Half Yearly Results
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AEW UK REIT plc (AEWU)
17 November 2021
AEW UK REIT PLC
Interim Report and Financial Statements for the six months ended 30 September 2021
AEW UK REIT PLC ("AEW UK REIT" or the "Company"), , which holds a diversified portfolio of 35 commercial investment properties throughout the UK, is pleased to publish its Interim Report and Financial Statements for the six months ended 30 September 2021.
Mark Burton, Chairman of AEW UK REIT, commented: "We are very pleased with the strong performance over the period with the Company's NAV increasing by 10.96% and a total shareholder return of 28.37%. . The valuation of the Company's property portfolio rose by 9.81% on a like-for-like basis, chiefly driven by its industrial assets. The sales of Langthwaite Industrial Estate, South Kirkby for £10.84 million and Wella Warehouse, Basingstoke for £5.86 million post period end were well above both purchase prices and book values.
The Company continues to see a number of attractive investment opportunities as it seeks to deliver further attractive returns to shareholders and support the 8p annual dividend. The Company made two acquisitions during the period, and one after half-year end, that are aligned with AEWU's strategy of adding value through active asset management by renewing current tenancies and securing new tenants. "
Financial Highlights
Property Highlights
1 The valuation figure is reconciled to the fair value under IFRS in note 10.
Chairman's Statement
Overview I am pleased to report the unaudited interim results of the Company for the six months ended 30 September 2021 (the 'period'). The Company held a diversified portfolio of 35 commercial investment properties located throughout the UK with a value of £206.69 million as at 30 September 2021.
The Company's NAV has performed well over the period, having increased by 10.96%. The valuation of the Company's property portfolio rose by 9.81% on a like-for-like basis over the period, chiefly driven by its industrial assets. The sales of Langthwaite Industrial Estate, South Kirkby for £10.84 million and Wella Warehouse, Basingstoke for £5.86 million post period end were undertaken at 1.9x and 1.7x the purchase prices, respectively. The resulting profits achieved on disposal were £2.25 million and £1.93 million above book values, respectively, providing a boost to the Company's NAV. The Company closed the period in a position to take advantage of attractive opportunities to reinvest as a result of its cash position and debt covenant headroom. The Company has maintained a conservative Loan to NAV ratio, which stood at 29.00% at 30 September 2021, and had a healthy cash balance of £15.16 million.
Following the disposal of the Corby and Solihull sites in the prior period, the Company reinvested the sales proceeds to make two acquisitions during the period. Arrow Point Retail Park in Shrewsbury was acquired in May 2021 for £8.35 million and is a fully-let, purpose-built retail park prominently located on a busy estate and providing a Net Initial Yield ('NIY') of 8.7%. The second, 15-33 Union Street, Bristol, is a prime retail site located on a busy pedestrian thoroughfare in Bristol city centre and was purchased for £10.19 million, equating to a low capital value of £161 per sq ft and reflecting a NIY of 8.0%. Both of these assets provide opportunity for value growth in the medium to long term, and also have strong and stable income streams from their tenancy profiles.
The ongoing remedial works in Blackpool, along with the vacancy costs at Glasgow where we have sold an asset conditional on obtaining vacant possession, have constrained the portfolio's overall EPRA EPS, which was 3.45 pence for the period, providing a dividend cover of 86.10%. Following the planned sale of Glasgow, currently anticipated in December 2021, and completion of the works at Blackpool in early 2022, we expect this cost overhead to fall, leading to an increase in the EPRA EPS. The Company has made one acquisition post period-end of a retail park in Coventry for a purchase price of £16.41 million. This presents opportunities to add value through active asset management by renewing current tenancies and securing new tenants, which will further add to the recent strong income return and NAV growth achieved by the Company. The acquisition is accretive to EPRA EPS and takes the Company close to full investment.
