Half Yearly Results

AEW UK REIT PLC
22 November 2023
 

22 November 2023

 

 

AEW UK REIT PLC

 

Interim Report and Financial Statements

for the six months ended 30 September 2023

 

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 2023.

 

Mark Burton, Chairman of AEW UK REIT, commented: "We have been encouraged by the Company's performance this period with NAV total return of 4.30%. All sectors of the Company's portfolio outperformed the MSCI index, demonstrating the benefits of our active asset management style in delivering performance throughout market cycles. I am pleased to report significant progress towards the Company's strategic objective of reinvesting surplus capital into higher yielding assets which are expected to deliver NAV growth over time. The purchases of NCP, York, and Cambridge House, Bath, have returned the portfolio to being materially fully invested, with EPRA earnings growing accordingly. NAV grew by 0.49%, driven by two successive quarters of positive valuation movement and accretive asset sales, where values were felt to have been maximised over the medium term. This momentum in activity has helped to create a healthy near-term outlook and we are pleased to have confirmed continued payment of the Company's market-leading 2p quarterly dividend, which has now been paid for 32 consecutive quarters."

 

Financial Highlights

 

Net Asset Value ('NAV') of £167.93 million and of 106.00 pence per share ('pps') as at 30 September 2023 (31 March 2023: £167.10 million and 105.48 pps).


NAV Total Return for the period of 4.30% (six months ended 30 September 2022: 4.35%).

Operating profit before fair value changes of £6.63 million for the period (six months ended 30 September 2022: £5.25 million).

Profit Before Tax ('PBT')* of £7.16 million and earnings per share ('EPS') of 4.52 pps for the period (six months ended 30 September 2022: £8.32 million and 5.25 pps). PBT includes a £0.16 million loss arising from changes to the fair values of investment properties in the period (six months ended 30 September 2022: £6.51 million loss) and £1.65 million realised gains on disposal of investment properties (six months ended 30 September 2022: £10.83 million gains).

 

EPRA Earnings Per Share ('EPRA EPS') for the period of 3.58 pps (six months ended 30 September 2022: 2.58 pps). See the full Half Year Report for the calculation of EPRA EPS.

 

Total dividends* of 4.00 pps declared in relation to the period (six months ended 30 September 2022: 4.00 pps).

 

Shareholder Total Return* for the period of 11.00% (six months ended 30 September 2022: -18.53%).

 

The price of the Company's Ordinary Shares on the London Stock Exchange was 98.43 pps as at 30 September 2023 (31 March 2023: 92.10 pps).

 

As at 30 September 2023, the Company had drawn £60.00 million (31 March 2023: £60.00 million) of its £60.00 million (31 March 2023: £60.00 million) loan facility with AgFe and was geared to 27.35% of GAV (31 March 2023: 28.06%). See note 15 in the full Half Year Report for further detail.

 

The Company held cash balances totalling £6.44 million as at 30 September 2023 (31 March 2023: £14.32 million).

 

Property Highlights

 

As at 30 September 2023, the Company's property portfolio had a valuation of £219.36 million across 35 properties (31 March 2023: £213.83 million across 36 properties) as assessed by the valuer1 and a historical cost of £231.38 million (31 March 2023: £224.03 million).

 

The Company acquired two properties during the period for a total purchase price of £21.52 million, excluding acquisition costs (year ended 31 March 2023: five properties for £32.05 million).

 

The Company made three disposals during the period for gross sale proceeds of £20.85 million (year ended 31 March 2023: five properties for gross sale proceeds of £44.41 million).

 

The portfolio had an EPRA vacancy rate** of 6.98% as at 30 September 2023 (31 March 2023: 7.83%).

 

Rental income generated during the period was £9.43 million (six months ended 30 September 2022: £8.41 million).

 

EPRA Net Initial Yield ('EPRA NIY')** of 7.85% as at 30 September 2023 (31 March 2023: 7.65%).

 

Weighted Average Unexpired Lease Term ('WAULT')* of 4.45 years to break and 5.72 years to expiry (31 March 2023: 3.05 years to break and 4.33 years to expiry).

 

* See KPIs in the full Half Year Report for definition of alternative performance measures.
**
See glossary in the full Half Year Report for definition of alternative performance measures.
1
The valuation figure is reconciled to the fair value under IFRS in note 12.

