NAV Update and Dividend Declaration

RNS Number : 4427G

AEW UK REIT PLC

30 May 2017

 

30 May 2017

NAV Update and Dividend Declaration for the three months to 30 April 2017

AEW UK REIT plc (LSE: AEWU) ("the Company"), which, as at 30 May 2017, owns a diversified portfolio of 30 direct regional UK commercial property assets, announces its quarterly unaudited Net Asset Value ("NAV") and interim dividend for the three month period ended 30 April 2017.

Highlights

·      Fair value independent valuation of the property portfolio increased by £5.75 million to £137.82 million (31 January 2017: £132.07 million), primarily as a result of a new acquisition. On a like-for-like basis the valuation of the property portfolio increased by 0.85% over the quarter.

·      NAV of £118.68 million or 95.98 pence per share (31 January 2017: £118.24 million or 95.62 pence per share).

·      EPRA earnings per share for the period of 1.84 pence per share (31 January 2017: 1.81 pence per share).

·      Final dividend of 2.0 pence per share announced for the quarter ending 30 April 2017.

·      The Company remains conservatively geared with a gross loan to value ratio of 19.9% (31 January 2017: 19.4%) and net loan to value ratio of 17.4% (31 January 2017: 16.3%).[i]

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

o  Acquisition of a multi-let industrial unit located in Basildon, Essex for £4.55m reflecting a high Net Initial Yield of 7.8% and a low capital value of £66 per sq ft, in line with vacant possession values.  Basildon has seen strong rental performance over the past 18 months, driven by  strong demand and limited levels of supply;

o  Acquisition of a 33,000 sq ft single-let industrial building located on the established Pipps Hill Industrial Estate in Basildon, let on a new 10 year lease at a passing rent of £6 per sq ft.

o  Simultaneous surrender and letting at Unit 1003 Sarus Court.  The transaction, agreed at £5.25 per sq ft, not only increased the length of income at the unit by three years but was agreed above ERV and without any void period or loss of income to the Company; 

·      Portfolio activity after the period including:

o  Disposal of the Company's remaining units in the AEW UK Core Property Fund (the "Core Fund") for total proceeds of £7.62m.  The Company has held an ownership in the Fund since launch in May 2015 for the purpose of expediting its investment period.  The units have now been sold at a price in excess of the Core Fund's latest published NAV, and the proceeds will be used for direct investment;

o  Acquisition of one further industrial asset for £2 million. This is the final unit at Sarus Court industrial Estate, following acquisition of the rest of the estate in 2015. The estate provides well specified, modern industrial units of between 11,000 and 17,000 sq ft, which are let to a number of light-industrial occupiers on a WAULT of over 4 years.

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

"The sectors, locations and lot sizes that underpin our investment strategy have continued to perform well this quarter. The Bank of England's GDP forecast remains unchanged and inflation has increased slightly over the first quarter in 2017. A general election has been called for 8 June 2017 and so far the market remains resilient in terms of both pricing and sentiment.

"For the second quarter in a row MSCI data showed that the market has started to regain the value it lost in the immediate aftermath of the Brexit vote, and this is evidenced by our own valuation growth of nearly 1% over the quarter.  MSCI saw the largest increases in value in the industrial and alternative sectors where higher yields and attractive lease terms are available. There have been significant levels of investment in these sectors over and above the larger central London office market which saw net outflows and, according to Real Capital Analytics, transaction values down 10% from their end of 2015 peak.

"The Company's portfolio is reaching maturity following its initial launch in May 2015. It is now well diversified with 30 direct assets, weighted 25.9% in office, 34.6% retail, 35.4% industrial and 4.1% in other assets. The properties are predominantly located in strong regional centres in the UK, and the Company has paid its 2.0p per quarter dividend, its stated strategy at IPO, for each of the last five quarters. We have completed the sale of the Company's holding in the Core Fund and proceeds have been reallocated to direct property investments. In addition, we are likely to sell a directly held asset in the forthcoming quarter where asset management initiatives have added approximately 60% to its value over the hold period, demonstrating our ability to not only transact but also extract significant value from value-add assets.

"In the strong regional centres where we focus the Company's investment activities we still see robust rental growth, with a number of asset management deals adding to the Company's rental income during the quarter. The Company's vacancy rate is currently 7.22% (January 2017: 9.01%), following the sale of Castlegate, Salisbury, and with a further 12,727 sq ft under offer to let, we anticipate further reductions in the void rate in the near future.

