NAV Update and Dividend Declaration

RNS Number : 9390V

AEW UK REIT PLC

27 July 2018

 

27 July 2018

NAV Update and Dividend Declaration for the three months to 30 June 2018

AEW UK REIT plc (LSE: AEWU) ("the Company"), which, as at 27 July 2018, directly owns a diversified portfolio of 36 regional UK commercial property assets, announces its unaudited Net Asset Value ("NAV") and interim dividend for the three month period ended 30 June 2018.

Highlights

·      At 30 June, the fair value independent valuation of the property portfolio was £191.95 million (31 March 2018: £192.34 million), following the part sale of Pearl Assurance House, Nottingham, during the quarter. On a like-for-like basis the valuation of the property portfolio increased by £3.26 million (1.73%) over the quarter (31 March 2018: £0.74 million and 0.48%).

·      NAV of £149.14 million or 98.40 pence per share (31 March 2018: £146.03 million or 96.36 pence per share).

·      EPRA earnings per share ("EPRA EPS") for the quarter of 2.04 pence per share (31 March 2018: 1.76 pence per share), in line with the Company's target annual dividend of 8.00 pence per share.  The increase in earnings compared with the prior quarter reflects a full quarter's income having been received from the five acquisitions made during the prior quarter.

·      The Company today announces an interim dividend of 2.00 pence per share for the three months ended 30 June 2018.

·      NAV total return of 4.28% and shareholder total return of 3.22% for the three months ended 30 June 2018.

·      The Company remains conservatively geared with a gross loan to value ratio of 26.05% (31 March 2018: 26.00%).

·      At 30 June 2018, the Company held £6.72 million cash for investment.

·      Portfolio and asset management activity during the period included:

o  The part sale of Pearl Assurance House, Nottingham, for gross proceeds of £3.65 million.  The first to ninth floors of the building were sold on 5 April 2018, reducing the overall vacancy level of the portfolio by 1.5%.

o  The lease renewal with the Secretary of State for Communities and Local Government at Cedar House, Gloucester, for a ten year term and an increase in rent from £300,000 to £321,000 per annum.  The asset has seen an increase in valuation of 20.3% from the prior quarter as a result.

o  The reversionary lease renewal with Ramboll Whitbybird at 40 Queen Square, Bristol.  The new lease is due to commence in November 2018 for a ten year term and the rent will increase from £66,623 per annum (£16.84 per sq ft) to £94,500 per annum (£23.00 per sq ft).  The tenant will benefit from a break option in year 5.

o  Post period-end, the Company has completed a ten year lease renewal with Greggs Plc at its retail property located on Commercial Road in Portsmouth.  The new rent agreed of £20,500 per annum exceeds the unit's previous ERV by 11%.

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

"Following a strong quarter of acquisitions for the Company at the start of the year, Q2 has seen the portfolio benefit from a number of asset management transactions and, as we are now entering our fourth year of investment, the portfolio is looking very well established with business plans beginning to mature across many of the assets.  As a result of this, we have seen vacancy within the portfolio fall from 7.1% in Q1 to 5.3% as at the end of Q2.  We are very pleased with this result.  This further supports the Company's ability to pay its target dividend of 8p per share per annum, which remains the highest in its peer group.  We expect the level of vacancy to decline further during the remainder of 2018.

We have also seen some strong leasing performance over the quarter with new lettings or lease renewals achieved in Bristol, Runcorn and Wakefield all showing levels ahead of ERV.  Bristol and Runcorn in particular have benefitted from strong valuation growth, with Wakefield being a new acquisition showing strong potential for the future.

In terms of the wider market, we continue to see polarised performance from the various sectors.  Industrial still represents a strong area for continued growth, both in terms of income and capital value.  We therefore see attractive acquisition opportunities in this sector, as evidenced by our various industrial acquisitions over the past 12 months.  Conversely, the retail market outside of major city centres appears to be much less robust, however all of the assets acquired by the Company over the past three years have been acquired with this underlying economic backdrop in mind.  As such, they have been made with very conservative performance assumptions and show low entry values that will support alternative uses.  We are therefore making sure that, in these cases, downside protection for investors is backed up with supports such as the ground work required for change of use consents and redevelopment.  As in recent quarters, office performance remains location dependent, with centres such as Bristol still showing strong expectations of growth.