 

 Enquiries  

 


AEW UK 

Laura Elkin

 

Laura.Elkin@eu.aew.com 

 

Nicki Gladstone 

Nicki.Gladstone-ext@eu.aew.com 

+44(0) 771 140 1021 

 

Liberum Capital

Darren Vickers

Darren.Vickers@liberum.com

+44 (0)20 3100 2218

 

TB Cardew  

Ed Orlebar 

Tania Wild

 

 AEW@tbcardew.com  

+44(0) 7738 724 630 

+44(0) 7425 536 903

 

 

Chairman's Statement

 

Overview

Despite the lacklustre economic headlines, we were encouraged to see the portfolio's performance return to positive territory in the first half of the year, following a tumultuous period for UK property valuations. During the period, the Company achieved NAV growth of 0.49%, with two successive quarters of positive valuation movements and numerous NAV accretive sales having been completed. Positive like-for-like valuation movement was seen in all sectors of the Company's portfolio, with the exception of offices, which are still stabilising. All sectors of the Company's portfolio outperformed the MSCI index during the period, demonstrating the benefits of an actively managed portfolio. Quarterly EPRA earnings per share ('EPS') grew by 4% during the period, with EPS reaching 1.84pps for the quarter ending 30 September 2023. Further growth in earnings and NAV are expected in the near term.

 

The commercial property investment market remained subdued during the period, with transaction volumes in all sectors well below historic averages. Despite the depressed transactional activity, the Company has identified plentiful pipeline opportunities. Less direct competition and a greater prevalence of mispricing have resulted in value investment opportunities being more numerous.

 

To exploit these opportunities, the Company has undertaken a strategy of selective capital recycling, in order to benefit from the attractive locations and advantageous pricing in its pipeline. Assets have been sold where their values have been maximised over the medium term and their earnings are below those seen in the Company's pipeline. During the period, the Company undertook three sales where offers had been received at levels that maximised asset value over the short to medium term. These sales included two industrial assets in Leeds and Bradford, sold as a package for a blended net initial yield of 6.2%, far below the Company's achieved average purchase yield during the period of 8.6%, demonstrating the Company's ability to crystallise asset management gains by selling out of lower yielding assets and recycling them into higher yielding assets, thereby enhancing earnings. The sale prices exceeded the assets' valuations prior to disposal by an average of 14%. The third sale was of an industrial property in Deeside, which was sold vacant for an 8% premium to the prior valuation. The asset was sold in order to avoid a costly refurbishment programme. These sales added to the Company's existing strong track record of crystallising net gains on disposal. The resulting capital profit will be utilised, where needed, to supplement earnings in the payment of the Company's market leading dividend, which has now been paid for 32 consecutive quarters.

 

I am pleased to report significant progress towards the Company's strategic objective of reinvesting capital generated from sales into higher yielding assets in core urban locations. The purchases of NCP, York, and Cambridge House, Bath, utilised most of the capital available for deployment and have strengthened earnings with a combined initial yield of 8.6%. Both assets have robust reversionary potential, each offering yields in excess of 10%, thus furthering their potential accretion to earnings over time. Despite the short-term negative impact on NAV of acquisition costs, these purchases are expected to deliver NAV growth over the medium term. Critical to these acquisitions were the strong locations of the assets, both of which occupy attractive central pitches in cities with a tight supply of land.

 

This has been a fruitful period for the Company's active asset management capabilities, with high numbers of leasing transactions completing that have fuelled earnings growth and bolstered NAV. The Company's portfolio has seen robust occupational activity across all major market sectors, with a particular concentration of activity in retail sectors, where the Company has focused much of its recent purchases. This activity is testament to the Investment Manager's expertise in stock selection and proactive asset management, both of which have driven the strong total return performance achieved by the portfolio's assets.

 

Further benefits to earnings and values from asset management transactions are expected to be realised over coming periods, with a number of key negotiations ongoing. As at the period end, the Company had a reversionary yield of 8.72%, as independently assessed by the valuer, Knight Frank, versus an initial yield of 7.31%. This is a measure of the inherent potential for future income growth that the current portfolio provides. Given the portfolio retains a low average passing rent of £6.29 per sq ft, this represents a conservative starting point for value protection and income growth.

 

Financial Results


Six months ended 30 September

2023

Six months ended 30 September

2022

Year ended 31 March

2023

Operating profit before fair value changes (£'000)

6,627

5,253

11,096

Operating profit/(loss) (£'000)

8,110

9,576

(9,164)

Profit/(loss) before tax (£'000)

7,162

8,322

(11,325)

Earnings/(loss) per share (basic and diluted) (pence)*

4.52

5.25

(7.15)

EPRA Earnings per share (basic and diluted) (pence)*

3.58

2.58

5.70

Ongoing Charges (%)

1.50

1.33

1.37

Net Asset Value per share (pence)*

106.00

121.88

105.48

EPRA Net Tangible Assets per share (pence)*

106.00

121.88

105.48

 

* see note 10 of the Financial Statements for the corresponding calculations. See the Investment Manager's Report for further explanation of performance in the period.

