Half Yearly Results
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AEW UK REIT plc (AEWU)
18 November 2020
AEW UK REIT PLC (the "Company")
Interim Report and Financial Statements for the six months ended 30 September 2020
Financial Highlights
Property Highlights
Chairman's Statement
Overview I am pleased to report the unaudited interim results of AEW UK REIT plc (the 'Company') for the six months ended 30 September 2020. The Company had a diversified portfolio of 34 commercial investment properties throughout the UK with a value of £171.36 million as at 30 September 2020.
The Company's NAV has remained resilient over the period, having fallen by only 0.43% despite the uncertain economic backdrop caused by the ongoing COVID-19 pandemic. Although the valuation of the Company's property portfolio has fallen by 1.69% on a like-for-like basis over the period, the sale of 2 Geddington Road, Corby, at a price significantly ahead of its prevailing valuation, realised a profit on disposal of £3.67 million. This not only provided a boost to the Company's NAV, but improved the Company's position in terms of its cash and debt covenants, thus making the Company robustly positioned to deal with uncertainty resulting from the pandemic. The Company repaid £12.00 million of its debt facility in July 2020, resulting in a Loan to NAV ratio of 26.83% while maintaining a healthy cash balance of £13.36 million, both as at 30 September 2020.
The sale of Corby and the resulting loss of the Company's largest tenant at the time has contributed to a fall in rental income and therefore a fall in EPRA EPS, which was 3.41 pence for the period. Proceeds from the sale of Corby have now begun to be reinvested as our Investment Manager (AEW UK Investment Management LLP) is starting to see more attractive opportunities in the investment pipeline that should prove to be accretive to both NAV and earnings. The Company made one acquisition post period-end, acquiring a warehouse asset in Weston-Super-Mare for a purchase price of £5.40 million. The property shows strong potential for medium and long term value growth due to neighbouring land sales for residential development as well as offering an attractive income yield in the meantime. We hope that further opportunities such as this will allow the Company to increase its earnings over the coming quarters.
The Investment Manager continues to work with the Company's tenants in order to manage the difficulties posed by the pandemic. To date, the tenancy profile of the Company has remained largely intact, as the vacancy rate by ERV was just 4.9% as at 30 September 2020 (this excludes vacancy at the Company's property in Glasgow, which has exchanged to be sold with a condition of vacant possession. Portfolio level vacancy increases to 8.2% with this asset included). Rent collection rates have remained high for the March 2020, June 2020 and September 2020 rent quarters in comparison with the averages seen in the wider market and we expect that ultimate rates of collection, following the expiry of longer-term payment plans, should result in collection rates in excess of 90%. There are tenants who continue to face difficulties in the current environment and in such instances the Investment Manager has agreed a longer-term payment plan where rental income can be recovered in full over coming periods. A prudent assessment has been made of the recoverability of the Company's outstanding receivables, taking into account the uncertain economic climate, and a provision has been made in the financial statements for expected credit losses.
The active asset management approach of the Investment Manager has continued to add value and limit the downside in the current market. During the period, the Company has completed a number of lettings and lease renewals which are noted in more detail in the 'Asset Management' section of the Investment Manager's report. The most notable of these has been the 15-year lease renewal with the Secretary of State for Housing, Communities and Local Government at the Company's office asset, Sandford House, Solihull, which resulted in a 30% increase in rental income. In addition to its letting activity, the Company has begun to undertake remedial works to its property at Bank Hey Street, Blackpool, which include the overhaul and reinstatement of its cathodic protection system, and comprehensive repairs to faience elevations and windows. The nature of these repair works means that as the costs are incurred, they will be expensed to the Company's profit or loss, with a corresponding increase expected to be seen in the revaluation of the property.
The Company's share price was 75.20 pps as at 30 September 2020, representing an 18.90% discount to NAV. This reflects the declines experienced in equity markets in general and specifically in the real estate sector as a result of the COVID-19 pandemic. In light of the discount in share price to NAV and cash reserves available, post period-end the Company has bought back 350,000 of its own shares for gross consideration of £262,995, which will have a positive impact on the Company's NAV per share.
We are delighted to announce that the Company has received four awards during the year; EPRA Gold medal for Financial Reporting, EPRA Silver medal for Sustainability Reporting and EPRA Most Improved award for Sustainability Reporting. The Company has also been named Best UK Real Estate Investment Trust in the Citywire Investment Trust Awards based upon its strong three year track record. These awards are a reflection of much hard work committed to the Company by the Investment Manager and the Board would like to thank the team at AEW and express its positivity and confidence in the Investment Manager's ongoing ability to implement the Company's strategy.