The Company continues to work with its tenants in order to manage the difficulties posed by the pandemic. To date, the tenancy profile of the Company has proved to be resilient, demonstrated by the Company's low underlying vacancy rate of 5.43%* by Estimated Rental Value ('ERV') as at 30 September 2021. Rent collection rates have remained high for the March and June 2021 quarters, being 99% for both and 87% has been collected to date for the September 2021 rent quarter. These collection rates are high 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 98%. There are a small number of tenants who continue to face challenges in the current environment, and in a small number of cases the Company has agreed a longer-term payment plan to recover rental income in full over an extended period. A prudent assessment has been made of the recoverability of the Company's outstanding debts and a provision has been made in the financial statements for potential debt write-offs.
The office park at Oxford continues to perform well with its transition to life sciences/medical use, a sector which is seeing particularly strong investor demand at present. Moreover, after a tumultuous period for the retail sector, we have seen valuations stabilise this period, with our valuations increasing by 1.36% on a like-for-like basis, particularly driven by our new retail warehousing holding in Shrewsbury. Stock selection and active asset management continue to be key features of the Company's strategy and drivers of performance. During the period, the Company completed a number of lettings and lease renewals, the most notable of which was two new lettings at our office holding in Bristol, both of which were 15% above ERV. These are noted in more detail below in the 'Asset Management' section of the Investment Manager's Report.
The Company's share price was 102.80 pence per share as at 30 September 2021, representing a 6.56% discount to NAV (31 March 2021: 83.20 pence per share, representing a 16.1% discount to NAV). Subsequent to the period-end, the Company's share price has experienced additional growth, causing a further reduction in the discount to NAV.
* Including vacancy contributed by Bath Street, Glasgow, which has been sold with the condition of vacant possession, the vacancy rate was 8.59%.
Financial Results
* see note 8 of the Financial Statements for the corresponding calculations. Financing The Company has a £60.00 million loan facility, of which it had drawn a balance of £50.50 million as at 30 September 2021 (31 March 2021: £60.00 million facility; £39.50 million drawn), producing a Loan to NAV ratio of 28.97% (31 March 2021: 25.15%).
The unexpired term of the facility was 2.1 years as at 30 September 2021 (31 March 2021: 2.6 years). The loan incurs interest at 3-month SONIA +1.4%, which equated to an all-in rate of 1.47% as at 30 September 2021 (31 March 2021: 3-month LIBOR + 1.4% equating to an all-in rate of 1.44%).
The Company is protected from a significant rise in interest rates as it has interest rate caps in place. Throughout the period and up to the date of this report, the Company had in effect interest rate caps on a notional value of £51.50 million of the loan, capped at 1.00%, which resulted in the loan balance being 102.0% hedged as at 30 September 2021.
As noted in the KPIs, the Company targets long-term gearing of 35% Loan to NAV, which is the maximum gearing on drawdown of the RBSi facility. The Board and Investment Manager continue to monitor the level of gearing and have the ability to adjust the target gearing according to the Company's circumstances and perceived risk levels.
The Company passed its Interest Cover Ratio ('ICR') tests for April, July and October 2021 with significant headroom.
Dividends The Company has continued to deliver on its target of paying dividends of 8.00 pence per share per annum. During the period, the Company declared and paid two quarterly dividends of 2.00 pence per Ordinary Share, in line with its target. Dividends for the period were 86.00% covered by EPRA EPS.
It remains the Company's intention to continue to pay dividends in line with its dividend policy, and the existing portfolio and investment opportunities support this policy. However, the outlook remains unclear in the wake of the COVID-19 pandemic and 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.
Outlook The easing of most of the remaining COVID-19 restrictions, combined with the continued rollout of the vaccination programme, has lifted most economists' outlook for the post COVID-19 rebound in the second half of 2021. In light of this, the property market has experienced a gradual recovery, with rent collection levels greatly improving, as cash flow pressures on tenants ease. With its strong cash position and borrowing covenant headroom, the Company is well positioned to take advantage of attractive opportunities coming to the market. During the period, the Company has displayed strong NAV performance, reflecting the geographical diversity of the portfolio, its circa 50% exposure to the industrial sector and the fact that many of its assets benefit from viable alternative use potential, limiting downside risk and volatility.