 

Awards

I am delighted that the Company's performance and practices have been recognised in four awards received during the period. The Company has once again been awarded a gold medal by EPRA, the European Public Real Estate Association, for its high standard of financial reporting and a silver medal for standards of sustainability reporting. These awards are testament to the Company's robust governance and transparency.

 

The Company also won the Citywire investment trust award in the 'UK Property' category for the fourth successive year, as well as winning the 'Property' category at the Investment Week Investment Company of the Year awards.

 

Board Changes

As announced previously, I am very pleased to confirm the appointments of Mr Robin Archibald and Mrs Liz Peace as independent Non-Executive Directors to the Board of the Company, effective 1 October 2023. As part of orderly succession planning, Robin has been appointed as Chairman-elect and will succeed as Chairman of the Board upon my retirement at the Company's 2024 AGM. I am delighted that Robin and Liz are joining the Board and I am confident that their experience and range of skills will complement and further strengthen the existing Board for many years to come. Their collective extensive knowledge and experience in property and investment companies will be of great benefit. I look forward to working closely with Robin to ensure a smooth handover until September 2024.

 

On 30 September 2023, Mr Bim Sandhu retired from the Board as Chairman of the Audit Committee, having reached the end of his nine-year tenure as a Director of the Company. As first announced on 10 November 2022, Mr Mark Kirkland was appointed as Chairman-designate of the Audit Committee and has now succeeded Mr Sandhu as Audit Committee Chairman. On behalf of the Board, I thank Bim for his invaluable contribution since the IPO of the Company, and wish him well for his future endeavours.

 

Outlook

We are pleased by the Company's progress in continuing to invest capital into attractive pipeline assets, where market conditions have enabled attractive pricing levels. These purchases have returned the Company's portfolio to being materially fully invested and as a result, income levels have grown accordingly. We are reassured by the occupational resilience that the portfolio has shown during a period of ongoing uncertainty. The quantum of asset management activity completed during the period is testament to the Investment Manager's proactive approach and to the quality of assets held in the portfolio. This activity has also boosted earnings and creates a healthy near-term outlook for further growth.

 

The Board believes that the ongoing relevance of the Company's strategy is highlighted by its consistent outperformance of the MSCI benchmark, with a five-year annualised outperformance of 6.66%. The Company has identified a plentiful pipeline, which has presented excellent opportunities for a diversified, value-focused investment strategy that is nimble in making cross-sector and often, counter-cyclical moves, thereby delivering optimal value to Shareholders. We believe that the relevance of this strategy is highlighted by the robustness of the Company's share rating, whose discount to NAV has consistently been the narrowest of its peers in the UK diversified peer group.

 

The Board and Investment Manager will continue to take a prudent approach to the ongoing management of the Company, alongside considering opportunities for investment, growth and capital recycling, as they arise.

 

 

Mark Burton

Chairman

21 November 2023

 

 

Investment Manager's Report

 

Property Market Outlook

Despite uncertainty remaining in the wider economy, values in UK commercial property largely stabilised during the six months to 30 September 2023. UK property is expected to offer healthy return prospects over the coming periods, with consensus forecasts showing an expected return to positive rental growth across all major market sectors by 2025, and all UK property total returns to average 5.6% per annum over the next five years (2023-2027).

 

Industrial

During the period, the industrials sector remained robust having been the sector which saw the steepest value declines at the end of 2023. Supported by resilient levels of occupational demand, the sector has continued to see the highest levels of rental growth and although this is expected to slow in coming years, it is expected to remain in positive territory, showing expected average annual growth of 3.3% between 2023 and 2027. We believe that the Company's industrial portfolio, with a low average passing rent of £3.60 per sq ft, will be well placed to benefit. The Company has completed several sales from the sector during the period, where sales yields have compressed significantly compared to pipeline assets, due to vendors' positive expectations on rental growth.

 

Retail

Values in the retail sector also faired robustly during the period, buoyed by positive sector indicators. Retail sales volumes increased 0.3% over the three months to August 2023 and the proportion of online retail sales fell marginally in the month to August. These figures, however, mask a divergence in performance of the underlying retail sectors, with retail warehousing remaining more robust on a total return basis than its high street equivalent. Vacancy levels across retail warehousing have fallen to 4.7%, the lowest level seen since 2018. Performance on the high street remains significantly polarised from town to town, with the top tiers remaining robust and those now deemed to be lower quality struggling, both for occupational and investor demand.

 

The period saw the failure of Wilko, which affected both high street and retail warehousing locations. Tenant failures and CVAs have not been as common as compared to the more regular occurrence seen during the Covid pandemic, however we remain cautious of further distress in the sector.