Financial Results
Financing The Company has a £60.00 million loan facility, of which it had drawn a balance of £39.50 million as at 30 September 2020 (31 March 2020: £60.00 million facility; £51.50 million drawn), producing a Loan to NAV ratio of 26.83% (31 March 2020: 34.83%). During the period, the Company amended the facility to allow the flexibility to make repayments and re-draw these amounts, akin to a revolving credit facility.
The unexpired term of the facility was 3.1 years as at 30 September 2020 (31 March 2020: 3.6 years). The loan incurs interest at 3-month LIBOR +1.4%, which equated to an all-in rate of 1.47% as at 30 September 2020 (31 March 2020: 2.10%).
The Company is protected from a significant rise in interest rates as it has in place interest rate caps. Throughout the period and up to 19 October 2020, the Company had in effect interest rate caps on a notional value of £36.51 million of the loan, with £26.51 million capped at 2.50% and £10.00 million capped at 2.00%, which resulted in the loan balance being 92.4% hedged as at 30 September 2020. During the period, the Company paid a premium of £62,968 to enter into new interest rate caps effective from 20 October 2020 and for the remaining term of the loan, which cap the LIBOR rate at 1.00% on a notional value of £51.50 million.
As noted in the KPIs, the Company targets a long-term gearing of 35% Loan to NAV, which is the maximum gearing on drawdown of the RBSi loan facility. The Board and Investment Manager will continue to monitor the level of gearing and may adjust the gearing according to the Company's circumstances and perceived risk levels.
During the period, the Company obtained consent from its lender, RBSi, to waive the interest cover ratio ('ICR') tests within its loan agreement for July and October 2020, with the next proposed test being in January 2021, which was considered to be a prudent action given the economic environment. Irrespective of these waivers the Company would have passed its ICR tests for both July and October 2020.
Dividends The Company has continued to deliver on its target of paying dividends of 8.00 pps per annum. During the period, the Company declared and paid two quarterly dividends of 2.00 pps, in line with its target. Dividends for the period were 85.25% covered by EPRA EPS.
It remains the Company's intention to continue to pay dividends in line with its dividend policy, however the outlook remains very uncertain given the current COVID-19 pandemic. In determining future dividend payments, regard will be had 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, which will remain a key consideration.
Outlook At the time of writing this report, the UK faces unprecedented economic uncertainty and it appears likely that the economy will continue to struggle for the remainder of 2020 and beyond. While we expect that this will continue to impact the property market, the Company remains well positioned to withstand these conditions as a result of its healthy cash position and borrowing covenant headroom. Since the onset of the pandemic, the Company has displayed stable NAV performance, reflecting the diversity of the portfolio, its low exposure to the retail sector and the fact that many of its assets benefit from viable alternative use potential, which limits downside risk and volatility. We are also encouraged by strong and improving rent collection levels to date.
In the near term, the Board and Investment Manager will continue to focus on minimising the impact of COVID-19 on its stakeholders and, as more attractive opportunities arise in the investment market, will aim to find suitable assets to build earnings back towards a fully covered dividend, following the sale of the Company's Corby asset. The developing economic conditions will be monitored closely and the Company's strategy adjusted accordingly. There has recently been some positive news regarding the development of a vaccine and it is hoped that its implementation will kick-start economic recovery and provide the conditions to enable growth of the Company to resume.
Mark Burton Chairman 17 November 2020
Key Performance Indicators
Investment Manager's Report
Economic Outlook As a second wave of the COVID-19 pandemic leads to increased lockdown restrictions being implemented across the country, the UK faces continued uncertainty. The economy has already experienced contraction in the quarter to 30 June 2020 following a nationwide lockdown and KPMG's September 2020 UK Economic Outlook expects the economy to contract by 10.3% over the year as a whole. When the Government withdraws its job retention scheme, unemployment will be expected to rise and key indicators of short term economic outlook will be the extent of the impact of the second wave, the subsequent responses needed to contain the virus and further progress in the development of a vaccine.
The strength and timing of the economic recovery thereafter will largely depend on the success in implementing a vaccine, while a no deal Brexit scenario will also pose a risk. The KPMG Economic Outlook forecasts growth of 8.4% in 2021, assuming a vaccine is approved in January 2021 and an outline trade agreement is reached with the EU by the end of the transition period, with the economy forecast to reach pre-COVID-19 levels by the start of 2023. However, the picture is ever changing and it is difficult to place any significant reliance on forecasts with such variable assumptions. Inflation is expected to remain well below the Bank of England's 2% target, which should see the base rate remain at 0.1% or below until at least the end of 2021.
