REG - AEW UK REIT PLC - NAV Update and Dividend Declaration

Aew UK ReitAnnouncement

27/07/2022 07:00

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RNS Number : 8246T  AEW UK REIT PLC  27 July 2022

27 July 2022

 

AEW UK REIT Plc

 

NAV Update and Dividend Declaration

 

AEW UK REIT plc (LSE: AEWU) (the "Company"), which directly owns a
value-focused portfolio of 37 regional UK commercial property assets,
announces its unaudited Net Asset Value ("NAV") and interim dividend for the
three-month period ended 30 June 2022.

 

Highlights

 

·    NAV of £200.40 million or 126.50 pence per share as at 30 June 2022
(31 March 2022: £191.10 million or 120.63 pence per share).

·      NAV total return of 6.53% for the quarter (31 March 2022 quarter:
7.37%).

·     4.49% like-for-like valuation increase for the quarter (31 March
2022 quarter: 4.74%), driven by a 17.62% like-for-like increase from the
office sector associated with the anticipated sale of Eastpoint Business Park
in Oxford.

·    EPRA earnings per share ("EPRA EPS") for the quarter of 1.50 pence
(31 March 2022 quarter: 1.55 pence). This is expected to return to the
Company's target level of 2.00 pence per quarter once the sales of both
Eastpoint Business Park, Oxford and Bath Street, Glasgow, complete during
August and sales proceeds have been reinvested.

·     Interim dividend of 2.00 pence per share for the three months
ended 30 June 2022, in line with the targeted annual dividend of 8.00 pence
per share.

·    New £60 million debt facility with AgFe priced at a fixed total
interest cost of 2.959% for five years. Following this refinancing, the
existing RBSi loan facility has been repaid in full.

·    Loan to NAV ratio at the quarter end was 29.94% (31 March 2022:
28.26%). The Company had a cash balance of £4.51 million and its loan
facility was fully drawn.

·    Acquisition of Railway Station Retail Park in Dewsbury for a purchase
price of £4.70 million, a capital value of £82 per sq. ft. The price
reflects a net initial yield of circa 9.4%.

·     Attractive investment pipeline of value-orientated assets showing
net initial yields between 6.75% and 10% is under exclusivity.

·   Post quarter end, contractually committed disposal of Eastpoint
Business Park, Oxford for £29.0 million, a 16% premium to the asset's value
within the published NAV. Completion of the sale will take place on 8(th)
August 2022. As a result of the transaction having exchanged post quarter end,
a further 2.5p is expected to be realised in the Company's Net Asset Value per
share.

·     Post quarter end, exchanged contracts for disposal of Moorside
Road, Swinton for £1.71 million, at a 58% premium to the acquisition price,
reflecting a net initial yield of circa 6.6% and a capital value of £75 psf.
Completion is due to take place prior to the end of July.

 

Laura Elkin, Portfolio Manager, AEW UK REIT, commented:

"The portfolio's strong capital performance continues this quarter, with the
majority of the assets demonstrating continued resilience. The office sector
value gains seen in the portfolio of late, following a period of strong
performance by our industrial assets in previous quarters, demonstrate the
benefits of the strategy's ability to invest across market sectors to maximise
value at different times. It is also an indicator of the positive NAV impact
our proactive approach to portfolio management can have. In a value portfolio
such as this, active asset management can continue to drive defensive capital
performance at times when values in general may be experiencing increased
volatility. Asset management activity this quarter demonstrates this point,
with value accretive transactions seen in all major market sectors."

Portfolio Manager's Review

Capital growth in the Company's office assets was driven in the most part this
quarter by the Eastpoint Business Park in Oxford which has now been formally
revalued for the first time since being placed under offer for sale in April.
The value of the asset rose 43% during the quarter although, due to the sale
having exchanged post quarter end, further NAV uplift equating to 16% of the
30 June 2022 valuation is expected to follow. This is expected to add a
further 2.5p to the Company's Net Asset Value per share.