In the near term, the Board and Investment Manager will continue to focus on minimising the legacy 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 to a fully covered dividend. The developing economic conditions will be monitored closely and the Company's strategy adjusted accordingly. It is hoped that the start of 2022 will build upon the economic recovery of the second half of 2021, providing conditions to enable further growth of the Company
Mark Burton Chairman 16 November 2021
Key Performance Indicators
* Glasgow has exchanged to be sold with condition of vacant possession.
Investment Manager's Report
Economic Outlook The easing of most of the remaining COVID-19 restrictions has increased market optimism in both the direct and indirect markets. Oxford Economics' latest forecasts published in mid-September 2021 indicate UK GDP growth to be 6.9% for the whole year, compared with the 9.8% contraction in 2020. However, the Bank of England signalled its concerns on inflation being well ahead of its target in mid-October. Due to energy, labour and materials shortages UK inflation is expected to peak near 6% in early 2022. As a result, gilt markets are pricing in interest rate hikes starting in December 2021 followed by further increases in 2022. Despite these interest rate increases, Oxford Economics' latest forecast confirms the continued strong UK economic recovery with GDP growth of 6.7% in 2022.
Although the direct markets are still strongest in the industrial and warehouse sector, the next year is expected to be a year of recovery and growth where some parts of the retail and leisure sectors may be the beneficiaries. The Company is focusing on portfolio adjustments to take advantage of value opportunities, driven more by the specifics of the asset than the sector. This may see the Company realise profits through sales where it believes values have been optimised and where the funds can be recycled into assets with better growth potential going forwards. There is likely to be a slightly reduced weighting to business space and a rotation towards retail warehousing, leisure and a continued focus on assets with viable alternative use value. Assets whose current value is supported by long-term alternative use optionality, irrespective of current use, will be of increasing importance in our stock selection process. Moreover, recent changes to the Use Classes Order are likely to have a significant impact on portfolios in terms of broadening potential use. Finally, in line with market optimism and a period of post pandemic growth, rent collection rates have strongly improved and this trend is expected to continue.
Financial Results The Company's NAV as at 30 September 2021 was £174.29 million or 110.01 pps (31 March 2021: £157.08 million or 99.15 pps). This is an increase of 10.86 pps or 10.96% over the period.
EPRA EPS for the period was 3.45 pence which, based on dividends paid of 4.00 pps, reflects a dividend cover of 86.00%. The increase in dividend cover compared to the prior six-month period has largely arisen due to improvements in rent collection levels, along with successful legal outcomes that have recovered significant arrears. Income across the tenancy profile has remained largely intact. Collection rates have reached 99% for both the March and June 2021 quarters respectively, with further payments expected to be received under longer-term payment plans. Of the outstanding arrears, £0.61 million has been provided for expected credit losses.
Financing As at 30 September 2021, the Company has a £60.00 million loan facility with RBSi, in place until October 2023, the details of which are presented below:
Due to GBP LIBOR ending at the end of 2021, the Company transitioned to SONIA on 20 July 2021, with a credit adjustment spread of 0.0981%.
Property Portfolio During the period, the Company disposed of Langthwaite Industrial Estate, South Kirkby, for net proceeds of £10.84 million. The Company made two acquisitions during the period being: Arrow Point Retail Park in Shrewsbury, which was acquired in May 2021 for £8.35 million, and 15-33 Union Street, Bristol, which was purchased in June 2021 for a price of £10.19 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 2021
Summary by Geographical Area as at 30 September 2021
*like-for-like rental growth is for the six months ended 30 September 2021. Source: Knight Frank/AEW, 30 September 2021.
Individual Property Classifications
The Company's top ten properties listed above comprise 49.2% of the total value of the portfolio.
Sector and Geographical Allocation by Market Value as at 30 September 2021
Sector Allocation
Geographical Allocation
Source: Knight Frank valuation report as at 30 September 2021.
Top Ten Tenants
The Company's top ten tenants, listed above, represent 35.4% of the total passing rental income of the portfolio.
Source: Knight Frank valuation report as at 30 September 2021.
