NAV Update and Dividend Declaration

RNS Number : 2272P

AEW UK REIT PLC

15 November 2016

 

15 November 2016

NAV Update and Dividend Declaration for the three months to 31 October 2016

AEW UK REIT plc (LSE: AEWU) ("the Company"), which owns a diversified portfolio of 27 regional UK commercial property assets, announces its quarterly unaudited Net Asset Value ("NAV") and interim dividend for the period ended 31 October 2016.

Key points

·      Fair value independent valuation of the property portfolio increased to £125.88 million (31 July 2016: £125.48 million). On a like-for-like basis the valuation of the property portfolio increased by 0.33% over the quarter, inclusive of £0.78 million portfolio capital expenditure.

·      AEW UK Core Property Fund valuation of £9.33 million (31 July 2016: £8.65 million)

o  The value of the Company's interest in the AEW UK Core Property Fund (the "Core Fund") as at 31 October 2016 has been amended to value the holding in the Core Fund at its 31 October 2016 NAV. The Directors, in consultation with the Company's professional advisers, have adopted the amended valuation methodology as at 31 October 2016 in order to provide a better reflection of fair value of the Company's holding in the Core Fund.  The 31 July 2016 comparative figure above is based on the old valuation methodology and would have been £9.24 million based on the new valuation methodology.

·      First interim dividend of 2.0 pence per share declared on 15 August 2016, paid on 30 September 2016 reflecting a dividend yield of 7.6% based on the share price as at 31 October 2016.

·      NAV per share of 95.47 pence (31 July 2016: 94.57 pence).

·      Tap issues raised £5.99 million (before costs and expenses), issuing 6,137,250 new Ordinary Shares.

·      Earnings per share (excluding revaluation gains and losses on fair value of investments and calculated on weighted average of shares in issue) for the three month period ending 31 October 2016 increased by 13.5% to 2.29 pence per share (31 July: 1.98 pence per share).

·      Gross Loan to Value of 19.6% (31 July 2016: 19.8%) and Net Loan to Value of 12.1% (31 July 2016: 16.7%).[i]

·      Ongoing portfolio and asset management activity during the period including:

o  An uplift of £30,000 per annum from the outstanding 2012 rent review at Odeon Cinema, Southend

o  Disposal of the vacant upper parts (250 year-long leasehold) at the office building on 11-15 Fargate, Sheffield, for a price of £710,000 vs a median sale estimation at the time of acquisition in September 2015 of £250,000

o  A 15 year lease secured with Smyths Toys on units 5 & 6 at Valley Retail Park, Belfast, at £200,000 p.a.

Alex Short, Portfolio Manager, AEW UK REIT, commented:

"We have now seen two valuation dates since the referendum result in June and are encouraged by how the value of the portfolio has stabilised and also by its resilience to market uncertainty.  Since July our valuers have removed their caveat reflecting a lack of post-Brexit transactional evidence from our valuations and have also applied a modest level of post-Brexit capital growth.  Trading in the Company's shares has also been stable over the last quarter with a consistent premium being maintained which has allowed us to raise £6m in new equity from tap issues.  The net proceeds of the share issues, and debt facility up to 20% loan to GAV, are under offer on new acquisitions in the industrial sector.

Across the portfolio we continue to see the occupier market remaining active, with robust levels of tenant demand.  As a result, 40% of the portfolio's current vacancy is now under offer including units in Oxford, Sheffield and Salisbury.  Once completed, these lettings, with an income stream totalling over £400,000 pa, will reduce the current portfolio vacancy from 8.70% of ERV to 3.5%.  In locations where this occupier demand is coupled with a shortage of good quality supply we are seeing rental value uplift which gives confidence in the portfolio and has been additive to value.  Examples of this include Queen Square in Bristol where new lettings have been achieved above the valuer's estimate of rental value.  Also at Fargate in Sheffield, highlighting the success of our strategy to invest only in major retail centres, we have seen some significant rental value growth due to nearby recent lettings which is contrary to the national trend.

Conscious of an uncertain global economic backdrop, defensive downside protection remains a focus of our stock selection process with a focus on investment values that are underwritten by replacement cost, vacant possession and alternative use values and therefore less exposed to capital erosion.  In addition to this we are looking to lengthen income steams where possible and we are currently in negotiation with the portfolio's largest tenant occupying a distribution warehouse close to the M1 who has lease events both this year and next; supply in this location is tight due to a lack of development and we believe the tenant in question is wedded to the surrounding area.  We are also seeing many examples where a less proactive approach is required due to tenants not operating break clauses or remaining in occupation post expiry, again often due to a lack of supply highlighted by AEW at acquisition.  The portfolio's second largest tenant, The Secretary of State for Communities and Local Government, did not option a break in June and during the last quarter Wella, the portfolio's fifth largest tenant, removed a break clause from their lease in Basingstoke.