To date, the Company's income stream has not been affected by the myriad of Company Voluntary Arrangements ("CVAs") seen of late in the retail sector, which can allow for tenants in financial distress to restructure their rent obligations, often at the landlord's expense.  Only one tenant has been affected and, in this case, an under tenant was already in place to pay the rent.  This provides further evidence of the Company's effective stock selection process and the rigorous approach that AEW, as manager, applies to its acquisition analysis and due diligence. We believe that this is the best approach to providing our investors with both strong performance and long term value protection."

Net Asset Value

The Company's unaudited NAV as at 30 June 2018 was £149.14 million, or 98.40 pence per share. This reflects an increase of 2.12% compared with the NAV as at 31 March 2018. This increase is largely due to the increase in fair value of the investment property portfolio of £3.22 million. The Company's NAV total return, which includes the interim dividend for the period from 1 January 2018 to 31 March 2018 (of 2.00 pence per share), is 4.28% for the three month period ended 30 June 2018. As at 30 June 2018, the Company owned investment properties with a fair value of £191.95 million.  

	Pence per share	£ million
NAV at 1 April 2018	96.36	146.03
Loss on disposal of investment properties	(0.07)	(0.10)
Capital expenditure	(0.04)	(0.06)
Valuation change in property portfolio	2.12	3.22
Valuation change in derivatives	(0.01)	(0.01)
Income earned for the period	2.77	4.19
Expenses and net finance costs for the period	(0.73)	(1.10)
Interim dividend paid	(2.00)	(3.03)
NAV at 30 June 2018	98.40	149.14

The NAV attributable to the ordinary shares has been calculated under International Financial Reporting Standards and incorporates the independent portfolio valuation as at 30 June 2018 and income for the period, but does not include a provision for the interim dividend for the three month period to 30 June 2018.

Dividend

The Company today announces an interim dividend of 2.00 pence per share for the period from 1 April 2018 to 30 June 2018. The dividend payment will be made on 31 August 2018 to shareholders on the register as at 10 August 2018.  The ex-dividend date will be 9 August 2018.

The dividend of 2.00 pence per share will be designated 2.00 pence per share as an interim property income distribution ("PID").

The EPRA EPS for the three month period to 30 June 2018 was 2.04 pence (31 March 2018: 1.76 pence), exceeding the target 2.00 pence per share quarterly dividend. The Company has seen an increase in EPRA EPS during the quarter, having received a full quarter's income from the five assets acquired during the quarter ended 31 March 2018.  Based on the current leasing profile of the portfolio, the Directors do not foresee any events which would have a significant negative impact on the portfolio's income streams during the remainder of the financial year and, with all else being equal, the current level of earnings is expected to be sustainable.  The disposal of Floors 1-9, Pearl Assurance House, Nottingham, on 5 April 2018 for gross proceeds of £3.65 million could provide the opportunity to increase earnings further through re-investment into higher yielding assets.

The Directors will declare dividends taking into account the level of the Company's net income and the Directors' view on the outlook for sustainable recurring earnings.  As such, the level of dividends paid may increase or decrease from the current annual dividend of 8.00 pence per share.  Based on current market conditions, the Company expects to pay an annualised dividend of 8.00 pence per share in respect of the financial period ending 31 March 2019.

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 151,558,251 Ordinary Shares.

Debt

The Company's borrowings remained at £50.00 million throughout the quarter and at 30 June 2018, the Company was geared at a gross loan to value of 26.05% and a net loan to value of 21.99%.

The loan continues to attract 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 £36.51 million of the total value of the loan (£26.51 million at 2.5% cap rate and £10.00 million at 2.0% cap rate), resulting in the loan being 73% hedged.  The Investment Manager and the Company will keep the levels of gearing and hedging under review.