Asset Management The Company completed the following material asset management transactions during the period:
Acquisitions - Arrow Point Retail Park in Shrewsbury was acquired in May 2021 for £8.35 million and is a fully-let, purpose-built retail park prominently located on a busy commercial estate, providing a NIY of 8.7%. The second acquisition, 15-33 Union Street, Bristol, is a retail/leisure site located on a busy pedestrian thoroughfare in Bristol city centre and provides a NIY of 8.0%. Both of these assets provide opportunity for value growth in the medium to long term as well as strong and stable income streams from their tenancy profiles.
Disposals - Sales of Langthwaite Industrial Estate, South Kirkby for £10.84 million and Wella Warehouse, Basingstoke for £5.86 million have now been completed, with the latter completing post period end. The sales prices achieved were 31% and 35% ahead of their March 2021 valuations, and also 1.9x and 1.7x their purchase prices, respectively.
Arrow Point Retail Park, Shrewsbury - We have extended British Heart Foundation's unexpired term to break by moving their November 2021 break option out to December 2024 in return for four months' rent free. The majority of the rent free was used to write off rent arrears predating the Company's ownership. British Heart Foundation's lease expires in November 2028.
Diamond Business Park, Wakefield - We have completed a new five year ex-Act lease at £41,866 per annum/£3.75 per sq ft on Unit 14, which reflects a rent 25% above the March 2021 ERV. The tenant has provided a rent deposit equivalent to six month's rent. Six months' rent free was given as an incentive.
40 Queen Square, Bristol - We have completed a new five year ex-Act lease to Brewin Dolphin at £103,770 per annum/£30 per sq ft versus the previous passing rent of £22 per sq ft and the March 2021 ERV of £26 per sq ft. A 12 month rent free incentive was given. We have now also completed a lease renewal to Candide Limited until February 2025 at the same rent of £30 psf (£116,970 per annum). The previous passing rent was £22.81 per sq ft and only 1.5 months' rent free incentive was given. These lettings at £30 psf have produced an increase in the property's valuation of £1.05 million (9.9%) over the past six months.
Vantage Point, Hemel Hempstead - We have completed a new five year ex-Act lease (tenant break option at the end of year three) to Netronix Integration Limited at a rent of £33,683 per annum/£14.50 per sq ft, which is £3 per sq ft above ERV. Four months' rent free incentive was given, with a further two months should the tenant not exercise their tenant break option at the end of the third year.
Above Bar Street, Southampton - We have exchanged on a new straight five year ex-Act lease to Shoe Zone at a gross rent of £80,000 per annum, subject to approximately £40,000 landlord works. 12 months' rent free incentive was given.
Sarus Court, Runcorn - We have completed a ten year lease renewal with NTT United Kingdom Limited (Dimension Data) at £5.75 per sq ft (£64,066.50 per annum) versus the previous passing rent of £5.25 per sq ft. There is a tenant break option in December 2025. Five months' rent free incentive was given. The valuation of this asset has increased by £1.05 million (15.3%) over the past six months to £7.9 million.
Vacancy - The portfolio's overall vacancy level is 8.59%. Excluding vacancy contributed by the asset at 225 Bath Street, Glasgow, the vacancy level is 5.43%. This asset has now been exchanged for sale for alternative use redevelopment as student accommodation. As a condition of the sale agreement, full vacancy must be achieved before the sale can be completed. Completion of the sale is expected in Q4 2021 - Q1 2022. The purchaser has submitted a planning application and is awaiting confirmation on a committee date. Regarding achieving vacant possession, only one tenant remains in the building having recently exchanged on the variation of W.A. Fairhurst's lease, bringing their occupation to an end on 31 January 2022, in exchange for an £800,000 surrender premium, plus nine months' rent free from 28 February 2021 to 1 December 2021.
Environmental, Social and Governance ('ESG') Update The Company has maintained its two stars Global Real Estate Sustainability Benchmark ('GRESB') rating for 2021 and maintained its score of 65 (GRESB Average 72). A large portion of the GRESB score relates to performance data coverage where, due to the high percentage of single-let assets with tenant procured utilities, the Company does not score as well as funds with a smaller holding of single-let assets and a higher proportion of multi-let assets where the owner is responsible for the utilities and can therefore gather the relevant data.