 

Office

The Office sector saw a stronger post-Covid recovery in 2022 than some may have expected, with office-based employment growing in 2022. This trend started to reverse during 2023, resulting in negative capital growth seen across most locations. Occupational uncertainty remains across the sector, as businesses continue to transition to new working patterns. Tenants have also become more discerning in recent years, with occupiers now wishing to benefit from strong sustainability credentials as well as surrounding amenities and top-quality space. This is particularly the case for large corporate tenants, but it is increasingly becoming a key factor for smaller businesses too. As a result of all these factors, we have seen investor demand for the sector remain light, with investors further deterred by the high costs associated with delivery.

 

Alternatives

Across alternative sectors, visibility of performance in trading updates is key to investor demand and where these have remained robust, despite the squeeze on consumer discretionary spend, investment volumes have held up. Generally, leisure has historically fared relatively defensively during periods of economic uncertainty. Operators carrying unsustainably high levels of debt are seen as a concern, however. We find the sector attractive on a selective basis, particularly for assets that offer a superior income return and occupy larger land holdings, or sites in urban areas that can often be underpinned by alternative use values, most likely residential.

 

Financial Results

The Company's NAV as at 30 September 2023 was £167.93 million or 106.00 pps (31 March 2023: £167.10 million or 105.48 pps). This represents an increase of 0.52 pps or 0.49% over the six-month period, with the underlying movement in NAV set out in the table below:

 

NAV Reconciliation

NAV as at 1 April 2023

105.48

Change in fair value of investment property

1.82

Portfolio acquisition costs

(1.06)

Capital expenditure

(0.87)

Gain on disposal of investment property

1.04

Income earned for the period

6.19

Expenses and net finance costs for the period

(2.60)

Dividends paid

(4.00)

NAV as at 30 September 2023

106.00

 

EPRA EPS for the period was 3.58 pence which, based on dividends paid of 4.00 pps, reflects a dividend cover of 89.50%. The increase in dividend cover compared to the prior six-month period has largely arisen due to the completion of key asset management transactions. Our portfolio has gradually been reducing its industrial exposure over the past 18 months, and although this may not continue at the same rate going forward, it has allowed us to crystallise profits made in the sector and concurrently recycle the resulting capital into high yielding assets in our pipeline, mostly within other market sectors. We believe that this ability to move nimbly between property sectors in order to extract maximum value from our portfolio is a key strength of our strategy.

 

Further gains in EPS are expected in the coming quarters as the ongoing programme of new lettings should provide a boost to income streams and a reduction in void costs. The Company's focus for the deployment of capital continues to be further accretive investment opportunities, alongside re-investment into the existing portfolio where capex is needed in order to drive future performance gains.

 

Rent collection rates have reached 99% for both the March 2023 and June 2023 quarters respectively, with further payments expected to be received under longer-term payment plans. Of the outstanding arrears, the Company has made a £1.27 million expected credit loss provision, given the challenging economic outlook. The Company will continue to pursue all outstanding arrears.

 

The ongoing charges ratio has increased during the period as a result of the decline in the valuation of the portfolio rather than an increase in the Company's underlying cost base.

 

Financing

The Company holds a £60.00 million five-year term loan facility, maturing in May 2027. The loan is held with AgFe, a leading independent asset manager specialising in debt-based investments. It is priced as a fixed rate loan with a total interest cost of 2.959%. In the current inflationary environment, the Company considered it prudent to fix the loan and interest, rather than run the risk of further interest rate rises during the loan term.

 

The details of the loan facility are as follows:

 

30 September 2023

31 March 2023

Facility

£60.00 million

£60.00 million

Drawn

£60.00 million

£60.00 million

Gearing (Loan to GAV)

27.35%

28.06%

Interest rate

2.959% fixed

2.959% fixed

 

Property Portfolio

In the year to 30 September 2023, the Company outperformed the benchmark in total return terms across all property sectors, demonstrating the benefits of an actively managed portfolio. This was driven by capital growth outperformance in all sectors aside from retail, and income return outperformance in all sectors aside from offices.

 

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 2023

 

 

 

 

Sector

 

 

Number of

assets

 

 

 

Valuation

(£m)

 

 

 

Area

(sq ft)

 

 

Vacancy

by ERV

(%)

 

 

WAULT to

break

(years)

Gross

passing

rental

income

(£m)

Gross

passing

rental

income

(£psf)

 

 

 

ERV

(£m)

 

 

 

ERV

(£psf)

 

 

Rental

income

(£m)

Like-

for-like

rental

growth*

(£m)

Like-

for-like

rental

growth*

%














Industrial

14

78.33

1,880,794

4.35

3.80

6.78

3.60

7.71

4.10

3.51

(0.08)

(2.31)