Portfolio activity and asset management

Pearl Assurance House, Nottingham

In April the Company completed the part sale of Pearl Assurance House, which was purchased in 2016 for £8.15 million.  The sale of £3.65 million comprises the first to the ninth floors of the building as well as a ground floor reception and car parking spaces, providing a total area of 41,262 sq ft.  The transaction reflected a net initial yield of 6.9% and reduces the overall vacancy level in the portfolio by 1.5% (previously reported as 1.9%.  This has been diluted with new acquisitions).

The Company will retain the fully let ground floor accommodation in this busy city centre location, totalling 28,432 sq ft, let to national retail operators including Costa Coffee, Poundland and Lakeland.  The retained element will provide the Company with an ongoing yield of 9.5% based on its component value of £5.26 million.

Cedar house, Gloucester

In June the Company completed a lease renewal to the Secretary of State for Communities and Local Government at its Cedar House office building in Gloucester. The property was acquired in December with the expectation of achieving a new three year lease at the passing rent of £300,000 per annum and this has been vastly exceeded with a 10 year lease at a rent of £321,000 per annum.  No rent free incentive was offered to the tenant.  As a result of this asset management transaction, the value of the building as confirmed by Knight Frank has risen by 20.3% over the quarter.

40 Queen Square, Bristol

In June the Company also completed a reversionary lease renewal at 40 Queen Square, Bristol, with tenant Ramboll Whitbybird Ltd. A 10 year lease was signed to commence at the expiry of the tenant's current lease in November, although the tenant has the option to break at year 5.  The letting at a rent of £94,500 per annum proved a new high rental tone for unrefurbished space within the building at £23.00 per sq ft, as compared to a passing rent of £16.84 per sq ft.  This shows an increase in rental income of 37% and the property saw an overall valuation uplift over the quarter of 9.8%.  The property has increased in value by 63% since its acquisition in December 2015.

Diamond Business Park, Wakefield

During June a new letting was also completed at Diamond Business Park, Wakefield which was acquired by the Company in February.  Unit 7, totalling c. 13,700 sq ft, has been let to Wow Interiors Yorkshire Ltd for a 6 year term with tenant break options in years 2 and 4.  Stepped rental increases have been agreed so that, if the tenant remains in occupation for the full term, the average rent received equates to £3.30 per sq ft as compared to an ERV of £3.00 per sq ft.  The value of the building as confirmed by Knight Frank rose by 1.8% over the quarter.

Sarus Court, Runcorn

During the quarter the Manager documented two rent reviews with CJ Services, its largest tenant at Sarus Court, Runcorn.  The rent reviews at Units 1 and 2 date back to January 2017 and show a combined rate of £5.25 per sq ft net effective.  This supports a headline rent of c. £5.75 per sq ft which is £0.25 ahead of the property's current ERV.  The property has benefitted from valuation uplift of 28% since its acquisition in 2015.

Commercial Road, Portsmouth

Post period-end, the Company has completed a ten year lease renewal with Greggs Plc at its retail property located on Commercial Road in Portsmouth.  The new rent agreed of £20,500 per annum exceeds the unit's previous ERV by 11%.  Greggs have been in occupation of the unit for ten years and have the option to break the lease after the expiry of a further five years.

Enquiries
AEW UK
Alex Short	[e-mail]
	[phone]
Nicki Gladstone	[e-mail]
	[phone]
Company Secretary
Link Company Matters Limited	[e-mail]
	T: [phone]
TB Cardew
Ed Orlebar	[e-mail]
	T: 07738 724 630
Lucy Featherstone	[e-mail]
	T: [phone]
	M: [phone]
Liberum Capital
Gillian Martin	T: [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 was listed on the Official List of the UK Listing Authority and admitted to trading on the Main Market of the London Stock Exchange on 12 May 2015.

Since its IPO in May 2015, the Company has invested over £190 million in 36 assets.  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 8.00 pence per share p.a..

AEW UK Investment Management LLP employs a well-resourced team comprising 24 individuals covering investment, asset management, operations and strategy.  It is part of AEW Group, one of the world's largest real estate managers, with €59.3 billion of assets under management as at 31 March 2018. 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 31 March 2018, AEW Group managed €29.4 billion in value in properties of all types located in 15 countries, with over 390 staff.  The Investment Manager is a 50:50 joint venture between the principals of the Investment Manager and AEW.

 

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