We continue to implement our plan to improve overall data coverage and data collection for all utilities through increased tenant engagement at our single-let assets and by installing automated meter readers ('AMR') across the portfolio. So far, we are in the process of installing AMRs in all of our multi-let properties. We are also in discussions with the tenants of our top 10 single-let FRI assets (in terms of floor area) regarding the installation of AMR.
We endeavour, where the opportunity presents itself through a lease event, to include green clauses in leases, covenanting landlord and tenant to collaborate over the environmental performance of the property.
We continue to assess and strengthen our reporting and alignment against the framework set out by the Taskforce on Climate-Related Financial Disclosures ('TCFD') with further disclosure and update to be provided in the 2022 annual report and accounts. We are pleased to report the Company has maintained its EPRA Silver rating for sBPR for ESG disclosure and transparency.
We have an Asset Sustainability Action Plan ('ASAP') initiative, tracking ESG initiatives across the portfolio on an asset by asset basis for targeted/relevant and specific implementation of ESG improvements. In doing so, all managed assets and units have recently been contracted to High Quality Green Tariffs, ensuring that electricity supply is from renewable sources. All void/vacant unit supplies have also been transferred to High Quality Green Tariffs.
All managed assets will be moved to 'Green Gas' supplies in 2022.
We are underway with implementing initiatives such as a new landscaping/biodiversity programme at our retail warehouse in Barnstaple, replacing the existing plants and shrubs with a greater diversity of appropriate species which in turn will attract a wider variety of insects and wildlife to the property.
Lease Expiry Profile Approximately £3.48 million of the Company's current contracted income stream is subject to an expiry or break within the 12 month period commencing 1 October 2021. 12.87% (£447,984) of this income (Indigo Lighthouse Solutions and WA Fairhurst) is attributable to our office holding in Glasgow, which has exchanged for sale. A further 9.38% (£326,668) of this income relates to a property where we expect the tenants to stay, renewing their leases. 18.31% (£637,238) of this income is in the industrial sector, where we anticipate strong occupier demand, low incentives and reversionary rents. Regarding the remainder, we will proactively manage, looking to unlock capital upside, whether that be through lease regears/renewals, or through refurbishment/capex projects and new lettings.
Source: Knight Frank valuation report as at 30 September 2021.
AEW UK Investment Management LLP 16 November 2021
Principal Risks and Uncertainties
The Company's assets consist 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 2021 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 16 November 2021
Independent Review Report to AEW UK REIT PLC
Introduction We have been engaged by the Company to review the condensed set of Financial Statements in the Interim Report and Financial Statements for the six months ended 30 September 2021 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 related notes.
We have read the other information contained in the Interim Report and Financial Statements and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
Directors' responsibilities The Interim Report and Financial Statements is the responsibility of and has been approved by the Directors. The Directors are responsible for preparing the Interim Report and Financial Statements in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.
As disclosed in note 2, the annual financial statements of the Company will be prepared in accordance with UK adopted international accounting standards. The condensed set of financial statements included in this Interim Report and Financial Statements has been prepared in accordance with UK adopted International Accounting Standard 34, ''Interim Financial Reporting''.
Our responsibility Our responsibility is to express to the Company a conclusion on the condensed set of Financial Statements in the Interim Report and Financial Statements based on our review.
Scope of review We 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 Financial Reporting Council for use in the United Kingdom. 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. 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.
Conclusion Based on our review, nothing has come to our attention that causes us to believe that the condensed set of Financial Statements in the Interim Report and Financial Statements for the six months ended 30 September 2021 is not prepared, in all material respects, in accordance with UK adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Use of our report Our report has been prepared in accordance with the terms of our engagement to assist the Company in meeting its responsibilities in respect of half-yearly financial reporting in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.
BDO LLP Chartered Accountants London United Kingdom 16 November 2021
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
Financial Statements
Condensed Statement of Comprehensive Income for the six months ended 30 September 2021
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 2021
* The capital reserve has arisen from the cancellation of part of the Company's share premium account and is a distributable reserve.
The notes below form an integral part of these condensed financial statements.
