NAV Update and Dividend Declaration - Replacement

RNS Number : 3847R

AEW UK REIT PLC

28 February 2023

 

This announcement replaces the announcement released under RNS number 1929N at 07:00 hours on 19 January 2023. The property sector table has been updated to amend certain like-for-like value movements which were shown incorrectly, with consequential changes to paragraphs two and three of the Portfolio Manager's Review. No other changes have been made and the overall movement in valuation has not changed. The changes do not impact the Company's NAV calculation, nor the Company's reported earnings.

28 February 2023

AEW UK REIT plc

NAV Update and Dividend Declaration

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

Highlights

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Valuation movement

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

Sector	Valuation 31 December 2022		Like-for-like valuation movement for the quarter
	£ million	%	£ million	%
Industrial	95.88	45.80	(17.45)	(15.39)
Retail Warehouses	37.30	17.82	(2.40)	(6.05)
High Street Retail	40.20	19.20	(2.80)	(11.34)
Other	19.90	9.50	0.13	0.63
Office	16.09	7.68	(0.66)	(3.94)
Total	209.37	100.00	(23.18)	(10.82)*

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

Portfolio Manager's Review

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

AEWU's office assets have delivered a relatively robust performance during the quarter, with value decline of 3.94%. This resilience demonstrates our strong stock selection compared with wider market trends. The CBRE monthly index reported office capital value loss of 5.1%, 4.5% and 3% in October, November and December respectively. This indicates total value loss in the sector of approximately 12.1% during the quarter. In contrast to the relatively strong position seen in industrial occupier markets, we do not expect rental growth in the office sector, except in the very best specified and well-located assets. Occupancy levels within the sector continue to struggle and our view is that the Company's future performance will benefit from its low exposure to the sector, at only 7.68% of the portfolio.

Following more positive than expected sales during December, there is a sense that the retail sector has been tested to such an extent in recent years that both values and tenant operating figures are bottoming out in top tier locations. That said, where there are willing sellers, buying opportunities have opened up in high quality locations that the Company has been able to take advantage of. Locations added to AEWU's portfolio during the quarter, such as Northgate House in central Bath, one of the UK's top 10 tourist destinations, represent a step change in the quality profile of retail assets that AEWU has been able to access in recent months.

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

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

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

Net Asset Value

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

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

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

Share price and Discount

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

Dividend

Dividend declaration

The Company today announces an interim dividend of 2.00 pence per share for the period from 1 October 2022 to 31 December 2022. The dividend payment will be made on 20 February 2023 to shareholders on the register as at 27 January 2023.  The ex-dividend date will be 26 January 2023. The Company operates a Dividend Reinvestment Plan ("DRIP"), which is managed by its registrar, Link Group. For shareholders who wish to receive their dividend in the form of shares, the deadline to elect for the DRIP is 30 January 2023.

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

The Company has now paid a 2.00 pence quarterly dividend for 29 consecutive quarters ¹ , providing income consistency to our shareholders.

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

Dividend outlook

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

Financing

Equity

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

Debt

The Company completed a refinancing of its debt facility in May 2022. The Company has a 60.00 million, five-year term loan facility with AgFe, a leading independent asset manager specialising in debt-based investments. The loan is priced as a fixed rate loan with a total interest cost of 2.959%. The Company intends to utilise borrowings to enhance returns over the next five years.

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

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

Investment Update

During the quarter the Company completed the following investment transactions:

Purchases:

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

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

Asset Management Update

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

Central Six Retail Park, Coventry (retail/leisure)  - In October, the Company completed an agreement for lease with new tenant, Aldi Stores Limited, for vacant units 8 & 9. Aldi will enter into a new 20-year lease with a 15-year tenant break option at a rent of 270,166 per annum, reflecting 13 per sq ft, to be reviewed every five years based on compounded annual RPI, collared and capped at 1% and 3% respectively. The letting is subject to the landlord securing planning permission for 1) change of use to food use (achieved in July 2022), 2) external alteration works (achieved in November 2022) and 3) extended delivery hours, as well as landlord works which will commence this month, at a cost of 894,212. Lease completion is targeted for July 2023. The letting also includes a 12-month rent-free incentive.

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

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

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

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

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

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

  AEW UK

Laura Elkin	[e-mail] [phone]
Henry Butt	[e-mail] [phone]
Nicki Gladstone	[e-mail]
	[phone]
Company Secretary
Link Company Matters Limited	[e-mail]
	[phone]
TB Cardew	[e-mail]
Ed Orlebar Tania Wild	[phone] [phone]
Liberum Capital
Darren Vickers / Owen Matthews	[phone]

Notes to Editors

About AEW UK REIT

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

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

LEI:  21380073LDXHV2LP5K50

About AEW UK Investment Management LLP

AEW UK Investment Management LLP employs a well-resourced team comprising 29 individuals covering investment, asset management, operations and strategy. It is part of AEW Group, one of the world's largest real estate managers, with 90.8bn of assets under management as at 30 September 2022. AEW Group comprises AEW SA and AEW Capital Management L.P., a U.S. registered investment manager and their respective subsidiaries. In Europe, as at 30 September 2022, AEW Group managed 39.7bn of real estate assets on behalf of a number of funds and separate accounts with over 470 staff located in 12 locations.

www.aewuk.co.uk

 

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