Retail warehouses

5

46.25

484,033

18.14

5.25

3.40

7.03

4.32

8.93

2.07

  (0.19)

(9.67)

Standard retail

8

38.16

357,227

3.16

4.89

3.89

10.90

3.98

11.13

2.03

0.03

1.98

Alternatives

5

30.37

197,491

0.00

7.54

2.98

15.08

2.75

13.95

1.16

(0.04)

(3.91)

Office

3

26.25

125,318

9.34

2.96

2.10

16.74

2.73

21.75

0.66

0.05

8.14














Portfolio

35

219.36

3,044,863

6.98

4.45

19.15

6.29

21.49

7.06

9.43

(0.23) 

(2.89) 

 

Summary by Geographical Area as at 30 September 2023


 

 

 

Geographical Area

 

 

Number of

assets

 

 

 

Valuation

(£m)

 

 

 

Area

(sq ft)

 

 

Vacancy

by ERV 

(%)

 

 

WAULT to

break

(years)

Gross

passing

rental

income

(£m)

Gross

passing

rental

income

(£psf)

 

 

 

ERV

(£m)

 

 

 

ERV

(£psf)

 

 

Rental

income

(£m)

Like-

for-like

rental

growth*

(£m)

Like-

for-like

rental

growth*

%














South West

7

57.35

635,587

9.65

3.96

4.58

7.20

6.15

9.68

2.33

0.10

6.51

West Midlands

5

43.00

597,860

10.24

4.22

3.60

      6.03

3.86

6.46

1.81

(0.09)

(4.62)

Yorkshire and Humberside

7

32.43

616,838

13.81

4.85

2.92

4.74

3.57

5.79

1.48

(0.02)

(1.57)

Eastern

4

22.08

326,419

0.80

3.29

1.92

5.87

2.10

6.44

0.83

(0.15)

 (15.61)

North West

4

21.60

336,043

0.00

6.05

1.90

5.67

2.00

5.95

0.98

(0.07)

(9.75)

Wales

2

14.90

319,010

0.00

9.48

1.28

 4.00

1.38

4.34

0.61

(0.03)

(5.37)

South East

3

 12.15

86,826

0.00

2.67

1.39

16.06

    1.05

12.07

0.62

0.07

17.96

Rest of London

1

10.00

71,720

0.00

8.01

0.94

13.04

0.79

10.94

0.49

(0.02)

(4.62)

East Midlands

1

3.70

28,219

0.00

3.62

0.41

14.56

0.38

13.38

0.18

(0.02)

(10.37)

Scotland

1

2.15

26,341

0.00

4.54

0.21

7.97

0.21

7.97

0.10

  - 

   1.89














Portfolio

35

219.36

3,044,863

6.98

4.45

19.15

6.29

21.49

7.06

9.43

(0.23)

(2.89)

*like-for-like rental growth is for the six months ended 30 September 2023.

Source: Knight Frank/AEW, 30 September 2023.

 


Individual Property Classifications

 

 

 

 

Market Value

 

Property - Top 10

Sector

Region

Range (£m)

 

 

 

 

 

1

Central Six Retail Park, Coventry

Retail warehouses

West Midlands

20.0-25.0

2

Northgate House, Bath

Standard retail

South West

10.0-15.0

3

Gresford Industrial Estate, Wrexham

Industrial

Wales

10.0-15.0

4

Cambridge House, Bath

Offices

South West

10.0-15.0

5

40 Queen Square, Bristol

Offices

South West

      10.0-15.0

6

Tanner Row, York

Other

Yorkshire and Humberside

10.0-15.0

7

London East Leisure Park, Dagenham

Other

Rest of London

10.0-15.0

8

Arrow Point Retail Park, Shrewsbury

Retail warehouses

West Midlands

7.5-10.0

9

Units 1001-1004, Sarus Court, Runcorn

Industrial

North West

5.0-7.5

10

Apollo Business Park, Basildon

Industrial

Eastern

5.0-7.5

 

The Company's top ten properties listed above comprise 51.1% of the total value of the portfolio.