As a precursor to a more stable view on pricing, the Investment market has seen a healthy level of activity since the end of the summer and is currently showing a strong pipeline of opportunities suitable for the future growth of the strategy.  With this in mind, approval has been given by the Board of Directors to sell down the Company's Core Fund holding (at NAV or better) at an appropriate time now that pricing has returned to offer.  Although this holding was particularly accretive to performance during the ramp-up phase, with a more mature portfolio the holding is now less relevant to the Company's strategy and the intention will be to reinvest the proceeds from any sale as quickly as possible back into direct property holdings".

Net Asset Value

The Company's unaudited NAV as at 31 October 2016 was £118.05 million, or 95.47 pence per share. This reflects an increase of 0.95% per share compared with the NAV as at 31 July 2016, or a NAV total return, including the first interim dividend for the period from 1 May 2016 to 31 July 2016 of 2.0 pence per share, of 3.13%. As at 31 October 2016, the Company owned investment properties with a fair value of £125.88 million. The Company's investment in the Core Fund is valued at £9.33 million and the Company had cash balances of £10.21 million, of which £7.33 million is available for capital investment.

	Pence per share	£ million
NAV at 1 August 2016	94.57	111.13
Portfolio capital expenditure	(0.65)	(0.78)
Valuation change in property portfolio	0.57	0.69
Valuation change in AEW UK Core Property Fund	0.57	0.69
Valuation change in derivatives	0.03	0.03
Gain on disposal	0.35	0.41
Income earned for the period	2.72	3.26
Expenses and net finance costs for the period	(0.77)	(0.93)
First interim dividend paid	(2.00)	(2.35)
Issue of Equity (net of costs)	0.08	5.90
NAV at 31 October 2016	95.47	118.05

The NAV attributable to the ordinary shares has been calculated under International Financial Reporting Standards and incorporates the independent portfolio valuation as at 31 October 2016 and income for the period, but does not include a provision for the interim dividend for the period to 31 October 2016.

The Company received dividends during the period totalling £0.32 million from its investment in the Core Fund.

On 28 July 2016, in the interest of treating investors fairly, the Authorised Corporate Director of the Core Fund exercised its powers to swing the Core Fund's pricing basis to a bid basis with a fair value dilution reduction of 5%, representing an overall discount to the Core Fund NAV of 6.4%. This decision to change the pricing basis led to a revaluation of the Company's Core Fund holding as at 31 July 2016 to £8.65 million, from £10.11 million as at 30 April 2016 (being 1.25p per share). On 30 September 2016, the decision to implement the change in pricing basis and fair value dilution reduction was lifted.

In order to provide a better reflection of fair value than the single swinging price in current market conditions, a recommendation by the Investment Manager to adopt an amended valuation methodology for the Core Fund to a NAV basis was accepted by the Directors. The Company's holding was valued at £9.33 million as at 31 October 2016.

Dividend

The Company today announces an interim dividend of 2.0 pence per share for the period from 1 August 2016 to 31 October 2016. The dividend payment will be made on 31 December 2016 to shareholders on the register as at 25 November 2016. The ex-dividend date will be 24 November 2016.

The dividend of 2.0 pence per share will be designated 1.60 pence per share as an interim property income distribution ('PID') and 0.40 pence per share as an interim ordinary dividend ('non-PID').

The actual earnings per share for this period were 1.95 pence as a result of a reduction in the dividend received from the Core Fund. As noted above, the Company will look to sell down its holding in the Core Fund and reinvest the proceeds from any sale into direct property holdings. The Board of Directors continues to express confidence in the Company's continued ability to meet the 2.0 pence per quarter target dividend payment from property income based upon the existing assets. In addition, asset management initiatives continue to add to the Company's income stream. Investors should note that this target is for illustrative purposes only, based on current market conditions and is not intended to be, and should not be taken as, a profit forecast or estimate. Actual returns cannot be predicted and may differ materially from this illustrative figure. There can be no assurance that the target will be met or that any dividend or total return will be achieved.

Financing

Equity

The Company's issued share capital consists of 123,647,250 Ordinary Shares.