General recovery in the UK commercial property market is expected to track that of the wider UK economy although recovery in sub sectors of the property market will be driven by structural forces as well. A much publicised example of this includes the growth of online retail sales at the expense of physical stores, which has seen a divergence in the capital values of the retail and industrial warehousing sectors. This trend is an important one for the Company's portfolio due to its high weighting to industrial and warehousing property which makes up 52.9% of its property assets by value as at 30 September 2020. Given this weighting, the Company expects to continue its current trend of outperformance against the UK commercial property market as a whole. The high exposure to this sector is expected to continue to provide a resilient outlook for the Company's major performance indicators including net asset value, earnings and occupancy, despite wider economic uncertainty. The high portfolio weighting to warehouses is also expected to continue to provide a positive outlook for rent collection, which, based on levels seen to date since the start of the pandemic, is ultimately expected to well exceed 90% in each quarter.
This robust base will further be supported by the Investment Manager's proactive approach to asset management which, despite the ongoing pandemic, has delivered six new lettings in the portfolio since the start of UK-wide lockdowns in March 2020 across all major market sectors including retail. These lettings have secured ongoing rental income to the Company at a weighted average of 5% ahead of previous independent estimates.
Financial Results The Company's NAV as at 30 September 2020 was £147.24 million or 92.73 pps (31 March 2020: £147.86 million or 93.13 pps). This is a decrease of 0.40 pps or 0.27% over the period.
EPRA EPS for the year was 3.41 pps which, based on dividends paid of 4.00 pps, reflects a dividend cover of 85.25%. The reduction in dividend cover has largely come about due to the loss of rental income following the disposal of 2 Geddington Road, Corby, in May 2020, which realised a profit on disposal of £3.67 million. Income from the remaining tenancy profile has remained largely intact. Collection rates have reached 93% and 89% for the March 2020 and June 2020 quarters respectively, with further payments expected to be received under longer-term payment plans. Of the outstanding arrears, £0.20 million has been provided for expected credit losses.
Financing As at 30 September 2020, the Company has a £60.0 million loan facility with RBSi, in place until October 2023, the details of which are presented below:
On 24 June 2020, the Company announced an amendment to its facility, allowing the flexibility to make repayments and re-draw these amounts, akin to a revolving credit facility.
Property Portfolio During the period, the Company disposed of 2 Geddington Road, Corby, for net proceeds of £18.68 million. The Company made no acquisitions during the period.
The Company made no acquisitions during the period and disposed of one property, Geddington Road, Corby, for net proceeds of £18.68 million, realising a profit on disposal of £3.67 million. 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 2020
Summary by Geographical Area as at 30 September 2020
*like-for-like rental growth is for the six months ended 30 September 2020. **excluding Glasgow, total vacancy is 4.90%. Source: Knight Frank/AEW, 30 September 2020.
Individual Property Classifications
The Company's top ten properties listed above comprise 50.1% of the total value of the portfolio.
Sector and Geographical Allocation by Market Value as at 30 September 2020
Sector Allocation
Geographical Allocation
Top Ten Tenants
The Company's top ten tenants, listed above, represent 41.8% of the total passing rental income of the portfolio.
Asset Management The Company completed the following material asset management transactions during the period:
Bank Hey Street, Blackpool - In May 2020, the Company signed a reversionary lease with existing tenant JD Wetherspoon. This documents the removal of the tenant's break option in 2025 and provides an additional 10-year lease term taking the earliest expiry from 2025 to 2050. The annual rent payable by the tenant has reduced from £96,750 to £90,000 but the lease now provides five-yearly fixed increases reflecting 1% per annum.
2 Geddington Road, Corby - On 22 May 2020, the Company disposed of its largest asset at 2 Geddington Road, Corby, for gross proceeds of £18.80 million, 25% ahead of the valuation level immediately prior and 52% ahead of its acquisition price in 2018. The asset had been delivering an income yield to the Company of 10% per annum.
Sandford House, Solihull - During June 2020, the Company completed a 15-year renewal lease with its existing tenant, the Secretary of State for Housing, Communities and Local Government. The agreement documents the increase of rental income from the property by 30% as well as providing for five-yearly open market rent reviews and a tenant break option at year 10. The tenant intends to carry out a full refurbishment of the property over coming weeks requiring no capital payment by the Company either by way of refurbishment cost or capital incentive to the tenant. In addition, no rent free incentive has been granted to the tenant. Throughout its hold period the Company has so far received a net income yield from the asset in excess of 9% per annum against its purchase price of £5.4 million.
Bessemer Road, Basingstoke - In July 2020, the Company completed a 5-year lease renewal at its 58,000 sq ft industrial premises in Basingstoke. The lease has been granted with no rent free incentive given to the tenant and secures a rental income to the Company 6% ahead of independent valuer's estimated levels. The tenant has the benefit of a break option in year 3.
Langthwaite Grange Industrial Estate, South Kirkby - During August 2020, a lease renewal was signed with the Company's third largest tenant, Ardagh Glass. Rent payable under the new lease has been agreed 13% ahead of both independent valuer's estimated levels and the previous level of passing rent. The lease is for a five-year term and the tenant will benefit from four months' rent free and a tenant break option after three years.
