
focused much of its recent purchases. This activity is testament to the
Investment Manager's expertise in stock selection and proactive asset
management, both of which have driven the strong total return performance
achieved by the portfolio's assets.
Further benefits to earnings and values from asset management transactions are
expected to be realised over coming periods, with a number of key negotiations
ongoing. As at the period end, the Company had a reversionary yield of 8.72%,
as independently assessed by the valuer, Knight Frank, versus an initial yield
of 7.31%. This is a measure of the inherent potential for future income growth
that the current portfolio provides. Given the portfolio retains a low average
passing rent of £6.29 per sq ft, this represents a conservative starting
point for value protection and income growth.
Financial Results
Six months ended 30 September Six months ended 30 September Year ended 31 March
2023 2022 2023
Operating profit before fair value changes (£'000) 6,627 5,253 11,096
Operating profit/(loss) (£'000) 8,110 9,576 (9,164)
Profit/(loss) before tax (£'000) 7,162 8,322 (11,325)
Earnings/(loss) per share (basic and diluted) (pence)* 4.52 5.25 (7.15)
EPRA Earnings per share (basic and diluted) (pence)* 3.58 2.58 5.70
Ongoing Charges (%) 1.50 1.33 1.37
Net Asset Value per share (pence)* 106.00 121.88 105.48
EPRA Net Tangible Assets per share (pence)* 106.00 121.88 105.48
* see note 10 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 performance and practices have been
recognised in four awards received during the period. The Company has once
again been awarded a gold medal by EPRA, the European Public Real Estate
Association, for its high standard of financial reporting and a silver medal
for standards of sustainability reporting. These awards are testament to the
Company's robust governance and transparency.
The Company also won the Citywire investment trust award in the 'UK Property'
category for the fourth successive year, as well as winning the 'Property'
category at the Investment Week Investment Company of the Year awards.
Board Changes
As announced previously, I am very pleased to confirm the appointments of Mr
Robin Archibald and Mrs Liz Peace as independent Non-Executive Directors to
the Board of the Company, effective 1 October 2023. As part of orderly
succession planning, Robin has been appointed as Chairman-elect and will
succeed as Chairman of the Board upon my retirement at the Company's 2024 AGM.
I am delighted that Robin and Liz are joining the Board and I am confident
that their experience and range of skills will complement and further
strengthen the existing Board for many years to come. Their collective
extensive knowledge and experience in property and investment companies will
be of great benefit. I look forward to working closely with Robin to ensure a
smooth handover until September 2024.
On 30 September 2023, Mr Bim Sandhu retired from the Board as Chairman of the
Audit Committee, having reached the end of his nine-year tenure as a Director
of the Company. As first announced on 10 November 2022, Mr Mark Kirkland was
appointed as Chairman-designate of the Audit Committee and has now succeeded
Mr Sandhu as Audit Committee Chairman. On behalf of the Board, I thank Bim for
his invaluable contribution since the IPO of the Company, and wish him well
for his future endeavours.
Outlook
We are pleased by the Company's progress in continuing to invest capital into
attractive pipeline assets, where market conditions have enabled attractive
pricing levels. These purchases have returned the Company's portfolio to being
materially fully invested and as a result, income levels have grown
accordingly. We are reassured by the occupational resilience that the
portfolio has shown during a period of ongoing uncertainty. The quantum of
asset management activity completed during the period is testament to the
Investment Manager's proactive approach and to the quality of assets held in
the portfolio. This activity has also boosted earnings and creates a healthy
near-term outlook for further growth.
The Board believes that the ongoing relevance of the Company's strategy is
highlighted by its consistent outperformance of the MSCI benchmark, with a
five-year annualised outperformance of 6.66%. The Company has identified a
plentiful pipeline, which has presented excellent opportunities for a
diversified, value-focused investment strategy that is nimble in making
cross-sector and often, counter-cyclical moves, thereby delivering optimal
value to Shareholders. We believe that the relevance of this strategy is
highlighted by the robustness of the Company's share rating, whose discount to
NAV has consistently been the narrowest of its peers in the UK diversified
peer group.
The Board and Investment Manager will continue to take a prudent approach to
the ongoing management of the Company, alongside considering opportunities for
investment, growth and capital recycling, as they arise.