 

 

 

 

 

Market Value

 

Property

Sector

Region

Range (£m)

11

Cuerden Way, Preston

Retail warehouses

North West

5.0 - 7.5

12

Storey's Bar Road, Peterborough

Industrial

Eastern

5.0 - 7.5

13

Barnstaple Retail Park, Barnstaple

Retail warehouses

South West

5.0 - 7.5

14

15-33 Union Street, Bristol

Standard retail

South West

5.0 - 7.5

15

Mangham Road, Rotherham

Industrial

Yorkshire and Humberside

5.0 - 7.5

16

Westlands Distribution Park, Weston Super Mare

Industrial

South West

5.0 - 7.5

17

Brockhurst Crescent, Walsall

Industrial

West Midlands

5.0 - 7.5

18

Walkers Lane, St Helens

Industrial

North West

5.0 - 7.5

19

Diamond Business Park, Wakefield

Industrial

Yorkshire and Humberside

5.0 - 7.5

20

Odeon Cinema, Southend

Other

Eastern

5.0 - 7.5

21

Next, Bromley

Standard retail

South East

5.0 - 7.5

22

710 Brightside Lane, Sheffield

Industrial

Yorkshire and Humberside

< 5.0

23

Oak Park, Droitwich

Industrial

West Midlands

< 5.0

24

Commercial Road, Portsmouth

Standard retail

South East

< 5.0

25

Pearl House, Nottingham

Standard retail

East Midlands

< 5.0

26

The Railway Centre, Dewsbury

Retail warehouses

Yorkshire and Humberside

< 5.0

27

Cedar House, Gloucester

Offices

South West

< 5.0

28

Pipps Hall Industrial Estate, Basildon

Industrial

Eastern

< 5.0

29

69-75 Above Bar Street, Southampton

Standard retail

South East

< 5.0

30

Eagle Road, Redditch

Industrial

West Midlands

< 5.0

31

Circuit, Cardiff

Other

Wales

< 5.0

32

Bridge House, Bradford

Industrial

Yorkshire and Humberside

< 5.0

33

Pricebusters Building, Blackpool

Standard retail

North West

< 5.0

34

JD Gyms, Glasgow

Other

Scotland

< 5.0

35

11/15 Fargate, Sheffield

Standard retail

Yorkshire and Humberside

< 5.0

 

Sector and Geographical Allocation by Market Value as at 30 September 2023

 

Sector Allocation

 

Sector

%

Industrial

36

Retail warehouses

21

Standard retail

17

Alternative

14

Offices

12

 

Geographical Allocation

 

Location

%

South West

26

West Midlands

20

Yorkshire and Humberside

15

Eastern

10

North West

10

Wales

7

South East

5

Rest of London

4

East Midlands

2

Scotland

1

 

Source: Knight Frank valuation report as at 30 September 2023.

Top Ten Tenants

 

Tenant

Sector

Property

Passing

Rental

Income

(£'000)

% of

Portfolio

Total

Contracted

Rental

Income

1

Plastipak UK Limited

Industrial

Gresford Industrial Estate, Wrexham

975

5.1

2

NCP

Other

Tanner Row, York

733

3.8

3

Matalan

Retail warehouse

Matalan, Preston

651

3.4

4

Wyndeham Group

Industrial

Wyndeham, Peterborough

644

3.4

5

Poundland Limited

Retail

Various

631

3.3

6

Next

Retail

Next, Bromley

630

3.3

7

TJX UK Ltd

Retail

Various

608

3.2

8

Mecca Bingo Ltd

Other

London East Leisure Park, Dagenham

584

3.1

9

Odeon Cinemas

Other

Odeon Cinema, Southend-on-Sea

535

2.8

10

Bath Northgate House Centre Ltd

Retail

Northgate House, Bath

491

2.5

 

The Company's top ten tenants, listed above, represent 33.9% of the total passing rental income of the portfolio.

 

Source: Knight Frank valuation report as at 30 September 2023.

 

Investment Update

 

The Company completed the following material asset management transactions during the period:

 

Acquisitions - In July 2023, the Company completed the acquisition of Tanner Row, York, a mixed-use asset within York city centre for £10.02 million, reflecting an attractive net initial yield of 9.3%.

 

In September 2023, the Company acquired Cambridge House, Bath, a mixed-use asset in Bath city centre for £11.50 million, reflecting an attractive net initial yield of 8.0% and a capital value of £223 per sq ft.

 

Disposals - In May 2023, the Company completed the sale of its industrial holding in Deeside for £4.75 million, reflecting a capital value of circa £49 per sq ft. The vacant asset was sold to an owner-occupier, with the price reflecting an 8.0% premium to the 31 March 2023 valuation. By disposing of the asset, the Company also avoided a speculative refurbishment project costing approximately £1.00 million.

 

In June 2023, the Company completed the sale of two industrial assets, being Euroway Trading Estate, Bradford and Lockwood Court, Leeds, for combined proceeds of £16.10 million. This reflected a blended net initial yield (NIY) of 6.2% and a weighted average premium to acquisition price of 31.2%. Both sales realised significant profit for AEWU's shareholders. For Euroway Trading Estate and Lockwood Court respectively, their sales prices exceeded their 31 March 2023 valuations by 26.5% and 3.8%, as well as their acquisition prices by 30.3% and 31.8%.

