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

Aew UK ReitAnnouncement

19/01/2023 07:00

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RNS Number : 1929N  AEW UK REIT PLC  19 January 2023

The information contained within this announcement is deemed by the Company to
constitute inside information as stipulated under the Market Abuse Regulation
(EU) No. 596/2014 which forms part of domestic law in the United Kingdom
pursuant to The European Union Withdrawal Act 2018, as amended by The Market
Abuse (Amendment) (EU Exit) Regulations 2019.

 

19 January 2023

 

AEW UK REIT plc

 

NAV Update and Dividend Declaration

 

AEW UK REIT plc (LSE: AEWU) ("AEWU" or the "Company"), which directly owns a
value-focused portfolio of 37 regional UK commercial property assets,
announces its unaudited Net Asset Value ("NAV") as at 31 December 2022 and
interim dividend for the three-month period ended 31 December 2022.

 

Highlights

 

·    NAV of £166.24 million or 104.93 pence per share as at 31 December
2022 (30 September 2022: £193.08 million or 121.88 pence per share).

·     NAV total return of -12.26% for the quarter (30 September 2022
quarter: -2.07%).

·     -10.82% like-for-like valuation decrease for the quarter (30
September 2022 quarter decrease: -3.71%).

·      Share price total return of 10.68% for the quarter (30 September
2022 quarter: -16.89%).

·      EPRA earnings per share ("EPRA EPS") for the quarter of 1.34
pence (30 September 2022 quarter: 1.08 pence).

·   Interim dividend of 2.00 pence per share for the three months ended 31
December 2022, paid for 29 consecutive quarters and in line with the targeted
annual dividend of 8.00 pence per share.

·    Loan to NAV ratio at the quarter end was 36.09% (30 September 2022:
31.07%).  Significant headroom remains on all loan covenants.

·     Company will continue to benefit from a fixed cost of debt of 2.959%
until May 2027.

·    Acquisition of a freehold retail asset in Bromley for a purchase price
of £5.30 million, representing a low capital value of £101 per sq ft and an
attractive net initial yield of 8.7%.

·    Acquisition of Northgate House, Bath, for a purchase price of £13.00
million, representing a low capital value of £194 per sq ft and a net initial
yield of 8.5%.

·   Central Six Retail Park, Coventry: exchanged agreement for leases with
both Aldi Stores Limited and Iceland Foods Limited. Completed lease renewals
with Next Group plc and Caspian Food Services Limited, trading as Burger King.

·   £6.50 million available for deployment on new purchases. High quality
investment pipeline with the expectation that the supply of value
opportunities will continue during the first half of 2023.

·   98% of rental income collected during the quarter, consistent with each
quarter since the onset of the COVID pandemic in March 2020.

 

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

"Following interest rate rises and the unfolding UK macro-economic backdrop,
real estate valuations across all market sectors, in particular at the prime
end of the industrial and warehousing sector, fell significantly during the
quarter. The value of the Company's assets has not been immune from this trend
with like-for-like value loss of 10.82% during the quarter ending 31 December.
Nevertheless, this compares favourably to wider market declines with the CBRE
monthly index showing capital value falls of 6.8%, 5.5% and 3% for all UK
property in October, November and December respectively. This indicates total
value loss in the index of 14.57% during the quarter. Further narrative on
each sector is provided below.

Volatile markets can present significant opportunities for an actively managed
value strategy such as our own and, following a number of timely disposals
which helped to maximise the values of key assets during the summer of 2022,
we purchased two high-quality retail assets over the period. During the
quarter, vendor requirements for sale led to valuations moving materially in
favour of purchasers and this has allowed AEWU to access quality locations at
more favourable pricing. This opportunity is also demonstrated in our
investment pipeline where attractive assets in a number of sectors can
currently be bought at income levels that are accretive to the Company's
earnings and at capital values in line with their long-term fundamentals.
Looking forward, we are confident that the supply of value opportunities will
continue during the first half of 2023 and are excited to progress with some
of these using our available cash resources and capital if it can be
efficiently recycled.