Clarke Road, Milton Keynes and Moorside Road, Swinton - Nationwide Crash Repair Centres Limited, the tenant of this asset, which comprises 2% of the Company's annual rental income, appointed administrators on 3 September 2020 although subsequently, on 4 September 2020, the business was acquired by Redde Northgate Plc. Redde Northgate have confirmed that they intend to operate the Milton Keynes branch, the larger of the two within AEWU ownership, and negotiations are currently underway to extend the terms of this lease which should prove to be value accretive to the Company. Redde Northgate is a substantial and well capitalised business reporting profit before tax of over £60 million for the year ending 30 April 2019. The former Swinton branch of Nationwide Crash Repair Centres, representing 0.8% of the Company's annual rental income, will not be operated by Redde Northgate on an ongoing basis, however interest has already been received from a prospective new tenant.
Apollo Business Park, Basildon - During September 2020, the Company completed a 5-year lease renewal on 35,300 sq ft of these multi-let industrial premises in Basildon. The lease secures a rental income to the Company 4% ahead of independent valuer's estimated levels and 30% ahead of the previous rental level. The tenant will benefit from 6 months' rent free.
Wheeler Gate, Nottingham - In September 2020, a 5-year renewal lease was completed with Costa Coffee on a 1,400 sq ft retail unit located in central Nottingham. The reversionary lease documents the rebasing of Costa's rent from £110,000 to £52,000 per annum in line with its estimated rental value. The tenant benefits from 9 months' rent free.
Bath Street, Glasgow - During October 2020, the Company exchanged contracts to sell its 85,000 sq ft office holding at 225 Bath Street in Glasgow city centre to a subsidiary company of IQ Student Accommodation. The transaction is conditional upon various matters including the grant of planning permission for the development of a 480 bedroom student housing development. Sale pricing will be determined following the approval of all conditions according to an agreed matrix ranging from £8.55 to £9.30 million. Transaction pricing reflects 98% of pricing levels being discussed by the parties prior to the onset of the COVID-19 pandemic.
Bank Hey Street, Blackpool - The Company has begun to undertake remedial works to its property in Blackpool, which include the overhaul and reinstatement of its cathodic protection system, and comprehensive repairs to faience elevations and windows. Works have been budgeted at a total cost to the Company of £1.7 million over two years. The nature of these repair works means that as the costs are incurred, they will be expensed to the Company's profit or loss, with a corresponding increase expected to be seen in the revaluation of the property, all else being equal.
Weston Super Mare - Post period end, the Company acquired the multi-let Westlands Distribution Park in Weston Super Mare for a purchase price of £5.4 million. The purchase price reflects a low capital value of £175,000 per acre which provides strong potential for future capital value growth based upon nearby comparable land transactions which range between £350,000 and £500,000 per acre for other commercial and residential uses. The estate, located 3 miles from the M5 Motorway, provides a net initial yield of 6.4% which is expected to increase to at least 7.4% within the medium term. The average passing rent of £1.50 per sq ft also provides strong potential for rental growth. Tenants include North Somerset District Council who make up 30% of the income stream.
Vacancy - The portfolio's overall vacancy level now sits at 4.9%, excluding vacancy contributed by the asset at 225 Bath Street, Glasgow which, as discussed above, has now been exchanged for sale for alternative use redevelopment. As a condition of the sale agreement, full vacancy must be achieved in the building before the sale can be completed. Including this asset, overall vacancy is 8.21%.
AEW UK Investment Management LLP
17 November 2020
Principal Risks and Uncertainties The Company's assets consist primarily of UK commercial property. Its principal risks are therefore related to the commercial property market in general, but also to the particular circumstances of the individual properties and the tenants within the properties.
The Board has overall responsibility for reviewing the effectiveness of the system of risk management and internal control which is operated by the Investment Manager. The Company's ongoing risk management process is designed to identify, evaluate and mitigate the significant risks the Company faces.
At least twice a year, the Board undertakes a formal risk review with the assistance of the Audit Committee, to assess the adequacy and effectiveness of the Investment Manager and other service providers' risk management and internal control processes.
The Board has carried out a robust assessment of the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity.
An analysis of the principal risks and uncertainties is set out below. The risks below do not purport to be exhaustive as some risks are not yet known and some risks are currently not deemed material but could turn out to be material in the future. Changes to the principal risks since the date of the Annual Report and Financial Statements for the year ended 31 March 2020 are indicated below.
Interim Management Report and Directors' Responsibility Statement
Interim Management Report The important events that have occurred during the period under review, the key factors influencing the financial statements and the principal risks and uncertainties for the remaining six months of the financial year are set out above.