 

Following a refinancing in May, the Company now benefits from a fixed cost of
debt for the next five years, putting it at a significant advantage to those
competitors still paying floating rates. The Company has been able to lock in
a cost of debt below 3% due to its tactical decision to refinance at this
time. Debt finance is also deployed at a modest level of circa 30%, limiting
risk in future cycles.

The high yielding nature of the AEWU portfolio provides significant headroom
against rising interest rates that have started to impact prime yields in some
sectors. The portfolio's low capital values also provide a defensive starting
point due to their correlation with replacement costs and optionality for
alternative uses.

Earnings for the quarter of 1.50 pence per share are below target,
predominantly due to the continued impact of vacancy at Bath Street, Glasgow.
Following the completed sales of Glasgow and Oxford, which are both due during
August, earnings are expected to return to the Company's target level of 2.00
pence per share per quarter once sales proceeds have been reinvested. The
Company's 12-month backward looking dividend cover currently sits at 77% and
total historic dividend cover at 97%.

We have placed a significant pipeline of attractive assets under exclusivity
and endeavour to complete acquisitions promptly in order to return the
portfolio to a fully invested and maximum income producing position. These
pipeline assets have been sourced based upon the same value investment
principles as the existing portfolio, with net initial yields ranging between
6.75% and 10%. Further announcements regarding investment transactions are
expected in the coming weeks. Following both of these planned sales, the
Company's office exposure is projected to reduce to 8% of the portfolio.

As mentioned above, the Manager has completed several value accretive asset
management transactions this quarter. These have been undertaken across all
major property sectors, highlighting that tenant activity continues where
market appropriate levels of ERV have been applied. This has been particularly
reassuring in the high street retail and leisure sectors where tenants on the
whole remain keen to secure suitable premises to ensure the future of their
businesses, despite the backdrop of a gloomier economic outlook. From our
experience, this applies to both large national multiples, with whom we are
currently engaging in respect of vacant accommodation, and smaller emerging
chains, as demonstrated by the letting discussed below in Portsmouth to Kokoro
which has been achieved 15% ahead of our independent valuer's estimated rental
value.

Occupational demand also continues to be strong in the industrial and
warehousing sectors, contrary to the turbulence seen in the share prices of
some of the major listed REITs in these sectors. The portfolio is well placed
to benefit from this demand with an average passing rent psf in the Company's
warehousing portfolio of £3.40 psf. The Company has also continued to
crystallise profit in the sector having exchanged contracts for the sale of
Moorside Road in Swinton, the portfolio's smallest industrial asset, for
£1.71m, 58% ahead of its purchase price in 2015, post quarter end.

Another excellent outcome for the portfolio this quarter has been the
completion of Konica Minolta's agreement for lease at Queens Square, Bristol.
The letting will secure a new high rent of £40 psf in this building which has
already seen significant rental growth of 29% since its purchase.

In retail warehousing, a lease renewal with Charlie's Stores at Arrow Point,
Shrewsbury has been completed at a level 50% ahead of estimated rental value.
The portfolio's holdings within this sector are expected to provide an ongoing
source of value and income creation as various key business plans make
headway.

Valuation movement

As at 30 June 2022, the Company owned investment properties with a fair value
of £255.65 million. The like-for-like valuation increase for the quarter of
£10.78 million (4.49%) is broken down as follows by sector:

 

 Sector              Valuation 30 June 2022      Like-for-like valuation movement for the quarter
                     £ million     %             £ million                  %
 Industrial          122.82        48.04         2.08                       1.72
 Office              50.90         19.91         7.63                       17.62
 High Street Retail  24.70         9.66          (0.28)                     (1.10)
 Retail Warehouses   40.05         15.67         1.10                       3.21
 Other               17.18         6.72          0.25                       1.48
 Total               255.65        100.00        10.78                      4.49*

 

* This is the overall weighted average like-for-like valuation increase of the
portfolio.