The Company's diversified exposure and active asset management style help
provide investors with counter-cyclical performance from some assets, with the
values of several properties bucking wider market trends - either gaining or
holding value during the quarter as a result of accretive business plans. The
Odeon Cinema in Southend on Sea increased in value by 37 per cent. during the
period as a result of a completed lease renewal. In addition, four new leases
or agreement for leases were completed at the Central Six Retail Park in
Coventry and the value of the asset remained the same during the quarter.
Further capital and income growth is expected in future periods as a result of
our focus on active asset management. Reflecting on the strategy's overall
performance, we are comfortable with the Company's position, especially
following the prudent decisions taken on debt refinancing during 2022."

Valuation movement

As at 31 December 2022, the Company owned investment properties with a fair
value of £209.37 million. The like-for-like valuation decrease for the
quarter of £23.18 million (10.82%) is broken down as follows by sector:

 Sector              Valuation 31 December 2022      Like-for-like valuation movement for the quarter
                     £ million       %               £ million                  %
 Industrial          95.88           45.80           (17.45)                    (15.39)
 Retail Warehouses   37.30           17.82           (2.00)                     (5.71)
 High Street Retail  40.20           19.20           (3.20)                     (0.11)
 Other               19.90           9.50            0.13                       0.63
 Office              16.09           7.68            (0.66)                     (0.04)
 Total               209.37          100.00          (23.18)                    (10.82)*

 

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

 

Portfolio Manager's Review

AEWU's industrial portfolio recorded the largest value loss, experiencing a
decline of 15.39%. However, as tenant demand outstripped supply throughout
2022, the wider sector continued to provide the strongest level of rental
growth, nearing 10 per cent. With healthy levels of tenant demand expected to
continue in industrial markets, this represents a significant area of
opportunity for improved income generation. From a low starting average
passing rent of £3.50 per sq ft, we are still seeing rental growth in the
lease terms being discussed with our tenants in the sector and we therefore
remain confident about the portfolio's high weighting to industrial. In
addition to this, now that capital values in the sector have fallen, the
development pipeline will be more constrained, which will further bolster
occupational dynamics. The portfolio's industrial assets continue to represent
a long-term value proposition, with book values well below their replacement
cost.

AEWU's office assets have delivered a relatively robust performance during the
quarter, with value decline of only 0.04%. This resilience demonstrates our
strong stock selection compared with wider market trends. The CBRE monthly
index reported office capital value loss of 5.1%, 4.5% and 3% in October,
November and December respectively. This indicates total value loss in the
sector of approximately 12.1% during the quarter. In contrast to the
relatively strong position seen in industrial occupier markets, we do not
expect rental growth in the office sector, except in the very best specified
and well-located assets. Occupancy levels within the sector continue to
struggle and our view is that the Company's future performance will benefit
from its low exposure to the sector, at only 7.68% of the portfolio.

In the retail sector, high street retail has for the first time in recent
periods fared more robustly than retail warehousing, with both values and
rental levels on the high street remaining fairly stable in AEWU's portfolio.
Following more positive than expected retail sales during December, there is a
sense that the sector has been tested to such an extent in recent years that
both values and tenant operating figures are already bottoming out. That said,
value movements in the wider market since the autumn have opened up buying
opportunities in high quality locations that the Company has been able to take
advantage of. Locations added to AEWU's portfolio during the quarter, such as
Northgate House in central Bath, one of the UK's top 10 tourist destinations,
represent a step change in the quality profile of retail assets that AEWU has
been able to access in recent months.

It is also in the retail and leisure sectors that some of the Company's assets
have bucked wider market trends this quarter, experiencing either stable or
indeed higher valuations. This is where the active asset management style that
is at the heart of AEWU's strategy has led to the counter-cyclical performance
of some assets. Of note is the Company's leisure asset in Southend-on-Sea,
where a new lease to Odeon Cinemas has been signed, increasing the value of
the asset by 37% during the quarter. In addition to this, at Central Six
Retail Park in Coventry, a very busy quarter saw four separate tenant lettings
and agreement for leases reach fruition. As a result, the value of the asset
was maintained during the quarter, with further positive performance expected
to follow. More information on these lettings is provided below.