Responsibility Statement We confirm that to the best of our knowledge:
On behalf of the Board
Mark Burton Chairman
17 November 2020
Independent Review Report to AEW UK REIT PLC
ConclusionWe have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2020 which comprises the Condensed Statement of Comprehensive Income, Condensed Statement of Changes in Equity, Condensed Statement of Financial Position, Condensed Statement of Cash Flows and the related explanatory notes.
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2020 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the Disclosure Guidance and Transparency Rules ('the DTR') of the UK's Financial Conduct Authority ('the UK FCA').
Scope of reviewWe conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Directors' responsibilitiesThe half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.
The annual financial statements of the Company are prepared in accordance with International Financial Reporting Standards as adopted by the EU. The Directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted by the EU.
Our responsibility Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.
The purpose of our review work and to whom we owe our responsibilities This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the DTR of the UK FCA. Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.
Matthew Williams for and on behalf of KPMG LLP Chartered Accountants 15 Canada Square London E14 5GL 17 November 2020
Financial Statements
Condensed Statement of Comprehensive Income for the six months ended 30 September 2020
The notes below form an integral part of these condensed financial statements.
Condensed Statement of Changes in Equity for the six months ended 30 September 2020
The notes below form an integral part of these condensed financial statements.
Condensed Statement of Financial Position as at 30 September 2020
The financial statements were approved by the Board of Directors on 17 November 2020 and were signed on its behalf by:
Mark Burton Chairman AEW UK REIT plc Company number: 09522515
The notes below form an integral part of these condensed financial statements.
Condensed Statement of Cash Flows for the six months ended 30 September 2020
The notes below form an integral part of these condensed financial statements.
Notes to the Condensed Financial Statements for the six months ended 30 September 2020
1. Corporate information AEW UK REIT plc (the 'Company') is a closed ended Real Estate Investment Trust ('REIT') incorporated on 1 April 2015 and domiciled in the UK.
2. Accounting policies
2.1 Basis of preparation These interim condensed unaudited financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU, and should be read in conjunction with the Company's last financial statements for the year ended 31 March 2020. These condensed unaudited financial statements do not include all information required for a complete set of financial statements proposed in accordance with IFRS as adopted by the EU ('EU IFRS'). However, selected explanatory notes have been included to explain events and transactions that are significant in understanding changes in the Company's financial position and performance since the last financial statements.
The financial information contained in this Interim Report and Financial Statements for the six months ended 30 September 2020 and the comparative information for the year ended 31 March 2020 does not constitute statutory accounts as defined in sections 435(1) and (2) of the Companies Act 2006. Statutory accounts for the year ended 31 March 2020 have been delivered to the Registrar of Companies. The Auditor reported on those accounts. Its report was unqualified and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.
A review of the interim financial information has been performed by the Auditor of the Company for issue on 17 November 2020.
The comparative figures disclosed in the condensed unaudited financial statements and related notes have been presented for both the six month period ended 30 September 2019 and year ended 31 March 2020 and as at 30 September 2019 and 31 March 2020.
These condensed unaudited financial statements have been prepared under the historical-cost convention, except for investment property and interest rate derivatives that have been measured at fair value. The condensed unaudited financial statements are presented in Sterling and all values are rounded to the nearest thousand pounds (£'000), except when otherwise indicated.
The Company is exempt by virtue of section 402 of the Companies Act 2006 from the requirement to prepare group financial statements. These financial statements present information solely about the Company as an individual undertaking.
New standards, amendments and interpretations There were a number of new standards and amendments to existing standards which are required for the Company's accounting periods beginning after 1 April 2020, which have been considered and applied. These being:
The Company has applied the new standards and there has been no impact on the financial statements.
As a result of COVID-19 there was an amendment to IFRS 16, Leases, for COVID-19 related rent concessions. The amendment to the standard has been considered, however at the reporting date had not been required to be applied.
There are a number of new standards and amendments to existing standards which have been published and are mandatory for the Company's accounting periods beginning on or after 1 April 2021 or later. The Company has not early adopted any of these new or amended standards as the impact of the adoption is not considered to be significant.
2.2 Significant accounting judgements and estimates The preparation of financial statements in accordance with IAS 34 requires the Directors of the Company to make judgements, estimates and assumptions that affect the reported amounts recognised in the financial statements. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability in the future.
i) Valuation of investment property The Company's investment property is held at fair value as determined by the independent valuer on the basis of fair value in accordance with the internationally accepted Royal Institution of Chartered Surveyors ('RICS') Appraisal and Valuation Standards.