 

Net Asset Value

The Company's unaudited NAV at 30 June 2022 was £200.40 million, or 126.50
pence per share. This reflects an increase of 4.87% compared with the NAV per
share at 31 March 2022. The Company's NAV total return, which includes the
interim dividend of 2.00 pence per share for the period from 1 January 2022 to
31 March 2022, was 6.53% for the three-month period ended 30 June 2022.

 

                                                Pence per share    £ million
 NAV at 1 April 2022                            120.63             191.10
 Loss on sale of investments and derivatives    (0.06)             (0.09)
 Portfolio acquisition costs                    (0.20)             (0.33)
 Capital expenditure                            (0.13)             (0.20)
 Valuation change in property portfolio         6.76               10.71
 Income earned for the period                   3.15               5.00
 Expenses and net finance costs for the period  (1.65)             (2.62)
 Interim dividend paid                          (2.00)             (3.17)
 NAV at 30 June 2022                            126.50             200.40

 

The NAV attributable to the ordinary shares has been calculated under
International Financial Reporting Standards. It incorporates the independent
portfolio valuation at 30 June 2022 and income for the period, but does not
include a provision for the interim dividend for the three-month period to 30
June 2022.

 

Rent Collection

 

The Company has achieved very high rent collection levels, which stand at over
98%(1) for each quarter since March 2020 (excluding current quarter where rent
continues to be collected).

 

For the rental quarter commencing on 24 June 2022, approximately 89% of rent
has been collected, with 98% expected to be received prior to quarter end. The
remainder of rents owed will continue to be pursued.

(1)Excluding rent arrears from Outfit Retail Properties Limited, Central Six
Retail Park, Coventry, who are in administration, with the unit having been
vacant since acquisition (November 2021).

 

Dividend

 

Dividend declaration

The Company today announces an interim dividend of 2.00 pence per share for
the period from 1 April 2022 to 30 June 2022. The dividend payment will be
made on 31 August 2022 to shareholders on the register as at 5 August 2022.
The ex-dividend date will be 4 August 2022. The Company operates a Dividend
Reinvestment Plan ("DRIP"), which is managed by its registrar, Link Group. For
shareholders who wish to receive their dividend in the form of shares, the
deadline to elect for the DRIP is 9 August 2022.

 

The dividend of 2.00 pence per share will be designated 1.50 pence per share
as an interim property income distribution ("PID") and 0.50 pence per share as
an interim ordinary dividend ("non-PID").

 

The Company has now paid a 2.00 pence quarterly dividend for 27 consecutive
quarters(1), providing income consistency to our shareholders.

 

(1)For the period 1 November 2017 to 31 December 2017, a pro rata dividend of
1.33 pence per share was paid for this two-month period, following a change in
the accounting period end.

 

Dividend outlook

It remains the Company's intention to continue to pay dividends in line with
its dividend policy and this will be kept under review. In determining future
dividend payments, regard will be given to the circumstances prevailing at the
relevant time, as well as the Company's requirement, as a UK REIT, to
distribute at least 90% of its distributable income annually.

 

Financing

 

Equity

The Company's share capital consists of 158,774,746 Ordinary Shares, of which
350,000 are currently held by the Company as treasury shares.

 

Debt

 

The Company completed a refinancing of its debt facility in May 2022. The
Company has secured a new £60.00 million, five-year term loan facility with
AgFe, a leading independent asset manager specialising in debt-based
investments. The loan is priced as a fixed rate loan with a total interest
cost of 2.959%. The existing RBSi loan facility, which was priced at a
floating rate according to SONIA, was due to mature in October 2023 and has
been repaid in full by the new loan facility. Simultaneous to the funding, the
Company's interest rate cap was sold for proceeds of £743,000. In the current
inflationary environment, the Company considers it prudent to fix the loan
now, rather than run the risk of further rising rates. The Company intends to
utilise borrowings to enhance returns over the next five years.

 

The Company had borrowings of £60.0 million at 30 June 2022, producing a Loan
to NAV ratio of 29.94%. The loan is now fully drawn.