Condensed Statement of Financial Position as at 30 September 2021
The financial statements were approved by the Board of Directors on 16 November 2021 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 2021
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 2021
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 UK, and should be read in conjunction with the Company's last financial statements for the year ended 31 March 2021. 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 UK ('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 2021 and the comparative information for the year ended 31 March 2021 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 2021 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 16 November 2021.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 2020 and year ended 31 March 2021 and as at 30 September 2020 and 31 March 2021.
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 The Company has considered and applied the following new standards and amendments to existing standards which are required for the accounting period beginning on 1 April 2021:
* Amendments to IFRS 16 Covid-19 Related Rent Concessions beyond 30 June 2021; and
* Interest Rate Bench Reform - Phase 2 (Amendments to various standards: IFRS 9 'Financial Instruments', IAS 39 'Financial Instruments: Recognition and Measurement, IFRS 7 'Financial Instruments: Disclosures', IFRS 4 'Insurance Contracts' and IFRS 16 'Leases').
The Company has applied the new standards and there has been no significant impact on the financial statements.
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 2022 or later. The Company has not early adopted any of these new or amended standards.
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:
* The Company's rent collection has been strong, with 99% of contracted rent collected for the March and June 2021 quarters. At least 87% of contracted rent has either been collected, or payment plans agreed, for the September 2021 quarter. Based on the contracted rent as at 30 September 2021, a reduction of 66% in total rents could be accommodated before breaching the ICR covenant in the Company's debt arrangements;
* Based on the property valuation at 30 September 2021, the Company had room for a £62.10 million fall in NAV before reaching the maximum LTV covenant in the Company's debt arrangements. If certain conditions are met, such as providing security, a further £20.40 million fall in NAV could be accommodated.
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:
* A reduction in rental income of 30%;
* No new lettings or renewals, other than those where terms have already been agreed; and
* A 10% fall in property valuations.
Given the Company's financial position and headroom on covenants, the Directors do not consider that 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 2021 except for the changes as detailed in note 2.1.
3. Revenue
4. Property operating expenses
* Of the c. £644,000 non-recoverable service charge expenditure (30 September 2020: £601,000) c. £552,000 relates to Bank Hey Street, Blackpool (30 September 2020: £394,000) 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.
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.
1 EPRA Net Tangible Assets ('EPRA NTA') and EPRA Net Disposal Value ('EPRA NDV') are calculated using property values in line with IFRS, where values are net of Real Estate Transfer Tax ('RETT') and other purchasers' costs. RETT and other purchasers' costs are added back when calculating EPRA Net Reinstatement Value ('EPRA NRV') and have been estimated at 6.6% of the net valuation provided by Knight Frank.
1 EPRA NTA and EPRA NDV are calculated using property values in line with IFRS, where values are net of RETT and other purchasers' costs. RETT and other purchasers' costs are added back when calculating EPRA NRV and have been estimated at 6.6% of the net valuation provided by Knight Frank.
9. Dividends paid
Dividends paid relate to Ordinary Shares.
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 and Wella Warehouse, Basingstoke, have been classified as held-for-sale as at 30 September 2021. Contracts to sell 225 Bath Street were exchanged in October 2020 and its expected that the transaction will be completed within the next 12 months. Contracts to sell Wella Warehouse were exchanged in August 2021, with the transaction completed post period-end, in October 2021.
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.
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:
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 discount rate/ 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, where applicable, 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:
Expected credit losses have been assessed on receivables balances on an individual tenant-by-tenant basis. The risk of credit loss applied to each tenant is assessed based on information including, but not limited to: external credit ratings; financial statements; press information; previous experience of losses or late payment; discussions with the property manager and the tenant.
This assessment identified a number of receivables balances due from tenants known to be in financial difficulty or having already entered into a Company Voluntary Arrangement ('CVA') or administration. In these instances, a provision against the full balance of the receivable has been applied.
The assessment also identified receivables balances subject to dispute by tenants who are financially stable but unwilling to pay. The recoverability of these balances was subject to a decision by the Court, and as such, an assessment of the probability of a positive decision was made in reassessing the expected cash flows in relation to these balances and other receivables. Post period-end, these balances were recovered in full..