Other tenant lettings continued this quarter and we completed leases with
Sports Direct in Blackpool and Konica Minolta in Bristol.  Generally,
occupier health remains resilient, with a number of occupiers either choosing
not to action lease break options during the quarter or entering into renewal
discussions, such as in our office holding in Gloucester, where the tenant is
the Secretary of State for Communities and Local Government. We note that the
medium-term outlook for pressure on tenants from recent energy cost increases
is starting to ease with wholesale gas prices now trading roughly 80% down
from their March 2022 peak. We will, of course, continue to monitor this and
its impact on our tenants.

The Company's EPS for the quarter remains below target. The full benefit of
income earned from recent purchases is yet to be seen and a further sum of
£6.50 million remains available for deployment on new purchases, while
retaining sufficient cash for working capital. As previously stated, our
projections indicate a return to full dividend cover during the third quarter
of 2023, assuming full investment of the Company's cash resources at this time
and with assets such as Coventry benefitting from improved levels of income as
a result of this quarter's letting activity.

Net Asset Value

The Company's unaudited NAV at 31 December 2022 was £166.24 million, or
104.93 pence per share. This reflects a decrease of 13.90% compared with the
NAV per share at 30 September 2022. The Company's NAV total return, which
includes the interim dividend of 2.00 pence per share for the period from 1
July 2022 to 30 September 2022, was -12.26% for the three-month period ended
31 December 2022.

 

                                                Pence per share    £ million
 NAV at 1 October 2022                          121.88             193.08
 Loss on sale of investments                    (0.02)             (0.02)
 Portfolio acquisition costs                    (0.75)             (1.19)
 Capital expenditure                            (0.62)             (0.97)
 Valuation change in property portfolio         (14.90)            (23.61)
 Income earned for the period                   2.88               4.56
 Expenses and net finance costs for the period  (1.54)             (2.44)
 Interim dividend paid                          (2.00)             (3.17)
 NAV at 31 December 2022                        104.93             166.24

 

The NAV attributable to the ordinary shares has been calculated under
International Financial Reporting Standards. It incorporates the independent
portfolio valuation at 31 December 2022 and income for the period, but does
not include a provision for the interim dividend declared for the three-month
period to 31 December 2022.

 

Share price and Discount

 

The closing ordinary share price at 31 December was 101.6p, representing a
discount to the NAV per share of 3.18%. This reflects an increase of 8.6%
compared with the share price of 93.6p at 30 September 2022. The Company's
share price total return, which includes the interim dividend of 2.00 pence
per share for the period from 1 July 2022 to 30 September 2022, was 10.68% for
the three-month period ended 31 December 2022.

 

Dividend

 

Dividend declaration

The Company today announces an interim dividend of 2.00 pence per share for
the period from 1 October 2022 to 31 December 2022. The dividend payment will
be made on 20 February 2023 to shareholders on the register as at 27 January
2023.  The ex-dividend date will be 26 January 2023. 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 30 January 2023.

 

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 29 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 a £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
Company intends to utilise borrowings to enhance returns over the next five
years.

 

The loan was fully drawn at 31 December 2022, producing a Loan to NAV ratio of
36.09%.

 

Headroom on the debt facility's loan to value ("LTV") covenant continues to be
conservative. For those properties secured under the loan, a 45.83% fall in
valuation would be required before the LTV covenant is breached.

 

Investment Update

 

During the quarter the Company completed the following investment
transactions:

Purchases:

 

NEXT, Bromley (retail) - In late November, the Company completed the purchase
of a freehold retail asset in Bromley for £5.30 million, reflecting a low
capital value of £10 per sq ft and a net initial yield of 8.7%. The asset
is located in a prominent position on the western side of the pedestrianised
Bromley High Street and provides 54,215 sq ft of accommodation, let in its
entirety to Next Holdings Limited. Next Holdings Limited has occupied the
property since 2000 and, in September 2021, renewed on a four-year lease at a
rebased level of rent. A comprehensive store re-fit was undertaken by the
tenant at this time, demonstrating the retailer's commitment to the location.