Mark Burton
Chairman
21 November 2023
Investment Manager's Report
Property Market Outlook
Despite uncertainty remaining in the wider economy, values in UK commercial
property largely stabilised during the six months to 30 September 2023. UK
property is expected to offer healthy return prospects over the coming
periods, with consensus forecasts showing an expected return to positive
rental growth across all major market sectors by 2025, and all UK property
total returns to average 5.6% per annum over the next five years (2023-2027).
Industrial
During the period, the industrials sector remained robust having been the
sector which saw the steepest value declines at the end of 2023. Supported by
resilient levels of occupational demand, the sector has continued to see the
highest levels of rental growth and although this is expected to slow in
coming years, it is expected to remain in positive territory, showing expected
average annual growth of 3.3% between 2023 and 2027. We believe that the
Company's industrial portfolio, with a low average passing rent of £3.60 per
sq ft, will be well placed to benefit. The Company has completed several sales
from the sector during the period, where sales yields have compressed
significantly compared to pipeline assets, due to vendors' positive
expectations on rental growth.
Retail
Values in the retail sector also faired robustly during the period, buoyed by
positive sector indicators. Retail sales volumes increased 0.3% over the three
months to August 2023 and the proportion of online retail sales fell
marginally in the month to August. These figures, however, mask a divergence
in performance of the underlying retail sectors, with retail warehousing
remaining more robust on a total return basis than its high street equivalent.
Vacancy levels across retail warehousing have fallen to 4.7%, the lowest level
seen since 2018. Performance on the high street remains significantly
polarised from town to town, with the top tiers remaining robust and those now
deemed to be lower quality struggling, both for occupational and investor
demand.
The period saw the failure of Wilko, which affected both high street and
retail warehousing locations. Tenant failures and CVAs have not been as common
as compared to the more regular occurrence seen during the Covid pandemic,
however we remain cautious of further distress in the sector.
Office
The Office sector saw a stronger post-Covid recovery in 2022 than some may
have expected, with office-based employment growing in 2022. This trend
started to reverse during 2023, resulting in negative capital growth seen
across most locations. Occupational uncertainty remains across the sector, as
businesses continue to transition to new working patterns. Tenants have also
become more discerning in recent years, with occupiers now wishing to benefit
from strong sustainability credentials as well as surrounding amenities and
top-quality space. This is particularly the case for large corporate tenants,
but it is increasingly becoming a key factor for smaller businesses too. As a
result of all these factors, we have seen investor demand for the sector
remain light, with investors further deterred by the high costs associated
with delivery.
Alternatives
Across alternative sectors, visibility of performance in trading updates is
key to investor demand and where these have remained robust, despite the
squeeze on consumer discretionary spend, investment volumes have held up.
Generally, leisure has historically fared relatively defensively during
periods of economic uncertainty. Operators carrying unsustainably high levels
of debt are seen as a concern, however. We find the 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 2023 was £167.93 million or 106.00 pps
(31 March 2023: £167.10 million or 105.48 pps). This represents an increase
of 0.52 pps or 0.49% over the six-month period, with the underlying movement
in NAV set out in the table below:
NAV Reconciliation
NAV as at 1 April 2023 105.48
Change in fair value of investment property 1.82
Portfolio acquisition costs (1.06)
Capital expenditure (0.87)
Gain on disposal of investment property 1.04
Income earned for the period 6.19
Expenses and net finance costs for the period (2.60)
Dividends paid (4.00)
NAV as at 30 September 2023 106.00
EPRA EPS for the period was 3.58 pence which, based on dividends paid of 4.00
pps, reflects a dividend cover of 89.50%. The increase in dividend cover
compared to the prior six-month period has largely arisen due to the
completion of key asset management transactions. Our portfolio has gradually
been reducing its industrial exposure over the past 18 months, and although
this may not continue at the same rate going forward, it has allowed us to
crystallise profits made in the sector and concurrently recycle the resulting
capital into high yielding assets in our pipeline, mostly within other market
sectors. We believe that this ability to move nimbly between property sectors
in order to extract maximum value from our portfolio is a key strength of our
strategy.
Further gains in EPS are expected in the coming quarters as the ongoing
programme of new lettings should provide a boost to income streams and a
reduction in void costs. The Company's focus for the deployment of capital
continues to be further accretive investment opportunities, alongside
re-investment into the existing portfolio where capex is needed in order to
drive future performance gains.
Rent collection rates have reached 99% for both the March 2023 and June 2023
quarters respectively, with further payments expected to be received under
longer-term payment plans. Of the outstanding arrears, the Company has made a
£1.27 million expected credit loss provision, given the challenging economic
outlook. The Company will continue to pursue all outstanding arrears.