 

Investment Update

During the quarter the Company completed the following investment transaction:

Railway Station Retail Park, Dewsbury (retail warehouse) - In June, the
Company completed the acquisition of a 6.04-acre Railway Station Retail Park
in Dewsbury for a price of £4,700,000. The purchase price reflects a low
capital value of £82 psf and provides an attractive net initial yield of
9.4%. The park occupies a prominent location on the edge of the town centre
within an established retail and leisure area. Neighbouring occupiers include
Sainsburys, Aldi, Matalan, Pets at Home and Iceland, as well as a council
operated library and sports facility. Dewsbury has a tight supply of retail
warehousing stock, with no current vacancies within the town.

The park is fully let with a low average passing rent of £8.28 psf, which
the Manager believes provides strong potential for rental growth. Tenants
include Sports Direct, Mecca Bingo, Fieldrose Ltd, trading as KFC, and the
Danish furniture retailer, Jysk.

Post quarter end, the Company undertook the following investment transaction:

Eastpoint Business Park, Oxford (office) - During July, the Company exchanged
contracts to sell the Eastpoint Business Park in Oxford for the price of £29
million. The asset was acquired in May 2015 for £8.2 million reflecting a
net initial yield of over 9%. The sale price crystallises significant profit,
exceeding both the valuation level immediately prior to the sale by 16% and
the acquisition price by 254%. The asset has delivered an IRR to the Company
in excess of 22% during its hold period.

In 2018, the Company signed a new 25-year lease with specialist healthcare
provider Genesis Care. The lease provided for 5 yearly rental uplifts in line
with RPI which increased the asset's value by £2.0m. As a condition of this
letting, the Manager sought planning consent for change of use away from the
asset's existing office use setting a precedent for healthcare and life
science use in the location.

Since this time, investor demand in the healthcare and life science sectors
has increased and this is reflected in the sale pricing now achieved. Since
announcing an agreed sale price of £37 million on the 25 April, the rising
cost of debt combined with a more uncertain economic outlook impacted the
potential purchasers' assessment of the development risk and required returns
associated with the project, resulting in them withdrawing from the
transaction altogether. The Company received a number of offers for the asset
and accordingly the property went under offer to another party and ultimately
will complete at a reduced price of £29 million, with contracts having now
been exchanged.

The sale is due to complete on 8 August 2022 and the Company will receive
income from the asset until this date. Subsequent to this, the Manager intends
to reinvest the sale proceeds in assets producing net initial yields between
6.75% and 10% and has exclusively secured a pipeline of attractive assets with
further announcements in this regard expected imminently.  Due to recent
valuation increases, Oxford is currently producing an income yield of circa
1.0% and therefore, reinvested proceeds from the sale will be significantly
more accretive to the Company's earnings.

Due to the exchange of the sale post quarter end, a further 2.5p is expected
to be realised in the Company's Net Asset Value per share.

349 Moorside Road, Swinton (industrial) - Post quarter end, the Company has
exchanged on the sale of the property for £1.71 million. A sale at this price
reflects a net initial yield of circa 6.6% and a capital value of £75 psf.
The freehold property comprises 22,831 sq ft of modern industrial
accommodation on a 1.4 acre site. The property was acquired in September 2015
for £1,071,577 reflecting a 9.0% initial yield. A sale at £1.7 million
represents a 58% premium to the acquisition price. Completion of the sale is
due to take place prior to the end of July.

Asset Management Update

During the quarter the Company completed the following asset management
transactions:

Arrow Point, Shrewsbury (retail warehouse) - During May, the Company completed
the renewal of Charlie's Stores' lease on straight 10-year term at a rent of
£385,000 per annum reflecting £11 psf, versus an ERV of £7.50 psf.
Charlie's Stores is the scheme's anchor tenant, so this is an important
letting for the property. Only 9 months' rent-free incentive was given. The
valuation consequently rose by £300,000 to £10 million, having already
increased by £1.35 million on the 2021 purchase price of £8.35 million.