2.3 Segmental information The Board of Directors retains overall control of the Company but the Investment Manager (AEW UK Investment Management LLP) has certain authorities and fulfils the function of allocating resource to, and assessing the performance of the Company's operating segments and is therefore considered to be the Chief Operating Decision Maker ('CODM'). In accordance with IFRS 8, the Company considers each of its properties to be an individual operating segment. The CODM allocates resources, and reviews the performance of, the Company's portfolio on a property-by-property basis and discrete financial information is available for each individual property.
These operating segments have similar economic characteristics and, as such, are aggregated into one reporting segment, being investment in property and property-related investments in the UK.
2.4 Going concern The Directors assessed the Company's ability to continue as a going concern, which takes into consideration the uncertainty surrounding the outbreak of COVID-19, as well as the Company's cash flows, financial position, liquidity and borrowing facilities.
In that assessment the Directors' considered that the Company benefits from a diversified income stream from numerous tenants and sectors, which reduces risk. They also noted that:
Finally, the Directors' note that the Company's cash flow can also be significantly managed through the adjustment of dividend payments.
Taking this into consideration, the Directors have reviewed a number of scenarios over 12 months, including a severe but plausible downside scenario which makes the following assumptions:
Given the Company's financial position and headroom on covenants then even in this severe scenario, the Directors do not consider there are any material uncertainties in relation to the Company's ability to meets its liabilities as they fall due and continue in operation for a period of 12 months from the date of approval of these financial statements. They therefore consider the going concern basis adopted in the preparation of the interim financial statements is appropriate.
2.5 Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are consistent with those applied within the Company's Annual Report and Financial Statements for the year ended 31 March 2020 except for the changes as detailed in note 2.1.
3. Revenue
Gross rental income includes adjustment for the effect of any incentives agreed.
*For the current period, service charge income has been presented gross to reflect the Company's role as principal in its agreements with tenants. In comparative periods, they have been presented net, however the difference in presentation is considered to be immaterial.
4. Property operating expenses
* For the current period, recoverable service charge expenditure has been presented gross to reflect the Company's role as principal in its agreements with tenants. In comparative periods, they have been presented net, however the difference in presentation is considered to be immaterial.
# Of the c. £601,000 non-recoverable service charge expenditure c. £394,000 relates to Bank Hey Street, Blackpool which includes costs relating to the remedial works as detailed in the Investment Manager's Report.
5. Other operating expenses
6. Finance expense
7. Taxation
8. Earnings per share and NAV per share
Earnings per share amounts are calculated by dividing profit for the period attributable to ordinary equity holders of the Company by the weighted average number of Ordinary Shares in issue during the period. As at 30 September 2020, EPRA NNNAV was equal to IFRS NAV and as such a reconciliation between the two measures has not been presented.
9. Dividends paid
Dividends paid relate to Ordinary Shares only.
10. Investments
10.a) Investment property
* Adjustment in respect of minimum payment under head leases separately included as a liability within the Condensed Statement of Financial Position.
# 225 Bath Street, Glasgow, has been classified as held-for-sale as at 30 September 2020. Contracts to sell the property were exchanged post period-end, details of which can be found in Note 18 to the Financial Statements.
Valuation of investment property Valuation of investment property is performed by Knight Frank LLP, an accredited external valuer with recognised and relevant professional qualifications and recent experience of the location and category of the investment property being valued.
The valuation of the Company's investment property at fair value is determined by the external valuer on the basis of market value in accordance with the internationally accepted RICS Valuation - Professional Standards (incorporating the International Valuation Standards).
The determination of the fair value is based upon the income capitalisation approach. This approach involves applying capitalisation yields to current and future rental streams net of income voids arising from vacancies or rent-free periods and associated running costs. These capitalisation yields and estimated rental values are based on comparable property and leasing transactions in the market using the valuer's professional judgement and market observation. Other factors taken into account in the valuations include the tenure of the property, tenancy details, capital values of fixtures and fittings, environmental matter and the overall repair and condition of the property.
In the annual report to 31 March 2020 the report of the valuer included a material valuation uncertainty clause due to COVID 19 and its unknown impact at that point in time. This valuation uncertainty clause had been removed for the valuation provided as at 30 September 2020.
10.b) Fair value measurement hierarchy The following table provides the fair value measurement hierarchy for non-current assets:
Explanation of the fair value hierarchy:
Level 1 - Quoted prices for an identical instrument in active markets;
Level 2 - Prices of recent transactions for identical instruments and valuation techniques using observable market data; and
Level 3 - Valuation techniques using non-observable data.
There have been no transfers between Level 1 and Level 2 during either period, nor have there been any transfers in or out of Level 3.
Sensitivity analysis to significant changes in unobservable inputs within Level 3 of the hierarchy The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the entity's portfolios of investment properties are:
1) ERV
2) Equivalent yield
Increases/(decreases) in the ERV (per sq ft per annum) in isolation would result in a higher/(lower) fair value measurement. Increases/(decreases) in the yield in isolation would result in a lower/(higher) fair value measurement.