"The Company's share price for the quarter has been maintained at a premium to NAV and the team are focussed on growing the REIT to take advantage of our attractive investment pipeline and to provide enhanced liquidity to the Company's shareholders.

"We continue to focus our origination efforts in locations that exhibit low levels of supply, with a particular focus on industrial premises, which we will look to acquire at values close to vacant possession value. We are also selectively considering the retail and alternative sectors where some opportunities look attractively priced. We have a strong pipeline of assets under consideration and look forward to updating the market in respect of further acquisitions and our growth strategy in due course. We continue to focus on delivering to investors a sustainable and attractive level of dividend from a well-diversified regional portfolio."

Net Asset Value

The Company's unaudited NAV as at 30 April 2017 was £118.68 million, or 95.98 pence per share. This reflects an increase of 0.38% per share compared with the NAV as at 31 January 2017, or a NAV total return including the second interim dividend for the period from 1 November 2016 to 31 January 2017 (of 2.0 pence per share), of 2.52%. As at 30 April 2017, the Company owned investment properties with a fair value of £137.82 million. The Company's investment in the Core Fund was valued at £7.59 million and the Company had a cash balance of £1.31 million available for capital investment.

	Pence per share	£ million
NAV at 31 January 2017	95.62	118.24
Portfolio acquisition costs Realised loss on sale of investments	(0.30) (0.09)	(0.37) (0.11)
Capital expenditure	(0.11)	(0.14)
Valuation change in property portfolio	1.08	1.34
Valuation change in AEW UK Core Property Fund Valuation change in derivatives	(0.02) (0.04)	(0.03) (0.05)
Income earned for the period	2.79	3.45
Expenses and net finance costs for the period	(0.95)	(1.18)
Interim dividend paid	(2.00)	(2.47)
NAV at 30 April 2017	95.98	118.68

The NAV attributable to the ordinary shares has been calculated under International Financial Reporting Standards and incorporates the independent portfolio valuation as at 30 April 2017 and income for the period, but does not include a provision for the interim dividend for the period to 30 April 2017.

The Company received dividends during the period totalling £0.11 million from its investment in the Core Fund.

Dividend

The Company today announces an interim dividend of 2.0 pence per share for the period from 1 February 2017 to 30 April 2017. The dividend payment will be made on 30 June 2017 to shareholders on the register as at 9 June 2017. The ex-dividend date will be 8 June 2017.

The dividend of 2.0 pence per share will be designated 2.0 pence per share as an interim property income distribution ('PID').

The EPRA earnings per share for this period were 1.84 pence.

At the time of the Company's IPO, the Investment Manager provided guidance that they would assemble a portfolio supporting a target dividend between 8 to 9 pence per share. The initial portfolio has now been assembled enabling the Company to pay a 2 pence per share dividend for each quarter since January 2016.  The Board of Directors are of the view that over the medium term this level of dividend is supportable from earnings on the current portfolio; accordingly, the Board has resolved to pay a 2 pence per share dividend for this quarter, as with previous periods. With this dividend, the Company will have paid 13.5 pence per share since launch.

Going forward, we have always stated our desire to grow the Company, which is currently trading strongly in the market. Accordingly, subject to market conditions, the Company will look to raise additional capital during 2017. At the time of any significant fund raise, the Board will review the level of capital targeted to be raised and the assets likely to be acquired, together with the existing assets, activity and market prospects at the time and may issue further dividend guidance at such time, if appropriate. The Company will continue to focus its investment in relative value opportunities offered by pricing inefficiencies in smaller commercial properties let on shorter occupational leases.

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.

Debt

On 24 April 2017, the Company utilised an additional £1.5 million of its loan facility with RBS International, thereby bringing its drawdowns to £29.01 million as at 30 April 2017 and representing a gross loan to value ratio of 19.9%. 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 £26.51 million of the total balance of the loan at a strike rate of 2.5%, resulting in the loan being 91% hedged. On 11 May 2017 the terms of the loan facility with RBS International were amended from a £40 million to a £32.5 million facility. The Investment Manager and the Company will keep the level of gearing under review and, if appropriate, will look to increase the facility.

Portfolio activity and asset management

Apollo Business Park, Basildon

In April, the Company announced the acquisition of a c. 69,000 sq ft multi-let industrial building in Basildon, Essex, for £4.55 million, reflecting an attractive Net Initial Yield of 7.8% and a capital value of £66 per sq ft.