The Company issued the following shares in the three months to 31 October 2016:

Date of Issue	Number of Shares	Issue Price per Share	Gross Proceeds
12 September 2016	2,450,000	97.00 p	£2.38 million
3 October 2016	2,612,250	98.25 p	£2.57 million
4 October 2016	825,000	98.25 p	£0.81 million
5 October 2016	250,000	98.25 p	£0.25 million

Debt

As at 31 October 2016, the Company has utilised £26.51 million from its £40 million facility with RBS International, representing 19.6% of Gross Loan to Value. The loan attracts interest at LIBOR + 1.4%. To mitigate the interest rate risk that arises as a result of entering into a variable rate linked loan, the Company has entered into interest rate caps on the entire balance of the loan at a strike rate of 2.5% and continues to be 100% hedged.

Portfolio activity and asset management

Cranbourne House, Basingstoke

In return for receiving the landlord's consent to assign the lease to parent company HFC Prestige Manufacturing Limited, Wella Holdings Limited contracted to remove its 2017 break clause giving the Company two years of  additional income to 2019, at £410,000 p.a, plus a 6 months rental guarantee. The tenant is now also carrying out refurbishment works to the building, further demonstrating its commitment to the location.

Odeon Cinema, Southend

We have obtained an uplift of £30,000 per annum for the outstanding 2012 rent review from £505,000 to £535,000, backdated to 29 September 2012. Negotiations have commenced on the 2017 rent review.

 11-15 Fargate, Sheffield

The Company has completed the leasehold disposal of vacant upper parts above prime retail units for a price of £710,000, against an assumed acquisition value of £250,000.  The vacant uppers were held at nil cost to the Company due to a 12 month guarantee from the vendor of the property covering rent, rates and service charge.  The retained retail units fronting the prime pedestrianised pitch of Fargate provide good potential for rental value growth going forward due to a higher rental level that has recently been documented in new lettings on the pitch directly opposite.

Valley Retail Park, Belfast

A 15 year lease was completed with national retailer Smyths Toys at units 5 & 6 Valley Retail Park producing additional income of £200,000 p.a. As a result of this letting the scheme is now fully let and, due to asset management initiatives completed over the past 12 months, is showing a weighted average unexpired lease term to breaks of 10 years, as compared to 3 years at acquisition.  The value of the asset has increased by over 40% since acquisition in September 2015.

Sandford House, Solihull

The portfolios second largest tenant did not exercise its break option in 2017 and is now contracted to stay in occupation for a further 2 years until 2019. We are looking at various long term options for this central Solihull property including residential, retail or a second office building.

Research Personnel

Alan Patterson has joined the AEW UK team as Research Consultant following former Head of Research Sam Martin's decision to return to his native New Zealand earlier in the year.  He is a leading real estate researcher and land economist, having served as the Chairman of the IPF Research Steering Group until 2015.  He has predominantly worked as a head of direct property research, previously in commercial agents Hillier Parker (predecessor to CBRE) and most recently in AXA Real Estate Investment Managers.  Alan will provide a valuable input to the business on both macro-economic issues and expected property industry trends.

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement via Regulatory Information Service this inside information is now considered to be in the public domain.

Enquiries
AEW UK
Laura Elkin	[e-mail]
	[phone]
Nicki Gladstone	[e-mail]
	[phone]
Company Secretary
Benjamin Hanley, Capita Company Secretarial Services	[e-mail]
	T: 01392 477 653
FTI Consulting
Richard Sunderland, Claire Turvey, Richard Gotla	[e-mail]
	T: 020 3727 1000

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 £10 million), on shorter occupational leases, in strong commercial locations across the United Kingdom.

Since its IPO in May 2015, AEWU has the Company has invested just over £123 million in 27 properties, including £9.75 million in AEW UK's Core Property Fund. It 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 the income stream. Whilst occupational demand in strategic locations remains, securing tenants on shorter leases allows AEWU to crystallise value through rent reviews and lease re‐gears.

AEWU is currently paying a dividend of 8p per share p.a. and targets a total annual return, over the medium term, in excess of 12% on the IPO issue price, net of all fees.

Real estate investment specialist AEW UK Investment Management LLP is a joint venture between the management team, which together has an average of 25 years of real estate experience, and AEW Europe, which has €48.1 billion of real estate assets under management. AEW UK Investment Management LLP has a strong and expert asset management team, with a proven record of identifying and delivering value from real estate assets across all sectors.

 

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[i] Net Loan to Value is Gross Loan to Value after consideration of cash balances as at 31 October 2016

 

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