The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy of the portfolio of investment property are:
Fair value per Knight Frank LLP.
Where possible, sensitivity of the fair values of Level 3 assets are tested to changes in unobservable inputs to reasonable alternatives.
Gains and losses recorded in profit or loss for recurring fair value measurements categorised within Level 3 of the fair value hierarchy are attributable to changes in unrealised gains or losses relating to investment property and investments held at the end of the reporting period.
With regards to both investment property and investments, gains and losses for recurring fair value measurements categorised within Level 3 of the fair value hierarchy, prior to adjustment for rent free debtor and rent guarantee debtor, are recorded in profit and loss.
The tables below set out a sensitivity analysis for each of the key sources of estimation uncertainty with the resulting increase/(decrease) in the fair value of investment property.
11. Receivables and prepayments
The aged debtor analysis of receivables as follows:
12. Interest rate derivatives
The Company is protected from a significant rise in interest rates as it currently has interest rate caps in effect with a combined notional value of £36.51 million (31 March 2020: £36.51 million), with £26.51 million capped at 2.50% and £10.00 million capped at 2.00%, resulting in the loan being 92% hedged (31 March 2020: 71%). These interest rate caps are effective until 19 October 2020. The Company has additional interest rate caps covering the remaining period of the loan from 20 October 2020 to 23 October 2023. During the period, the Company replaced its existing caps covering this period, which capped the interest rate at 2.00% on a notional value of £49.51 million, with new caps covering the same period capping the interest rate at 1.00% on a notional value of £51.50 million. The Company paid a premium of £62,968.
Fair Value hierarchy The following table provides the fair value measurement hierarchy for interest rate derivatives:
The fair value of these contracts is recorded in the Condensed Statement of Financial Position as at the period end.
There have been no transfers between Level 1 and Level 2 during the period, nor have there been any transfers between Level 2 and Level 3 during the period.
13. Interest bearing loans and borrowings
The Company has a £60.00 million (31 March 2020: £60.00 million) credit facility with RBSi of which £39.50 million (31 March 2020: £51.50 million) has been utilised as at 30 September 2020.
The Company has a target gearing of 35% Loan to NAV, which is the maximum gearing on drawdown under the terms of the facility. As at 30 September 2020, the Company's gearing was 26.83% Loan to NAV (31 March 2020: 34.83%).
Borrowing costs associated with the credit facility are shown as finance costs in note 6 to these financial statements.
14. Payables and accrued expenses
15. Lease obligation as lessee
Leases as lessee are capitalised at the lease's commencement at the present value of the minimum lease payments. The present value of the corresponding rental obligations are included as liabilities.
The following table analyses the present value of the minimum lease payments under non-cancellable finance leases:
16. Issued share capital
There was no change to the issued share capital during the period. The number of ordinary shares in issue and fully paid remains 151,774,746 of £0.01 each.
17. Transactions with related parties
As defined by IAS 24 Related Party Disclosures, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions.
For the six months ended 30 September 2020, the Directors of the Company are considered to be the key management personnel. Directors' remuneration is disclosed in note 5.
The Company is party to an Investment Management Agreement with the Investment Manager, pursuant to which the Company has appointed the Investment Manager to provide investment management services relating to the respective assets on a day-to-day basis in accordance with their respective investment objectives and policies, subject to the overall supervision and direction of the Board of Directors.
Under the Investment Management Agreement, the Investment Manager receives a quarterly management fee which is calculated and accrued monthly at a rate equivalent to 0.9% per annum of NAV (excluding uninvested proceeds from fundraising).
During the period from 1 April 2020 to 30 September 2020, the Company incurred £578,821 (six months ended 30 September 2019: £665,344) in respect of investment management fees and expenses of which £304,595 was outstanding at 30 September 2020 (31 March 2020: £311,683).
18. Events after reporting date
Dividend On 22 October 2020, the Board declared its second interim dividend of 2.00 pps in respect of the period from 1 July 2020 to 30 September 2020. The dividend payment will be made on 30 November 2020 to shareholders on the register as at 30 October 2020. The ex-dividend date was 29 October 2020.
The dividend of 2.00 pps was designated as an interim property income distribution ('PID'). Unless shareholders have elected to receive the PID gross, 20% tax will be deducted at source.
Property acquisitions Post period-end, in November 2020, the Company acquired a warehouse asset in Weston-Super-Mare for a purchase price of £5.40 million.
Share buybacks 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. This reflects 350,000 Ordinary Shares having been bought back since the period end for a gross consideration of £262,995.