Northgate House, Bath (retail) - In late November, the Company completed the
purchase of a 67,020 sq ft mixed-use block located in Bath city centre at a
price of £13.00 million, reflecting a low capital value of £194 per sq ft
and a net initial yield of 8.5%. The asset provides 48,805 sq ft of retail
accommodation fronting on to Bath's High Street, Upper Borough Walls and
Union Passage.  The retail accommodation is let to 11 tenants, anchored by TK
Maxx, which has recently renewed its commitment to the location by agreeing
the removal of a tenant break option.  Retail lettings provide a weighted
unexpired lease term in excess of five years. The remaining 18,215 sq ft of
accommodation comprises grade A specification offices recently refurbished by
the vendor. The office accommodation is fully let to a wholly owned subsidiary
of Regus Group until 2032, trading as co-working brand, Spaces.

Asset Management Update

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

Central Six Retail Park, Coventry (retail/leisure) - In October, the Company
completed an agreement for lease with new tenant, Aldi Stores Limited, for
vacant units 8 & 9. Aldi will enter into a new 20-year lease with a
15-year tenant break option at a 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 letting is subject to the
landlord securing planning permission for 1) change of use to food use
(achieved in July 2022), 2) external alteration works (achieved in November
2022) and 3) extended delivery hours, as well as landlord works which will
commence this month, at a cost of £894,212. Lease completion is targeted for
July 2023. The letting also includes a 12-month rent-free incentive.

In November 2022, the Company completed a lease renewal with existing tenant
Next Group Plc. The tenant has entered into a new five-year lease with a
three-year tenant break option, at a rent of £151,800 per annum, reflecting
£15 per sq ft, with a nine-month rent-free incentive.

In December 2022, the Company completed a lease renewal with existing tenant
Caspian Food Services Limited, trading as Burger King. The tenant has entered
into a new 10-year lease at a rent of £100,000 per annum, reflecting £40 per
sq ft.

In December 2022, the Company completed an agreement for lease with new tenant
Iceland Foods Limited, trading as The Food Warehouse for units 6a & 6b.
The tenant will enter into a new 10-year lease at a rent of £250,000 per
annum, reflecting £16.51 per sq ft. The letting includes a three-month rent
free and a £812,500 cash incentive which will be paid to the tenant on
completion of the lease which is expected to be in November. The letting is
subject to the landlord securing planning permission for 1) change of use to
food use and 2) extended delivery hours.

Odeon Cinema, Southend (leisure) - The Company has completed a straight
five-year reversionary lease with Odeon Cinemas Ltd at the previous passing
rent of £534,000 per annum. In doing so, a seven and a half month rent-free
incentive has been granted to the tenant. The valuation increase for the
quarter was £1.35 million.

Pricebusters Building, Blackpool (retail/leisure) - The Company has completed
a five-year lease renewal with Sports Direct, whose lease expired on 4th
October 2022. The lease has a tenant rolling break option, subject to 18
months term certain, and a landlord rolling break option from the expiry of
the third year. The rent is £175,000 per annum, inclusive of service charge
currently running at approximately £40,000 per annum. No rent-free incentive
was given.

40 Queen Square, Bristol (office) - Having entered into an Agreement for
Lease, subject to landlord refurbishment works, the Company has now completed
on the lease and licence for alterations with existing tenant, Konica Minolta
Marketing Services Ltd, on the third floor. A new 10-year lease commenced on
19th December at a rent of £218,840 per annum, reflecting a new high rental
tone for the building of £40 per sq ft. There is a five-year tenant break
option. The refurbishment works included roof, lift and reception upgrades at
a cost of £1.07 million plus an eleven-month rent-free incentive. The works
undertaken will provide benefits to all tenants within the building and are
expected to assist with further rental growth at the asset.

 

  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 29
individuals covering investment, asset management, operations and strategy. It
is part of AEW Group, one of the world's largest real estate managers, with
€90.8bn of assets under management as at 30 September 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 30 September 2022,
AEW Group managed €39.7bn 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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