The warehouse, which is located within the established Cranes Farm Industrial area, fully let to four tenants, provides a WAULT of just under four years to lease breaks and six years to expiry.  The current lettings show an average passing rent of £5.50 per sq ft which is significantly below the local market average and as such, the building presents an opportunity for near-term rental income uplift through asset management. The site is strategically located adjacent to the A127, which provides quick vehicular access to Junction 29 of the M25.  Basildon has seen strong rental performance over the past 18 months, driven by a supply demand imbalance for single-tenant, well-located industrial units, and as such, prime and secondary rents in the town now sit at £8.50 per sq ft and £6.75 per sq ft respectively.

1 Bentalls, Pipps Hill Industrial Estate, Basildon

In April, the Company acquired a 33,000 sq ft single-let industrial building located on the established Pipps Hill Industrial Estate, just off the A127, approximately five miles from Junction 29 of the M25.  The purchase price of £2.0 million reflects an attractive net initial yield of 9.3%, a reversionary yield of 8.8% and a low capital value of £64 per sq ft.  The building will be let on a new 10 year lease to Merson Signs Ltd, at a passing rent of £6 per sq ft.  The unbroken 10 year lease will improve the Company's overall income profile; furthermore we believe that the acquisition pricing is well supported by the asset's underlying vacant possession value, limiting any downside risk.

Unit 1005, Sarus Court, Runcorn

Post quarter end in May, the Company acquired Unit 1005 Sarus Court which completes the Company's acquisition of the whole of the Sarus Court industrial estate, where the Company already owned five of the six units following acquisitions in 2015.  The estate provides well specified, modern industrial units of between 11,000 and 17,000 sq ft, which are let to a number of light-industrial occupiers on a WAULT of over 4 years.  Sarus Court forms part of the wider Manor Park industrial estate, strategically located to the west of Runcorn and five kilometres from the Mersey Gateway Project, a new six lane bridge over the River Mersey connecting the towns of Runcorn and Widnes and linking the M56 to M62.  The project is due for completion in Autumn 2017.

The newly acquired unit, which is let to Dimension Data until 2020, offers significant reversionary potential, with a passing rent of £4.50 per sq ft which is more than 15% lower than a recent letting at 1003 Sarus Court secured by AEW UK at £5.25 per sq ft.  The purchase therefore not only offers rental upside but brings the whole estate under the Company's ownership, which will add value from an estate management perspective.

Post period

AEW UK Core Property Fund ("Core Fund")

In May, the Company announced the sale of its remaining units in the Core Fund for total proceeds of £7.62 million.

The Company has held an ownership in the Core Fund since launch in May 2015 for the purpose of expediting its investment period and saw a total return of 13% over the hold period.  The units have now been sold at a price in excess of the Core Fund's latest published NAV, with the proceeds to fund direct investments in the portfolio.

Unit 1003, Sarus Court, Runcorn

The Company achieved a simultaneous surrender and letting at Unit 1003 Sarus Court to a group company of an existing tenant on the estate.  The transaction, agreed at £5.25 per sq ft, not only increased the length of income at the unit by 3 years but was agreed above ERV of £5 per sq ft and without any void period resulting in loss of income to the Company.  The new passing rent is also 15% ahead of the passing rent at the newly acquired Unit 1005 at Sarus Court providing evidence for future rental growth here.

Queen Square, Bristol

The Company has secured a letting of over 5,000 sq ft of ground floor office space on a 10 year lease with a tenant break option at year five, achieved a rental level that is £1.50 per sq ft ahead of the expected ERV at the time of purchase in December 2015.  The building has demonstrated very robust occupational performance since acquisition with vacancy levels reduced from 46% at acquisition to the current level of 5%.  This highlights the strength of both the Bristol office market as a whole, but also the prime nature of this micro- location, which is much sought after by financial and professional services occupiers.

Pearl House, Nottingham

The Company received consent for the change of use from office to 36 residential flats under Permitted Development Rights (PDR) on the upper floors at Pearl House, Wheeler Gate which is centrally located within the City and located just a short walk away from the mainline railway station.  The company intends however, to keep the building in its current use as offices for the foreseeable future and as such signed a letting of the entire third floor with tenant The Press Association for 5 years showing a rent of £13.78 per sq ft against an ERV of c £12 per sq ft when the property was acquired in May last year.

Enquiries
AEW UK
Alex Short	[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. 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, raising £100.5m. Since IPO it has raised a further £23m.

Since its IPO in May 2015, the Company has invested over £146 million in 30 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 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 €19.1 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.

 

---

[i] Net loan to value is gross loan to value after consideration of cash balances as at 30 April 2017

 

END

 

 

MSCAFMFTMBTTBRR