 

Asset Management Update

 

Central Six Retail Park, Coventry (retail warehousing) - in April 2023, the Company completed a lease renewal with existing tenant, Grahams Baked Potatoes Limited. The tenant has entered into a new four-year lease with rolling mutual break options at a rent of £24,500 per annum, equating to £45 per sq ft.

 

In May 2023, the Company completed a lease renewal with existing tenant, Oak Furnitureland Group Limited, for Unit 12. The tenant has entered into a new two-year lease with rolling mutual break options at a rent of £25,000 per annum, equating to £2.50 per sq ft.

 

In May 2023, the Company also completed a reversionary lease with existing tenant, Boots UK Limited, for Unit 7. The tenant has entered into a new five-year lease with effect from 28 February 2024 at a rent of £259,293 per annum, equating to £14.25 per sq ft. The letting also includes seven and a half months' rent free taken under the existing lease.

 

In June 2023, the Company completed the acquisition of the freehold interest in units 1-11, which had previously been held by way of long leasehold from Friargate JV Projects Limited. The acquisition of the freehold interest is expected to increase the liquidity of the asset in case of its future sale and also removes user restrictions within the long lease which are constrictive to lettings. In exchange for the freehold interest, the Company has granted to Friargate JV Projects an option to acquire the Company's long leasehold interest in units 12 A & B over a five-year period, commencing in two years' time.

 

The Company completed a new 20-year lease to Aldi Stores Limited, following the completion of the agreement for lease in October 2022. The lease provides an annual 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 lease provides Aldi with a 12-month rent-free incentive and a tenant break option at year 15.

 

In September 2023, the Company received formal confirmation of the planning permission for the amalgamation of Unit 6a and Unit 6b and extended delivery hours in order to facilitate the letting to The Food Warehouse. The letting is expected to complete in February 2024.

 

Barnstaple Retail Park, Barnstaple (retail warehousing) - the Company has completed an eight-year reversionary lease with B&Q from 29 September 2024 at the current passing rent of £348,000 per annum (£9.75 per sq ft). In return, the tenant has been granted a six-month rent-free period.

 

40 Queens Square, Bristol (office) - after protracted negotiations, the Company has settled three outstanding rent reviews at the building dating back to 2021 and 2022 with the following tenants: Leonard Curtis Recovery Limited, Chapman Taylor LLP and Turley Associates. The outcome of the reviews will see the annual rent from the three tenant's increase from £213,812 per annum to £281,550, reflecting a 32% uplift.

 

The Company has also recently completed a new five-year ex-Act lease to Environmental Resources Limited with a tenant break option at the end of the third year at a rent of £69,230 per annum (£35 per sq ft). The tenant has the benefit of an initial six-month rent-free period, with a further four months incentive if they do not serve their break option.

 

Arrow Point Retail Park, Shrewsbury (retail warehousing) - the Company has completed a three-year lease to Universal Consumer Products Limited at a rent of £110,000 per annum (£8 per sq ft). The previous passing rent was £95,844 (£7 per sq ft). No lease incentive was given.

 

Oak Park, Droitwich (industrial) - the Company has completed a new three-year ex-Act lease on units 266-270 to Roger Dyson at a stepped rent starting at £123,000 per annum in year one, £135,000 per annum in year two and £148,000 per annum in year three. There is a mutual break option on the expiry of the second year. The tenant was granted a one-month rent free period.

 

The Company has also completed a new three-year ex-Act lease to Adam Hewitt Ltd at units 263 and 265 at a rent of £70,000 per annum. There is a tenant break option after the first year. No rent incentive was given.

 

Lastly, the Company has completed a letting at units 272 and 273 to J Warwick Holdings Ltd for a new 15-year term, with rolling tenant break options every three years at a rent of £79,000 per annum. The tenant has the benefit of a six-month rent-free period. The property is now fully let.

 

Diamond Business Park, Wakefield (industrial) - in April 2023, the Company completed the settlement of an open market rent review with Tasca Tankers, dating back to June 2022. The review will see the rent received increase from £209,000 to £229,900 per annum, reflecting an uplift of 9.6%.

 

The Company has settled Compac UK's July 2023 RPI rent review at £53,517 per annum, representing an £11,517 per annum (circa 27%) increase. The unit is still considered under-rented, with an ERV of £4.00 per sq ft, compared to the new passing rent of £3.90 per sq ft.

 

The Company has also settled Economy Packaging Ltd's August 2023 open market rent review at £79,065 per annum, representing a £26,565 per annum (circa 50%) increase. This letting equates to £3.75 per sq ft and will provide good evidence for further asset management activity.

 

Northgate House, Bath (retail) - in June 2023, the Manager completed a new five-year ex-Act lease to Dimension Vintage limited at a rent of £40,000 per annum. Four months' rent-free has been granted.