The ongoing charges ratio has increased during the period as a result of the
decline in the valuation of the portfolio rather than an increase in the
Company's underlying cost base.
Financing
The Company holds a £60.00 million five-year term loan facility, maturing in
May 2027. The loan is held with AgFe, a leading independent asset manager
specialising in debt-based investments. It is priced as a fixed rate loan with
a total interest cost of 2.959%. In the current inflationary environment, the
Company considered it prudent to fix the loan and interest, rather than run
the risk of further interest rate rises during the loan term.
The details of the loan facility are as follows:
30 September 2023 31 March 2023
Facility £60.00 million £60.00 million
Drawn £60.00 million £60.00 million
Gearing (Loan to GAV) 27.35% 28.06%
Interest rate 2.959% fixed 2.959% fixed
Property Portfolio
In the year to 30 September 2023, 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 aside from retail, 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 2023
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 14 78.33 1,880,794 4.35 3.80 6.78 3.60 7.71 4.10 3.51 (0.08) (2.31)
Retail warehouses 5 46.25 484,033 18.14 5.25 3.40 7.03 4.32 8.93 2.07 (0.19) (9.67)
Standard retail 8 38.16 357,227 3.16 4.89 3.89 10.90 3.98 11.13 2.03 0.03 1.98
Alternatives 5 30.37 197,491 0.00 7.54 2.98 15.08 2.75 13.95 1.16 (0.04) (3.91)
Office 3 26.25 125,318 9.34 2.96 2.10 16.74 2.73 21.75 0.66 0.05 8.14
Portfolio 35 219.36 3,044,863 6.98 4.45 19.15 6.29 21.49 7.06 9.43 (0.23) (2.89)
Summary by Geographical Area as at 30 September 2023
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 57.35 635,587 9.65 3.96 4.58 7.20 6.15 9.68 2.33 0.10 6.51
West Midlands 5 43.00 597,860 10.24 4.22 3.60 6.03 3.86 6.46 1.81 (0.09) (4.62)
Yorkshire and Humberside 7 32.43 616,838 13.81 4.85 2.92 4.74 3.57 5.79 1.48 (0.02) (1.57)
Eastern 4 22.08 326,419 0.80 3.29 1.92 5.87 2.10 6.44 0.83 (0.15) (15.61)
North West 4 21.60 336,043 0.00 6.05 1.90 5.67 2.00 5.95 0.98 (0.07) (9.75)
Wales 2 14.90 319,010 0.00 9.48 1.28 4.00 1.38 4.34 0.61 (0.03) (5.37)
South East 3 12.15 86,826 0.00 2.67 1.39 16.06 1.05 12.07 0.62 0.07 17.96
Rest of London 1 10.00 71,720 0.00 8.01 0.94 13.04 0.79 10.94 0.49 (0.02) (4.62)
East Midlands 1 3.70 28,219 0.00 3.62 0.41 14.56 0.38 13.38 0.18 (0.02) (10.37)
Scotland 1 2.15 26,341 0.00 4.54 0.21 7.97 0.21 7.97 0.10 - 1.89
Portfolio 35 219.36 3,044,863 6.98 4.45 19.15 6.29 21.49 7.06 9.43 (0.23) (2.89)
*like-for-like rental growth is for the six months ended 30 September 2023.
Source: Knight Frank/AEW, 30 September 2023.
Individual Property Classifications
Market Value
Property - Top 10 Sector Region Range (£m)
1 Central Six Retail Park, Coventry Retail warehouses West Midlands 20.0-25.0
2 Northgate House, Bath Standard retail South West 10.0-15.0
3 Gresford Industrial Estate, Wrexham Industrial Wales 10.0-15.0
4 Cambridge House, Bath Offices South West 10.0-15.0
5 40 Queen Square, Bristol Offices South West 10.0-15.0
6 Tanner Row, York Other Yorkshire and Humberside 10.0-15.0
7 London East Leisure Park, Dagenham Other Rest of London 10.0-15.0
8 Arrow Point Retail Park, Shrewsbury Retail warehouses West Midlands 7.5-10.0
9 Units 1001-1004, Sarus Court, Runcorn Industrial North West 5.0-7.5
10 Apollo Business Park, Basildon Industrial Eastern 5.0-7.5
The Company's top ten properties listed above comprise 51.1% of the total
value of the portfolio.