40 Queens Square, Bristol (office) - The Company has completed an agreement
for lease with Konica Minolta Marketing Services Ltd on the third floor. The
tenant will enter into a new 10-year lease with a five-year tenant break
option at a rent of £218,840 per annum reflecting a new high rental tone for
the building of £40 psf. The letting is subject to the Company undertaking
landlord works comprising a comprehensive Cat A refurbishment and roof, lift
and reception works at a cost of £1.07 million plus 11 months' rent-free
incentive. The headline rent demonstrates the strong location and property
fundamentals of the asset.

Commercial Road, Portsmouth (high street retail) - During May, the Company
completed a new 15-year lease to Kokoro UK Limited, a Japanese-Korean
restaurant. The agreed rent is £52,500 per annum versus an ERV of £45,750
per annum. The tenant has the benefit of a 12-month rent free period and a
tenant only break option at the end of the tenth year.

Diamond Business Park, Wakefield (industrial) - During June, the Company
completed a new letting of Units 8 and 9 to Wow Interiors, an existing tenant
on the estate already occupying Unit 7. Wow have taken a new six-year lease
with a tenant break option at the end of the third year. The commencing rent
of £3 psf will increase to £3.50 psf in years 2 and 3, and subsequently
£3.75 psf from year 4 onwards. In doing so, the Company has also completed a
lease regear on Unit 7, removing Wow's 2022 tenant break option and agreeing a
3-year reversionary lease with a tenant break option mirroring Units 8 and
9.

 

 Enquiries
 AEW UK
 Laura Elkin                     laura.elkin@eu.aew.com (mailto:laura.elkin@eu.aew.com)

                                 +44(0) 20 7016 4869
 Henry Butt                      henry.butt@eu.aew.com (mailto:henry.butt@eu.aew.com)

                                 +44(0) 20 7016 4869
 Nicki Gladstone                 nicki.gladstone-ext@eu.aew.com (mailto:nicki.gladstone-ext@eu.aew.com)
                                 +44(0) 7711 401 021
 Company Secretary
 Link Company Matters Limited    aewu.cosec@linkgroup.co.uk
                                 +44(0) 1392 477 500

 TB Cardew                       AEW@tbcardew.com (mailto:AEW@tbcardew.com)
 Ed Orlebar                      +44 (0) 7738 724 630

 Tania Wild                      +44 (0) 7425 536 903

 Liberum Capital
 Darren Vickers / Owen Matthews  +44 (0) 20 3100 2000

 

 

Notes to Editors

 

About AEW UK REIT

 

AEW UK REIT plc (LSE: AEWU) aims to deliver an attractive total return to
shareholders by investing predominantly in smaller commercial properties
(typically less than £15 million), on shorter occupational leases in strong
commercial locations across the United Kingdom. The Company is currently
invested in office, retail, industrial and leisure assets, with a focus on
active asset management, repositioning the properties and improving the
quality of income streams.  AEWU is currently paying an annualised dividend
of 8p per share.

 

The Company was listed on the Official List of the Financial Conduct Authority
and admitted to trading on the Main Market of the London Stock Exchange on 12
May 2015. www.aewukreit.com (http://www.aewukreit.com/)

 

LEI: 21380073LDXHV2LP5K50

 

About AEW UK Investment Management LLP

 

AEW UK Investment Management LLP employs a well-resourced team comprising 26
individuals covering investment, asset management, operations and strategy. It
is part of AEW Group, one of the world's largest real estate managers, with
€85.2bn of assets under management as at 31 March 2022. AEW Group comprises
AEW SA and AEW Capital Management L.P., a U.S. registered investment manager
and their respective subsidiaries. In Europe, as at 31 March 2022, AEW Group
managed €39.5bn of real estate assets on behalf of a number of funds and
separate accounts with over 470 staff located in 12 locations.

 

www.aewuk.co.uk (http://www.aewuk.co.uk)

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