 

Commercial Road, Portsmouth (retail) - in June 2023, a new 10-year lease was completed to Specsavers at a rent of £60,000 per annum in vacant accommodation previously let to River Island. An incentive of nine months' rent free was granted to the tenant, along with a £40,000 capital contribution to improvement works. There will be a tenant only break option after six years on six months' notice.

 

Sarus Court, Runcorn (industrial) - The Manager has completed three lease renewals with existing tenant, CJ Services, for their leases at units 1001, 1002 and 1003. The total rent is £276,283 per annum reflecting £6.50 per sq ft, an increase from the previous average passing rent of £5.25 per sq ft. Five-year ex-Act leases were granted, with incentives equal to six months' rent-free.

 

The Railway Centre, Dewsbury (leisure) - Mecca Bingo, whose lease expires on 24 December 2023, have surrendered their lease early on 29 September 2023, paying all their rent, service charge and insurance to lease expiry. In doing so, the Company has also settled Mecca's dilapidations at £285,000. The full and final combined settlement totals £365,126. The Manager is in the process of agreeing terms with an incoming tenant where landlord enabling works will be required. An early surrender of Mecca's lease will facilitate the new letting completing a quarter earlier than otherwise possible.

 

Westlands Distribution Park, Weston-Super-Mare (industrial) - the Company has completed a lease renewal with JN Baker who have extended their occupation of Unit 2A for a further two years from April 2023, with a mutual break option exercisable after nine months. The agreed rent is £159,000 per annum, inclusive of insurance.

 

The Company has settled three outstanding April 2022 rent reviews with North Somerset Council at units 2, 5 and 6. The combined rental increase is £35,864 per annum (circa 20%).

 

Carr Coatings, Redditch (industrial) - the Company has settled Carrs Coatings Ltd's August 2023 annual uncapped RPI rent review at £294,348 per annum (£7.75 per sq ft), representing a £24,385 per annum (circa 9%) increase. The unit is single-let to Carrs Coatings Ltd until August 2028. The lease was entered into as a sale and leaseback in 2008 at an initial starting rent of £170,300 per annum (£4.50 psf).

 

Vacancy - The portfolio's overall vacancy level is 6.98%.

 

ESG Update

The Company has maintained its two stars Global Real Estate Sustainability Benchmark ('GRESB') rating for 2023, as well as maintaining its score of 67 (GRESB Peer Group Average-65). 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. We currently have thirteen AMR installation projects ongoing, including at single lets and multi-lets such as Central Six Retail Park. Several other AMR installations will be executed during 2024.

 

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. Green clauses seek to improve data coverage by ensuring tenants provide regular and appropriate utility consumption data.

 

We continue to assess and strengthen our reporting and alignment against the framework set out by the TCFD with further disclosure provided in the 2023 annual report and accounts. We are pleased to report that the Company has maintained its EPRA Silver rating for EPRA Sustainability Best Practices Recommendations ('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 implementation of ESG improvements. In doing so, we ensure all possible sustainability initiatives are considered and implemented where physically and economically viable.

 

Following a significant emissions reduction from assets within the portfolio during 2022 (-33.8% vs. the 2018 baseline), we took the decision to increase the reduction target from 15% to 40% by 2030, equating to a planned saving of roughly 76 extra tonnes of carbon. All managed assets and units have been contracted to High Quality Green Tariffs, ensuring that electricity supply is from renewable sources and contributing to the continued reduction in emissions. All void/vacant unit supplies have also been transferred to High Quality Green Tariffs, while gas capping exercises have been undertaken where possible, including several units at Diamond Business Park.

 

We are currently implementing several biodiversity initiatives across our portfolio, including significant biodiversity improvements to the Railway Centre, Dewsbury. This includes the installation of 20 bird boxes, 10 insect towers & hotels, a hedgehog house, a wildflower meadow and replanting of bushes across the site. Other notable projects include the installation of EV chargers at Central Six and a solar PV feasibility study at London East Leisure Park.

 

Lease Expiry Profile                                                                                                                      

Approximately £2.40 million of the Company's current contracted income stream is subject to an expiry or break within the 12-month period commencing 1 October 2023. We will proactively manage these leases nearing expiry, 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 2023.

 

 

AEW UK Investment Management LLP

21 November 2023

 

AEW UK REIT PLC's interim report and financial statements for the period ended 30 September 2023 will be available today on www.aewukreit.com.

It will also be submitted shortly in full unedited text to the Financial Conduct Authority's National Storage Mechanism and will be available for inspection at  data.fca.org.uk/#/nsm/nationalstoragemechanism in accordance with DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.

LEI: 21380073LDXHV2LP5K50

 

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