The below table presents the exposure to these classes of identified credit risk and the associated provision made against the receivables balances:
12. Interest rate derivatives
The Company is protected from a significant rise in interest rates as it currently has interest rate caps in effect which cap the interest rate at 1.00% on a notional value of £51.50 million. As a result, the loan was 102% hedged as at 30 September 2021 (31 March 2021: 130%).
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 2021: £60.00 million) credit facility with RBSi of which £50.50 million (31 March 2021: £39.50 million) has been utilised as at 30 September 2021.
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 2021, the Company's gearing was 28.97% Loan to NAV (31 March 2021: 25.15%).
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 allotted, called up and fully paid remains 158,774,746 of £0.01 each, of which 350,000 ordinary shares are held in treasury.
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 2021, 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 2021 to 30 September 2021, the Company incurred £732,204 (six months ended 30 September 2020: £578,821) of investment management fees and expenses of which £362,931 was outstanding at 30 September 2021 (31 March 2021: £315,825).
18. Events after reporting date
Dividend On 21 October 2021, the Board declared its second interim dividend of 2.00 pps in respect of the period from 1 July 2021 to 30 September 2021. The dividend payment will be made on 19 November 2021 to shareholders on the register as at 29 October 2021. The ex-dividend date was 28 October 2021.
Property Sales The Company completed the sale of Wella Warehouse on 15 October 2021 for gross proceeds of £5.86 million.
Property Acquisition On 5 November 2021, the Company acquired Central Six Retail Park in Coventry for a purchase price of £16.41 million.
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.
* Glasgow has exchanged to be sold with the condition of vacant possession.
Calculation of EPRA NTA, EPRA NRV and EPRA NDV In October 2019, EPRA issued new Best Practice Recommendations for financial guidelines on its definitions of NAV measures: EPRA NTA, EPRA NRV and EPRA NDV.
The Company considers EPRA NTA to be the most relevant NAV measure for the Company and we are now reporting this as our primary NAV measure, replacing our previously reported EPRA NAV and EPRA NNNAV per share metrics. EPRA NTA excludes the cumulative fair value adjustments for debt-related derivatives which are unlikely to be realised.
1 EPRA NTA and EPRA NDV are calculated using property values in line with IFRS, where values are net of Real Estate Transfer Tax ('RETT') and other purchasers' costs. RETT and other purchasers' costs are added back when calculating EPRA NRV and have been estimated at 6.6% of the net valuation provided by Knight Frank.
1 EPRA NTA and EPRA NDV are calculated using property values in line with IFRS, where values are net of RETT and other purchasers' costs. RETT and other purchasers' costs are added back when calculating EPRA NRV and have been estimated at 6.6% of the net valuation provided by Knight Frank.
Calculation of EPRA NIY and 'topped up' NIY
* Rent-free periods expire by June 2022.
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 2021, 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.
Like-for-like rental growth The table below sets out the like-for-like rental growth of the portfolio, by sector, in accordance with EPRA Best Practices Recommendations.
The like-for-like rental growth is based on changes in rental income for those properties which have been held for the duration of both the current and comparative reporting. This represents a portfolio valuation, as assessed by the valuer of £187.50 million (31 March 2021: £179.00 million).
Capital Expenditure The table below sets out the capital expenditure of the portfolio in accordance with EPRA Best Practice Recommendations.
Company Information
Shareholder Enquiries The register for the Ordinary Shares is maintained by Link Group. In the event of queries regarding your holding, please contact the Registrar on +44 (0)371 664 0391 or email: enquiries@linkgroup.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.signalshares.com. Shareholders eligible to receive dividend payments gross of tax may also download declaration forms from that website.
Share Information Ordinary £0.01 Shares 158,424,746 (excluding treasury shares) 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 Link Group 10th Floor Central Square 28 Wellington Street Leeds LS1 4DL
Auditor BDO LLP 55 Baker Street London W1U 7EU
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.: | 126970 |
| EQS News ID: | 1249566 |
| End of Announcement | EQS News Service |
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