Bath Street, Glasgow During October 2020, the Company exchanged contracts to sell its 85,000 sq ft office holding at 225 Bath Street in Glasgow city centre. The transaction is conditional upon various matters including the grant of planning permission for the development of a 480 bedroom student housing development. Sale pricing will be determined following the approval of all conditions according to an agreed matrix ranging from £8.55 to £9.30 million. Due to these conditions, there is some uncertainty as to the date of completion of the transaction, but there is considered to be a high probability that the transaction will complete within 12 months of the balance sheet date and, as such, the property has been classified as held-for-sale in these financial statements
EPRA Performance Measures
Detailed below is a summary table showing the EPRA performance measures of the Company. All EPRA performance measures have been calculated in line with EPRA Best Practices Recommendations Guidelines which can be found at www.epra.com.
Calculation of EPRA NIY and 'topped-up' NIY
EPRA NIY basis of calculation
EPRA NIY is calculated as the annualised net rent, divided by the gross value of the completed property portfolio.
The valuation of grossed up completed property portfolio is determined by our external valuers as at 30 September 2020, plus an allowance for estimated purchasers' costs. Estimated purchasers' costs are determined by the relevant stamp duty liability, plus an estimate by our valuers of agent and legal fees on notional acquisition. The net rent deduction allowed for property outgoings is based on our valuers' assumptions on future recurring non-recoverable revenue expenditure.
In calculating the EPRA 'topped-up' NIY, the annualised net rent is increased by the total contracted rent from expiry of rent-free periods and future contracted rental uplifts.
Calculation of EPRA Vacancy Rate
The Company has not capitalised any overhead or operating expenses in the accounting period disclosed above.
Only costs directly associated with the purchase or construction of properties as well as all subsequent value-enhancing capital expenditure are capitalised.
Company Information
Shareholder Enquiries The register for the Ordinary Shares is maintained by Computershare Investor Services PLC. In the event of queries regarding your holding, please contact the Registrar on +44 (0)370 707 1341 or email: web.queries@computershare.co.uk.
Changes of name and/or address must be notified in writing to the Registrar, at the address shown below. You can check your shareholding and find practical help on transferring shares or updating your details at www.investorcentre.co.uk. Shareholders eligible to receive dividend payments gross of tax may also download declaration forms from that website.
Share Information Ordinary £0.01 Shares 158,774,746 SEDOL Number BWD2415 ISIN Number GB00BWD24154 Ticker/TIDM AEWU
The Company's Ordinary Shares are traded on the Main Market of the London Stock Exchange.
Annual and Interim Reports Copies of the Annual and Interim Reports are available from the Company's website: www.aewukreit.com.
Provisional Financial Calendar
Dividends The following table summarises the dividends declared in relation to the period:
Independent Directors Mark Burton (Non-executive Chairman) Bimaljit ('Bim') Sandhu (Non-executive Director and Chairman of the Audit Committee) Katrina Hart (Non-executive Director)
Registered Office 6th Floor 65 Gresham Street London EC2V 7NQ
Investment Manager and AIFM AEW UK Investment Management LLP 33 Jermyn Street London SW1Y 6DN
Tel: 020 7016 4880 Website: www.aewuk.co.uk
Property Manager Mapp 180 Great Portland Street London W1W 5QZ
Corporate Broker Liberum Ropemaker Place 25 Ropemaker Street London EC2Y 9LY
Legal Adviser Gowling WLG (UK) LLP 4 More London Riverside London SE1 2AU
Depositary Langham Hall UK LLP 8th Floor 1 Fleet Place London EC4M 7RA
Administrator Link Alternative Fund Administrators Limited Beaufort House 51 New North Road Exeter EX4 4EP
Company Secretary Link Company Matters Limited 6th Floor 65 Gresham Street London EC2V 7NQ
Registrar Computershare Investor Services PLC The Pavilions Bridgwater Road Bristol BS13 8AE
Auditor KPMG LLP 15 Canada Square London E14 5GL
Valuer Knight Frank LLP 55 Baker Street London W1U 8AN
Frequency of NAV publication: The Company's NAV is released to the London Stock Exchange on a quarterly basis and is published on the Company's website.
National Storage Mechanism A copy of the Interim Report will be submitted shortly to the National Storage Mechanism ('NSM') and will be available for inspection at https://www.fca.org.uk/markets/primary-markets/regulatory-disclosures/national-storage-mechanism.
LEI: 21380073LDXHV2LP5K50
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| ISIN: | GB00BWD24154 |
| Category Code: | IR |
| TIDM: | AEWU |
| LEI Code: | 21380073LDXHV2LP5K50 |
| OAM Categories: | 1.2. Half yearly financial reports and audit reports/limited reviews |
| Sequence No.: | 88041 |
| EQS News ID: | 1148838 |
| End of Announcement | EQS News Service |
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