Market Value
Property Sector Region Range (£m)
11 Cuerden Way, Preston Retail warehouses North West 5.0 - 7.5
12 Storey's Bar Road, Peterborough Industrial Eastern 5.0 - 7.5
13 Barnstaple Retail Park, Barnstaple Retail warehouses South West 5.0 - 7.5
14 15-33 Union Street, Bristol Standard retail South West 5.0 - 7.5
15 Mangham Road, Rotherham Industrial Yorkshire and Humberside 5.0 - 7.5
16 Westlands Distribution Park, Weston Super Mare Industrial South West 5.0 - 7.5
17 Brockhurst Crescent, Walsall Industrial West Midlands 5.0 - 7.5
18 Walkers Lane, St Helens Industrial North West 5.0 - 7.5
19 Diamond Business Park, Wakefield Industrial Yorkshire and Humberside 5.0 - 7.5
20 Odeon Cinema, Southend Other Eastern 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 Oak Park, Droitwich Industrial West Midlands < 5.0
24 Commercial Road, Portsmouth Standard retail South East < 5.0
25 Pearl House, Nottingham Standard retail East Midlands < 5.0
26 The Railway Centre, Dewsbury Retail warehouses Yorkshire and Humberside < 5.0
27 Cedar House, Gloucester Offices South West < 5.0
28 Pipps Hall Industrial Estate, Basildon Industrial Eastern < 5.0
29 69-75 Above Bar Street, Southampton Standard retail South East < 5.0
30 Eagle Road, Redditch Industrial West Midlands < 5.0
31 Circuit, Cardiff Other Wales < 5.0
32 Bridge House, Bradford Industrial Yorkshire and Humberside < 5.0
33 Pricebusters Building, Blackpool Standard retail North West < 5.0
34 JD Gyms, Glasgow Other Scotland < 5.0
35 11/15 Fargate, Sheffield Standard retail Yorkshire and Humberside < 5.0
Sector and Geographical Allocation by Market Value as at 30 September 2023
Sector Allocation
Sector %
Industrial 36
Retail warehouses 21
Standard retail 17
Alternative 14
Offices 12
Geographical Allocation
Location %
South West 26
West Midlands 20
Yorkshire and Humberside 15
Eastern 10
North West 10
Wales 7
South East 5
Rest of London 4
East Midlands 2
Scotland 1
Source: Knight Frank valuation report as at 30 September 2023.
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 Matalan Retail warehouse Matalan, Preston 651 3.4
4 Wyndeham Group Industrial Wyndeham, Peterborough 644 3.4
5 Poundland Limited Retail Various 631 3.3
6 Next Retail Next, Bromley 630 3.3
7 TJX UK Ltd Retail Various 608 3.2
8 Mecca Bingo Ltd Other London East Leisure Park, Dagenham 584 3.1
9 Odeon Cinemas Other Odeon Cinema, Southend-on-Sea 535 2.8
10 Bath Northgate House Centre Ltd Retail Northgate House, Bath 491 2.5
The Company's top ten tenants, listed above, represent 33.9% of the total
passing rental income of the portfolio.
Source: Knight Frank valuation report as at 30 September 2023.
Investment Update
The Company completed the following material asset management transactions
during the period:
Acquisitions - In July 2023, the Company completed the acquisition of Tanner
Row, York, a mixed-use asset within York city centre for £10.02 million,
reflecting an attractive net initial yield of 9.3%.
In September 2023, the Company acquired Cambridge House, Bath, a mixed-use
asset in Bath city centre for £11.50 million, reflecting an attractive net
initial yield of 8.0% and a capital value of £223 per sq ft.
Disposals - In May 2023, the Company completed the sale of its industrial
holding in Deeside for £4.75 million, reflecting a capital value of circa
£49 per sq ft. The vacant asset was sold to an owner-occupier, with the price
reflecting an 8.0% premium to the 31 March 2023 valuation. By disposing of the
asset, the Company also avoided a speculative refurbishment project costing
approximately £1.00 million.
In June 2023, the Company completed the sale of two industrial assets, being
Euroway Trading Estate, Bradford and Lockwood Court, Leeds, for combined
proceeds of £16.10 million. This reflected a blended net initial yield (NIY)
of 6.2% and a weighted average premium to acquisition price of 31.2%. Both
sales realised significant profit for AEWU's shareholders. For Euroway Trading
Estate and Lockwood Court respectively, their sales prices exceeded their 31
March 2023 valuations by 26.5% and 3.8%, as well as their acquisition prices
by 30.3% and 31.8%.
Asset Management Update
Central Six Retail Park, Coventry (retail warehousing) - in April 2023, the
Company completed a lease renewal with existing tenant, Grahams Baked Potatoes
Limited. The tenant has entered into a new four-year lease with rolling mutual
break options at a rent of £24,500 per annum, equating to £45 per sq ft.
In May 2023, the Company completed a lease renewal with existing tenant, Oak
Furnitureland Group Limited, for Unit 12. The tenant has entered into a new
two-year lease with rolling mutual break options at a rent of £25,000 per
annum, equating to £2.50 per sq ft.
In May 2023, the Company also completed a reversionary lease with existing
tenant, Boots UK Limited, for Unit 7. The tenant has entered into a new
five-year lease with effect from 28 February 2024 at a rent of £259,293 per
annum, equating to £14.25 per sq ft. The letting also includes seven and a
half months' rent free taken under the existing lease.
In June 2023, the Company completed the acquisition of the freehold interest
in units 1-11, which had previously been held by way of long leasehold from
Friargate JV Projects Limited. The acquisition of the freehold interest is
expected to increase the liquidity of the asset in case of its future sale and
also removes user restrictions within the long lease which are constrictive to
lettings. In exchange for the freehold interest, the Company has granted to
Friargate JV Projects an option to acquire the Company's long leasehold
interest in units 12 A & B over a five-year period, commencing in two
years' time.
The Company completed a new 20-year lease to Aldi Stores Limited, following
the completion of the agreement for lease in October 2022. The lease provides
an annual rent of £270,166 per annum, reflecting £13 per sq ft, to be
reviewed every five years based on compounded annual RPI, collared and capped
at 1% and 3% respectively. The lease provides Aldi with a 12-month rent-free
incentive and a tenant break option at year 15.
In September 2023, the Company received formal confirmation of the planning
permission for the amalgamation of Unit 6a and Unit 6b and extended delivery
hours in order to facilitate the letting to The Food Warehouse. The letting is
expected to complete in February 2024.
Barnstaple Retail Park, Barnstaple (retail warehousing) - the Company has
completed an eight-year reversionary lease with B&Q from 29 September 2024
at the current passing rent of £348,000 per annum (£9.75 per sq ft). In
return, the tenant has been granted a six-month rent-free period.
40 Queens Square, Bristol (office) - after protracted negotiations, the
Company has settled three outstanding rent reviews at the building dating back
to 2021 and 2022 with the following tenants: Leonard Curtis Recovery Limited,
Chapman Taylor LLP and Turley Associates. The outcome of the reviews will see
the annual rent from the three tenant's increase from £213,812 per annum to
£281,550, reflecting a 32% uplift.
The Company has also recently completed a new five-year ex-Act lease to
Environmental Resources Limited with a tenant break option at the end of the
third year at a rent of £69,230 per annum (£35 per sq ft). The tenant has
the benefit of an initial six-month rent-free period, with a further four
months incentive if they do not serve their break option.
Arrow Point Retail Park, Shrewsbury (retail warehousing) - the Company has
completed a three-year lease to Universal Consumer Products Limited at a rent
of £110,000 per annum (£8 per sq ft). The previous passing rent was £95,844
(£7 per sq ft). No lease incentive was given.
Oak Park, Droitwich (industrial) - the Company has completed a new three-year
ex-Act lease on units 266-270 to Roger Dyson at a stepped rent starting at
£123,000 per annum in year one, £135,000 per annum in year two and £148,000
per annum in year three. There is a mutual break option on the expiry of the
second year. The tenant was granted a one-month rent free period.
The Company has also completed a new three-year ex-Act lease to Adam Hewitt
Ltd at units 263 and 265 at a rent of £70,000 per annum. There is a tenant
break option after the first year. No rent incentive was given.
Lastly, the Company has completed a letting at units 272 and 273 to J Warwick
Holdings Ltd for a new 15-year term, with rolling tenant break options every
three years at a rent of £79,000 per annum. The tenant has the benefit of a
six-month rent-free period. The property is now fully let.
Diamond Business Park, Wakefield (industrial) - in April 2023, the Company
completed the settlement of an open market rent review with Tasca Tankers,
dating back to June 2022. The review will see the rent received increase from
£209,000 to £229,900 per annum, reflecting an uplift of 9.6%.
The Company has settled Compac UK's July 2023 RPI rent review at £53,517 per
annum, representing an £11,517 per annum (circa 27%) increase. The unit is
still considered under-rented, with an ERV of £4.00 per sq ft, compared to
the new passing rent of £3.90 per sq ft.
The Company has also settled Economy Packaging Ltd's August 2023 open market
rent review at £79,065 per annum, representing a £26,565 per annum (circa
50%) increase. This letting equates to £3.75 per sq ft and will provide good
evidence for further asset management activity.
Northgate House, Bath (retail) - in June 2023, the Manager completed a new
five-year ex-Act lease to Dimension Vintage limited at a rent of £40,000 per
annum. Four months' rent-free has been granted.
Commercial Road, Portsmouth (retail) - in June 2023, a new 10-year lease was
completed to Specsavers at a rent of £60,000 per annum in vacant
accommodation previously let to River Island. An incentive of nine months'
rent free was granted to the tenant, along with a £40,000 capital
contribution to improvement works. There will be a tenant only break option
after six years on six months' notice.
Sarus Court, Runcorn (industrial) - The Manager has completed three lease
renewals with existing tenant, CJ Services, for their leases at units 1001,
1002 and 1003. The total rent is £276,283 per annum reflecting £6.50 per sq
ft, an increase from the previous average passing rent of £5.25 per sq ft.
Five-year ex-Act leases were granted, with incentives equal to six months'
rent-free.
The Railway Centre, Dewsbury (leisure) - Mecca Bingo, whose lease expires on
24 December 2023, have surrendered their lease early on 29 September 2023,
paying all their rent, service charge and insurance to lease expiry. In doing
so, the Company has also settled Mecca's dilapidations at £285,000. The full
and final combined settlement totals £365,126. The Manager is in the process
of agreeing terms with an incoming tenant where landlord enabling works will
be required. An early surrender of Mecca's lease will facilitate the new
letting completing a quarter earlier than otherwise possible.
Westlands Distribution Park, Weston-Super-Mare (industrial) - the Company has
completed a lease renewal with JN Baker who have extended their occupation of
Unit 2A for a further two years from April 2023, with a mutual break option
exercisable after nine months. The agreed rent is £159,000 per annum,
inclusive of insurance.
The Company has settled three outstanding April 2022 rent reviews with North
Somerset Council at units 2, 5 and 6. The combined rental increase is £35,864
per annum (circa 20%).
Carr Coatings, Redditch (industrial) - the Company has settled Carrs Coatings
Ltd's August 2023 annual uncapped RPI rent review at £294,348 per annum
(£7.75 per sq ft), representing a £24,385 per annum (circa 9%) 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 psf).
Vacancy - The portfolio's overall vacancy level is 6.98%.
ESG Update
The Company has maintained its two stars Global Real Estate Sustainability
Benchmark ('GRESB') rating for 2023, as well as maintaining its score of 67
(GRESB Peer Group Average-65). 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 owner 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 and by installing automated meter readers ('AMR') across the
portfolio. We currently have thirteen AMR installation projects ongoing,
including at single lets and multi-lets such as Central Six Retail Park.
Several other AMR installations will be executed during 2024.
We endeavour, where the opportunity presents itself through a lease event, 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.
We continue to assess and strengthen our reporting and alignment against the
framework set out by the TCFD with further disclosure provided in the 2023
annual report and accounts. We are pleased to report that the Company has
maintained its EPRA Silver rating for EPRA Sustainability Best Practices
Recommendations ('sBPR') for ESG disclosure and transparency.
We have 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.
Following a significant emissions reduction from assets within the portfolio
during 2022 (-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. 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. All void/vacant unit supplies have also been transferred to High
Quality Green Tariffs, while gas capping exercises have been undertaken where
possible, including several units at Diamond Business Park.
We are currently implementing several biodiversity initiatives across our
portfolio, including significant biodiversity improvements to the Railway
Centre, Dewsbury. This includes the installation of 20 bird boxes, 10 insect
towers & hotels, a hedgehog house, a wildflower meadow and replanting of
bushes across the site. Other notable projects include the installation of EV
chargers at Central Six and a solar PV feasibility study at London East
Leisure Park.
Lease Expiry Profile
Approximately £2.40 million of the Company's current contracted income stream
is subject to an expiry or break within the 12-month period commencing 1
October 2023. 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 2023.
AEW UK Investment Management LLP
21 November 2023
AEW UK REIT PLC's interim report and financial statements for the period ended
30 September 2023 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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